Knowing how to value a property is an essential part of the investment game.
When it comes to buying, you’ll want to know the value of your target property to ensure that you’re not paying over the odds, and when selling you’ll want to know how to set your price expectations realistically.
If it’s an existing property that you’re looking to sell, your first port of call may well be a real estate agent’s appraisal.
The good news is that appraisals are free, as it’s all part of the agent’s plan to get your business. And, if you’re dealing with a realistic and experienced agent who knows the area well, then their assessment of how much your property could sell for shouldn’t be too far off the mark.
“If you’ve got a real estate agent and a valuer – assuming both are coming at it with the same intention – both will come up with the same figure,” says Herron Todd White certified practising valuer Kieran Clair.
“A valuer will say that your property’s worth between x and z, and the valuation is y – in the middle. A real estate agent who’s worth his salt will say your property’s worth between x and z, ‘but I’m going to list it for z plus 5%. And if you mow the yard, tidy up the spare bedroom and give it a paint, I reckon we can give it a nudge’.”
WBP Property Group CEO and certified practicing valuer Greville Pabst warns, however, that sales agents who are hungry for your custom may falsely raise your expectations.
“If you’re contemplating selling your home, and you engage three local agents to come round and give you an appraisal, the motivation from the agent is to provide you with the highest price. And it’s human nature that you think that your property is worth more than what it might be,” he says.
“Many people are thus inclined to choose the agent that gives them the information that they want to hear.”
Auction day then comes around and the agent can blame poor weather, or say that the interested parties have failed to show “and then they start to squeeze the lemon and condition you into what the real price is.”
It’s also worth noting that the real estate agent that you’re dealing with may have limited experience in the field of appraisals.
“That person may not be a fully-licensed agent. They may just have an agent’s representative’s license, which means that they can act as a real estate agent and give appraisals, but they’ve only done a six-week course and prior to that they may have been selling washing machines or cars,” says Pabst.
“So there is a real difference in qualification in that a valuer must first have a bachelor of business degree in property, which is a four-year course, and then must have a minimum of 12 months’ practical experience in the field before he or she can then be qualified as a certified practising valuer.”
Automated valuation models
Automated valuation models (AVMs) are an increasingly popular means of estimating a property’s value.
“There are a number of commercial suppliers that can provide you with a crude automated valuation model, which is a statistical, mathematical model where you type in the address of your property and it will spit out an automated value,” explains Pabst.
The main benefits of AVMs are their speed and convenience. They are typically used by lenders in low risk situations where they deem that it’s not necessary to go to the time, effort and expense of sending a valuer out to conduct a full valuation.
“Some lenders do a computer generated valuation,” says Smartline personal mortgage advisor Hayden Folbigg. “If it’s a low LVR, the valuation is in the right price range, and there are comparable sales, then they’ll just accept it.”
Such valuations are provided by major data providers, such as Residex, RP Data and APM, and each company’s model has its own means of crunching the numbers and coming up with a value.
Australian Property Monitors’ AVM, for example, will come up with what it calls a “current Market Price Estimate”, and this is carried out by using comparable sales and statistical modelling based on the following critieria:
- Comparable properties: type of property, number of bedrooms, bathrooms, parking, land size and features
- Recorded sales: from a database of records dating from 1990
- Geography: analysis from the local neighbourhood through to state level
- Confidence indicator: cross-checking with the current market trends
Pabst warns, however, that there is no industry regulation on the methodology, data and systems used to create automated valuations, and that they should only be used as a general guide.
“There are a lot of statistical terms that wrap around that process, but it should only really be used as a very broad guide because nobody’s physically inspected the property,” he says.
Generally these statistical models work better in homogenous areas, such as estates where properties are all the same size and construction age, and those where there is a good set of recent comparable sales.
In some cases, the uniqueness of a property will mean that a computerised model simply can’t take into account certain vital factors that affect a property’s value. A poor selection of recent comparable sales, too affect an AVM’s accuracy.
“We have had the experience of a valuer in our office who had an acreage property who – for the sake of the exercise – did an automated valuation on his property knowing what it was going to be listed for, and found it to be some hundreds of thousands of dollars out,” says Clair.
“There is still a certain amount of instinct that comes into valuations, and I don’t think the automated valuations are able to handle that on the more unusual properties.”
The next step up from an automated valuation is what’s commonly known as a ‘desktop valuation’. This is where a certified valuer is asked to perform a valuation of a property based on the location, description (e.g. size, number of bedrooms, number of bathrooms), and recent comparable sales remotely from their office.
As PriceFinder COO Kent Lardner explains, desktop valuations are considered to be more reliable than AVMs thanks to the input of a qualified valuer who can take into account those considerations that an automated program won’t be able to pick up on.
