21 Jun The investor’s guide to valuations
Assessing the approximate market value of a property is not beyond the abilities of most residential investors; it just requires a keen ability to be impartial, informed and clinical
The first step is to understand what a valuer is assessing. Market value is the value of the subject property at its highest and best use on a specific date as negotiated between a fully informed and willing buyer and seller who are both keen to trade but neither so eager as to overlook reasonable business principles. It does not allow for special circumstances such as off-market sales involving the next door neighbour, between family members or where the seller is distressed.
When assessing value it is important to adopt a clinical approach. This is more difficult than it sounds – so much so that even the professionals may employ a colleague to value a property too close to their heart. Put your personal preferences and nuanced appreciation of the property on the footpath and approach it with the steely gaze of a business vulture.
Now is the time for research. Become the local area guru by finding out everything about your suburb of interest. Talk to agents, attend auctions, ask for comparable evidence, check council records, understand zonings and know the limitations of what can and cannot be done to a particular property.
Inspecting the property
When looking at your property break it down into its parts. Firstly, look at the land. What are the block size, shape, elevation, topography and usability? A site might be 1,000 sq metres larger than one across the road but if 80% of the land drops away behind the home like a glacial crevasse, then it is unlikely to carry much additional value punch. Also note surrounding uses and any potential problems. An adjacent petrol station or busy road cannot be ignored.
You should consider the actual streetscape, is it tree lined or is the property on a main road verses quieter street or a cul de sac? Is it located nearby or opposite a bus stop or railway line? What is the quality of surrounding homes and are they similar, inferior or superior? Find out if the street has a reputation.
It’s also vital to consider the type & style of construction, age, size, layout/design and condition of the home, car parking (with, without, what sort and the number of spaces), and the title to establish the existence of covenants, easements or like restrictions. Town planning issues like zoning influences and restrictions that can also influence development or renovation/refurbishment in the future.
Next, check out the site, or ancillary, improvements. Ancillaries are any improvement to the land apart from the main dwelling. This includes basics such as driveways and landscaping as well as extras such as tennis courts and water tanks. This is an area often plagued by overcapitalisation. The best check? Look over the fence. If the neighbours don’t have a helicopter pad and mini-golf course then these are best avoided in your investment.
Finally, check out the dwelling. Walk around the outside and, if practical, measure the home’s dimensions. Look at the condition of the structure and try to find problems – is there crack in the brickwork? Are there loose stumps? Will the gutters stand up to summer storms? Take it in and note it down. Now go inside and inspect every room. Get a feel for the condition, age and quality of fixtures and fittings. Are the “bones” good and do they provide for easy improvements? A new but inexpensive renter-grade carpet coupled with a paint job can be a boon to an asset but only if they’re not trying to hide three bedrooms so small residents have to sleep upright. Make sure the home has good useability and a functional layout. If you must walk through the fourth “bedroom” to get to the toilet then the valuer will reclassify it as an office.
Good, reliable sales evidence is the backbone of accurate assessment. The properties must have sold recently and be as similar to the subject as possible. Keep your evidence within close proximity so it has the same facilities as the subject. The sale price of the comparable property must also fulfil the definition of market value. If a sale is out of line with all other evidence there is probably a reason.
Sales evidence is found by footwork. Use one of the commercial databases and look up your suburb’s “sold” section on realestate.com.au. Drive around and look for “sold” signs and ring the agents. While you’re at it, find out if they have any other recent sales similar to your property. Dig, dig, dig to find your best evidence as these will be your beacon of accurate value.
Treat the comparable sales like your subject. Look at the land, ancillaries and improvements. Compare each aspect of the properties to decide if they’re superior or inferior.
Listings are next to useless as a comparison when assessing market value. Vendors can list a property for sale at any price that takes their fancy so these provide little indication of what price homes are actually selling for. Listings are quickly dismissed by a valuer in almost all circumstances.
Look at a minimum of three comparable properties and preferably at least six. A range of sales will avoid the summer swallow and the winter dodo scenario where an out of line sale will affect your assessment.
