Understanding the Valuation Process
Under-or over-valuing a property could sabotage a legitimate deal and limit the full potential of your property portfolio.
In an environment in which property valuations have become increasingly streamlined, it’s more important than ever for investors to do their own research.
Valuations often come in under or over market value, and the discrepancy could be anywhere up to 25 per cent. Therefore, investors need to have a clear understanding of how a valuation is conducted, and then form an estimate of how much their property is worth before calling in the professionals.
The current trend is for valuers to under-value because of pressure from the banks. Consequently, borrowers find themselves unable to get financing for legitimate deals.
To establish an accurate valuation it is important to start by doing your own research. Check street sales histories online, talk to local real estate professionals, buyers’ agents and sellers’ agents to get an idea of the true market value of the property.
The resources needed are out there; you just need to know where to look.
Once you have received a professional valuation, don’t be afraid to question the findings and ask for a substantial amount of market and comparable sales evidence to back up the final figure. Valuation methods vary, including in how much information the valuer takes on board.
Valuations and Appraisals
A valuation undertaken on behalf of a lender is quite different from a real estate agent’s market appraisal. For one thing, valuations carried out by a professional valuer are more detailed and are recognised by the courts.
While an appraisal is a great indication of the property’s approximate market value, it does have its limitations. Market conditions can change very quickly and in the case of unique properties, there are often no real direct comparisons. Therefore a real estate agent’s opinion should only be used as a guide.
Real estate agents tend to overvalue properties, while mortgage valuers are inclined to be more conservative.
With a large margin for differences between property valuations, depending on which professionals investors turn to, the question is: What is the market value?
The market value is determined by what the buying public is willing to pay for a property at the time of sale, which is also dependent upon the competition.
The valuation process can seem daunting for investors, but the fundamental techniques and methods are quite similar.
The first step is to physically inspect the property, which includes measuring the land and physical dwelling, and making note of its condition and any improvements that have been made. The value can then be determined through a number of methods.
As a guide you can estimate the value of your property by assessing the major features and then conducting a direct market comparison using recent sales of similar properties in the area. Aspects such as the orientation of the dwelling, planned developments and buildings next door are items that you may want to consider when estimating the value.
Overall, it is important to create your own valuation assessments before consulting a professional so that you can anticipate their answer and have solid research available to support a negotiation if needed.