“Desktops have been widely used by a number of lenders in Australia. Performed by local and qualified valuers, desktops offer substantially better results than AVMs,” he says.
As an investor, it’s also possible to purchase your own desktop valuation. Due to the manpower involved, however, these products cost substantially more than AVMs. RP Data, for example, provides what it calls a “Desktop Valuation EVR (Electronic Valuer Report)” for $196, which is $147 more than its “RP Estimate Report” AVM.
The main drawback of desktop valuations is that, while you’re adding the human element of a certified valuer, they’re still not physically inspecting the property or its surroundings.
Plus, as Clair warns, if the valuer doesn’t has a good level of experience in valuing properties in the location in question, then the fact that they’re not visiting the area can cause problems.
“The real value in those is when the valuer is experienced in your particular location,” he says. “I think if you have professionals who work a broad market area, their ability to be accurate based on the provided evidence is going to be less than someone who works that area constantly.”
He gives the example of a street in an area that he used to work in where shifting soil caused structural difficulties to houses on the western side of a certain street. “If you weren’t a regular in the area, you wouldn’t know that driving past,” he says.
Also known as ‘drive by valuations’ a kerbside valuation takes the valuer out of their office and to the property itself. Like AVM and desktop valuations, kerbside valuations are used by lenders as a cheaper and faster alternative to a full valuation report – often for low LVR loans.
Folbigg notes that kerbside valuations were quite prevalent before the GFC. In 2005, for example, the Australian Prudential and Regulatory Authority (APRA) found that one fifth of bank property valuations were completed remotely. Nowadays, however, the banks will be more inclined to ask for a complete valuation for riskier, higher LVR, loans.
“The kerbsides are still happening, but a lot of the lenders have just gone ‘full valuation on everything from here on in’. So it has changed a little bit,” he says.
What sets kerbside valuations apart from desktop valuations is that they allow the valuer to better gauge important factors such as the distance to transport, shops and amenities, and also gives them an idea of the current state of the property.
“They are reasonably common. Some of the major banks prefer them to desktop assessments,” says Pabst.
“They would prefer someone to physically go out to see that the property is there. That’s important when they’re lending on it, of course, because if it burnt down the night before, an AVM’s not going to pick that up.”
However, a kerbside valuation can never be as accurate as a full valuation – where the property is inspected inside and out.
“It is a cursory inspection of a property and is not a valuation. It does not include an internal inspection, but rather the property is briefly observed from the kerbside, and provides only a value range rather than a single point estimate,” says Pabst.
As the valuer isn’t able to inspect the property internally or speak to the property’s owner, they won’t be able to confirm certain features of the property that would be required for a full valuation report, such as its size, age and internal condition.
In some cases, a kerbside valuation will miss vital aspects of the property’s interior that have a drastic effect on its value. This could be a recent renovation that will increase the property’s value, or serious damage that would cut thousands from its sale price. Clair explains:
“There’s an old tale in our profession from many years back where it was heard of that a valuer did a final progress inspection on the outside of the house, because he had trouble getting into it, thinking that that would be fine.”
“But some disgruntled tradies had gone in and jackhammered up the slab in the living room. You couldn’t see that from the outside, but the moral of the tale is that there’s nothing like getting in there and having a good look.”
In the vast majority of cases, due to the risk associated with the LVR of the loan, a lender will order a full valuation in order to establish how much they are willing to lend on the property.
“Most people will borrow as much as they get, so in a high percentage of cases a valuer is used in the process,” says Pabst.
A full valuation involves a certified valuer inspecting the property inside and out, and in this instance they can be held legally accountable for their opinion.
“Only a valuer is considered an expert in the eyes of the court,” says Pabst. “It really is incumbent on the valuer that whatever he says must be supported by appropriate evidence in the marketplace. And the valuer has to stand by that valuation if it does sell within six months of the valuation being done.”
A valuation that’s commissioned for lending purposes aims to find a price that could be achieved if the lender had to sell the property within 90 days, given reasonable marketing. There should be no difference between mortgage valuation and a valuation that has been performed for other purposes – for example to give a seller an idea of their property’s value before listing it – as the same sales evidence will be used in each case.
Market conditions can change quickly in any given area, meaning even a full valuation has an official shelf life of just six months to account for value shifts created by events such as the GFC.
Even then, events such as last year’s Brisbane floods can wipe thousands from the value of a property overnight, meaning yesterday’s valuation may not reflect today’s market value.
A full valuation, given the time and expertise involved, is going to cost several hundred dollars. The actual cost will vary depending on the property type and the format of the report that’s required but, as a general rule, a standard three-page report for an average sized home will start at $500.
If you’re commissioning the valuation for your own purposes, then obviously you’re going to have to stump up the cost yourself. In the case of a valuation for lending purposes, too, the lender will often pass the cost on to the borrower in the form of a valuation fee.