We have all scratched our head when seeing a valuation and wondered how they arrived at that figure. Well to answer the question we need to explain a little bit of back ground….
When buying any real estate most people borrow some amount of the purchase price from a bank or similar. That bank takes security for that loan against the property they are lending on, in the form of a mortgage registered on the title. For the bank to satisfy itself that the value of the security (the property) comfortably covers the loan amount they instruct a qualified valuer to assess the properties market value. Essentially what the bank needs to know is, if you can’t pay them back, and they need to sell the property to get their money back, what they will be able to sell the property for.
In assessing that market value, the valuer is legally bound to follow a strict process, but the simple summary of it is… review other similar properties that have sold and adjust those sale prices for differences between the sold and subject properties, thereby arriving at a fair market value for the subject property.
If you think through this process there are certain challenges for the valuer…. Firstly all the sales occurred sometime in the past, and if the market is moving fast the valuation process doesn’t always account for differences in market conditions from the date of sale to the date of valuation… Secondly a valuer is not able to internally inspect the sale property, so they have limited understanding of the condition or configuration of the sale property unless they have very detailed information including photos… Thirdly some types of property are not sold very often, so the depth of sales information may be very thin meaning there will be lots of differences between the sold and subject properties and the sale date could be over a year old.
One extra challenge that has emerged with off the plan sales is that sometimes when the valuer visits the subject property they are valuing, it isn’t properly finished. Especially the landscaping and aesthetic finishes which make a property look so much better. In some instances the units themselves aren’t fully finished and the project is still a development site so the valuer cannot even inspect it.
And just to add one further complication, given the valuation is for the banks, they sometimes don’t allow the valuer to use “off the plan” sales as comparable sales. So essentially all the sales in the same development as the subject property and are the most comparable, can’t be used. So the valuation of a modern off the plan sale will often be assessed using sales of older properties, sold some time ago in existing developments.
There are several other purposes for a valuation and in each case the valuer is bound to follow a particular logic at arriving at the value. So as you can see there is a large degree of subjective judgement required and two valuers asked to do the same valuation will arrive at different prices.
Wood Property Partners Managing Director is a qualified valuer and is well placed to help you through the valuation process.