Valuations: The key elements that valuers look for when deciding residential valuations
Executive Chairman and Co-founder of WBP Property Group, Greville Pabst prides himself on leading a team of highly skilled and certified property professionals in the delivery of objective and impartial property advice to Australian property investors. He is determined to help the everyday Australian make smarter property investment decisions.
With three decades of experience in the Australian property market, Greville has expertise across valuations, property advisory and commercial property management. His valuations experience extends to all types of Australian commercial, residential and specialised properties. Greville is a judge on reality TV show The Block, and a regular media commentator. In other words, the perfect man to speak to about Valuations – the philosophy behind the concepts used, the methodology and the process….
Whenever you want to borrow money to purchase a property, the lender will use a professional valuer to give them an independent assessment of the property’s actual worth. This is necessary for the lender to confirm that the property represents adequate security for its loan. The lender will then use this valuation to determine how much money they are prepared to lend you to purchase the property. Lenders always conduct a professional valuation, even if you have already obtained one yourself, as it is important that their valuation be independent and unbiased. Valuations are also important if you are trying to assess the amount of equity you have in your home. With refinancing, equity can be used to make other purchases, like investment properties, stocks and shares, home improvements and so on.
The core philosophy for a valuer is to try and view any property through a “commercial lens” and decide what a reasonable buyer would be willing to pay. There are two main methods professional valuers use to make a valuation. The first is called the direct comparison method. Using this method, valuers research recent sales of similar properties in your area within the last six months and make a comparison of your property with them. The comparison properties act as a valuation guide enabling the valuer to compare like with like and make adjustments up or down if there are any material differences between the properties. The second method of arriving at an accurate valuation of your property is called the summation method. This method is a formula which adds the value of the land to the value of the improvements on the land – such as a house, pool and garage for example. Land value takes into account things like size, shape, location, views and surrounding infrastructure. The value of the improvements takes into account things like age, style, architectural features and overall appearance.
Most professional property valuation companies use a combination of these two methods.
The key steps in the valuation process are…
Prior to visiting the site (and utilising software and market data) the valuer will review the sales data of similar properties transacted in up to the last six months. This research will also include simple data on the key elements of the site – location, land and building size, amenities etc as well as checking the zoning to see if there are any restrictions on the title (for example, a single dwelling covenant which does not allow development, which in turn has an impact on the ability of an investor to add value to the site) or any other covenant or easements on the property.
Once the preliminary work is complete, the valuer will then visit the site to understand the particulars of the property itself and review the surrounding area. This physical inspection of the property probably takes about 10 or 15 minutes for a valuer to complete and is, put simply, a “walk through” from the front of the property to the rear. The valuer will inspect the major features of the land and buildings and complete a brief description of each of the areas. Special areas of focus are the age and quality of finishes and improvements, fixtures, fittings and general layout.
The valuer completes the review and then takes a physical measurement of the land allotment to confirm that the land that is being purchased is in accordance with the title details. This can be a crucial issue, particularly with properties where the major asset is the land (and not the building attached to it)
Once the physical inspection is complete, the valuer may then drive past the addresses of the surrounding area sales which have been included in the preliminary review. The aim here is to get a level of comfort that the comparisons used are sufficiently “like for like.”
The valuer will make the preliminary report available to the agents/vendors.
It’s important to note that, at this stage, quite often the vendor /owner’s expectations as to value differ from the figure included in the initial summary. However this is a good time to review the detail of the evidence gathered and discuss such. If there are local property purchases that the valuer has missed then these should be considered, added if appropriate, and the valuation adjusted to reflect this information.
If the valuation is for a commercial property (sitting inside a self managed superannuation fund for example) then the key considerations change somewhat. When assessing a commercial property the main factor that the valuer looks for is an income stream. In addition to getting comparable data on sales in the area and the quality of the area/suburb itself (eg type of properties on offer, number of vacant properties in the vicinity, industry types), the valuer also has to get data on rental yields (rental divided by sale price) achieved over the last 12 months and then adopt that yield per square meter to the property itself. In addition to these core numbers, issues such as services (on site parking, transport linkages , proximity to retail etc) , current lease terms and tenant history contribute to the valuation.
For more information about property valuations, talk to us today. As your mortgage broker we can often access market data that will help establish an approximate valuation of your home – which may be all you need to bid at auction or pre-arrange finance. If you require a professional valuation, ask us about a referral to a reliable organisation.
Get in touch with us to find out more!