Whenever you borrow to buy a residential property your lender will instruct a professional valuer to get independent confirmation that the property represents adequate security for its loan and that the amount advanced will not breach the agreed loan to value ratio (LVR). The LVR is a function of how much is borrowed and how much the property is deemed to be worth. So a $300,000 home loan on a property valued at $400,000 would result in a loan to value ratio of 75% (300,000/400,000).Valuations provide the lender with a price that could be realised if the property had to be sold within ninety days of purchase, given reasonable marketing and an arms-length transaction between a willing buyer and a willing seller. Lenders are looking at a worst case scenario where the property has to be sold reasonably quickly either through repossession or mutual agreement.
Valuations are not the same as a price estimate
It's important to understand that an estate agent's price estimate is not the same as a professional valuation. A price estimate merely acts as a guide to assist in the marketing and selling of the property - it is not a proper valuation and has no formal standing e.g. it's not recognised by the courts or by lenders when assessing a home loan application. A recognised property valuation can only be carried out by a fully licensed valuer.
The valuation process
A full and comprehensive valuation starts with an internal and external inspection of the property. It normally takes around 48 hours for a standard three page report to be produced. Valuation reports vary in price depending on the property type and the report format requested but for an average sized property costs start at around $300 plus GST.
Some of the key attributes the valuer will consider include:
- The land size, property aspect, topography and layout of the block.
- The size and layout of the residence.
- The location of the property in relation to schools, public transport, shops and amenities.
- The architectural style of the dwelling.
- How well the property has been maintained.
- What potential there might be e.g. renovation or redevelopment.
- Number of rooms, including bedrooms, bathrooms and the size of the kitchen.
Valuations are professional opinions based as much on art as on science because they take into consideration both tangible and intangible aspects of a property including its surrounds. According to Greville Pabst of WBP Property Group, there are three methods valuers use to come up with a property value range; direct comparison, summation and capitalisation of net income.
Different valuation methods
The direct comparison method looks at researching recent sales of similar properties (within the last six months) and comparing and contrasting those properties with the subject property. The comparison properties thereby act as a valuation guide enabling the valuer to compare like with like and to make adjustments (up or down) if there are any material differences between the properties.
The summation method comprises adding the value of the land to the value of the improvements on the land, which include things like the house, pool, garage and pergola. Land value takes into account things like its size, shape, location, topography and surrounding infrastructure and amendments. The value of the improvements is determined by taking into account things like age, style, architectural features, room numbers, renovations and overall appearance.
Valuers use a combination of these two methods to determine a valuation range and then use their skills and experience to come up with their valuation figure.
The third method, capitalisation of net income, involves applying an investment yield to the property to work out rental income which is then discounted to determine market value. This approach is more commonly used with investment properties.
What adds value to a property?
Valuers look for attributes that can add or reduce a property's value. It's useful to know which ones are good and which ones are bad as this can help not only in the selection of a property, but also in identifying undervalued properties and aiding in the type and extent of potential renovations. Some of the positive factors include:
- Aspect - things like water views can add significant value to a property.
- Proximity to lifestyle amenities.
- Land size.
- Development potential.
- Architectural style e.g. inner city Edwardian and Victorian styles.
- More than one bathroom - two is good.
- Modern well appointed kitchens.
- The condition and age of bathroom(s). As with kitchens, modern bathrooms are sought after.
What reduces a property's value?
Conversely there are certain attributes that may reduce a property's value. These include:
- Proximity to main road traffic.
- Mixed use property e.g. residential/commercial.
- Environmental risks e.g. overhead power lines.
- Poor proximity to public transport, shops and other amenities.
- Poor room layout and design which reduces openness of internal areas.
- The size and layout of rooms.
- Small land component.
- Poor state of repair of the buildings.
What happens if the valuation comes in under the purchase price?
Normally the valuation will come in around the purchase price - after all, that is what the market is willing to pay. But there could be times when it comes in under or over meaning you may have paid too much or got yourself a bargain.
If the valuation comes in under the purchase price, you could be in a spot of bother because the lender's LVR restrictions may limit the amount you can borrow meaning you may not be able to afford the property. Take for example a situation where you are looking to buy a house for $400,000 and have saved up a 10% deposit of $40,000 and your lender is willing to lend 90% of the property's value. So far so good because you'll have enough to buy the property i.e. $40,000 + $360,000 = $400,000. But if the valuation came in at $380,000, the lender would limit its loan to $342,000 ($380,000 x 90%) meaning you would have to find another $18,000 (see the table below) or in the worst case, walk away from the purchase - something you can't do if you've bought by auction.
How do you select a valuer?
Normally your lender will select a valuer from its panel - one that is local to the property you are looking to buy. However, there may be occasions when you'll want to appoint a valuer yourself - for instance, to help you set your upper limit if you're bidding at auction.
Whatever your reasons, if you're looking for a good valuer the first thing you should do is make sure he or she is a full member of the Australian Property Institute, Australia's peak body for property professionals. In addition, you need to check the valuer is appropriately licensed in the State or Territory they operate in. For example, valuers in NSW must be registered under the Valuers Act 2003. Finally, it's a good idea to find out who the valuer's clients are. For example, if they include any of the big banks this can give you some comfort you're dealing with someone decent, as the banks have strict valuation criteria.
Have you ever used a valuer before? Did they do a good job? (Share your views below)