Finally, the idea that there are no comparables because your property is unique is a myth. By looking at a range of sales in your area, no matter how inferior or superior they are to your property, you soon gain an understanding of how buyers view the local market and a sense of where your value sits.
Comparing the evidence
Now you know the ins and outs of the subject and the recent sales, you’re ready to stand back and assess value. Look at your first comparable and ask yourself honestly: “Is this better or worse than my property?” Follow up with, “If I were in the market, how much more or less would I realistically pay for my home compared to the sales evidence?” This can be a tough process but it is imperative to be coldly calculating with each of your comparisons as this process will result in a realistic market value range.
The value range is a useful tool for all parties in a transaction. There is no single, sharp end of the stick answer to a property’s value because markets have variations. On a standard, uncomplicated assessment, property valuers will try to keep their assessed range within 5 per cent of the midpoint so on a $400,000 property, the range should be about $380,000 to $420,000.
Maximising your valuation
So how do you ensure that your property will receive the most favourable assessment of value without breaking your budget? Firstly, keep things simple.
While valuers are capable of seeing past such easy-fix items as tidying the yard and de-cluttering the rumpus room, a lot of little items can add up to a figure-affecting headache. If you want to close the gap on the upper end of your value range then take care of the basics before inspection to ensure your property is seen in its best possible light. Sometimes the best money you can spend is on a paint touch-up and carpet clean. Valuers will also make special note of the age and condition of kitchen and bathrooms so it’s a good idea to have the new shower screen fitted and wonky cupboard door replaced before the valuer knocks on the door.
There is also a subliminal message when inspecting a well-presented and maintained property – if the little items are getting attention then so are the big items. As much as valuers avoid assuming the worst, it’s hard to presuppose that the floor coverings are in excellent condition when you can’t see them for out of date newspaper and old washing.
For bigger-ticket items, a value increase is tied to avoiding overcapitalisation. This is the one time you do not want to compete with the Joneses but stay on par with them. If everyone in your street has covered off-street car accommodation then you’d better have the same. The key with major changes is to look at the asset and ask yourself: “How much more would I pay in this location for my property if it had a tennis court/new deck/extra level?” If the answer is less than the cost of getting that improvement, and your decision is to be based purely on economic return and not lifestyle, then rethink your strategy.
What causes a low valuation?
“A property is what it is and market conditions are what they are and neither of these causes a low valuation despite what others may think,” says Calnin.
On the other hand, he says that a low valuation can be due to the property:
- Being poorly presented ie overgrown gardens
- In partially renovated condition
- Having damaged internal linings or missing fixtures and fittings like floor coverings, blinds/curtains/shutters, light fittings or kitchen appliances
All of this requires effort and risk from a buyer’s perspective and a buyer will heavily discount an offer if they have to do this work themselves.
Dealing with low valuations
Sometimes valuations come in either below an owner’s expectations or below contract price.
Property valuers have no vested interest in whether the contract proceeds or the loan progresses and maintain a professional independence to ensure the figure is correct. In most instances, a figure comes in short because a purchaser or owner is not fully informed about the market and how it would respond to the subject property.
Owners may believe the hype of a keen marketer or may convince themselves that their property is far and away superior to any possible sales evidence and that there is a cashed-up super-buyer salivating at the idea of purchasing their home at any price. This is rarely the case and a valuer is required to act as the voice of reason.
That said, valuers are attempting to find a fixed point in an environment of variables and can occasionally come unstuck. The only effective approach when a valuation appears below expectations is to find evidence supporting your position. A valuer may be genuinely unaware of recent arms-length sales indicating a higher value and will consider your additional evidence if it falls within the market value criteria.
If property values are falling in your local area and that is an issue for you, then think twice about committing further capital expenditure on your property. “Ask yourself what value this expenditure will add. You can do this by inspecting similar homes for sale in your local area with the additional improvements that you were proposing. If a house with these additional features is adding value then you might want to proceed, however, if you are unlikely to get your money back in the short term, then you might want to reconsider your options before you commit to this expense.”
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