Valuations – Art or Science?

Most of us will have a property valued at some time, often for financing reasons.

So what makes a good valuer, and how do they arrive at the final valuation figure?

There are numerous reasons for ordering a valuation of a property, from ascertaining market value for mortgage and re-financing purposes to family law and insurance reasons. Some of the more popular ones include:

1. Mortgage/Refinancing Valuation. Assesses the real value of property for banking and financing purposes.

2. Before-You-Buy Valuation. Accurate and independent market valuation of your intended purchase.

3. Before-You-Sell Valuation. Accurate and independent market valuation before you place your property on the market with an agent or privately.

4. Before-You-Renovate Valuation. Accurate and independent valuation of your property pre-renovation to avoid over-capitalisation or post-renovation to determine improved value.

5. Family Law Valuation. Required for family law purpose, to reduce the potential for dispute.

6. Capital Gains Tax or GST Valuation. Required by investors who sell a property that was purchased as an investment post-September 20, 1985 or who have leased their property after owner-occupation.

7. Rental Assessment. To assess the market rental of a residential or commercial tenancy.

8. Estate/Probate Valuation. To establish the market value of the property of a deceased estate.

9. Rating & Tax Valuation. To assess the real value of property for rating and taxation purposes.

Certified Practising Valuers

So what qualifies a valuer to make these assessments, and how do they do it?

Like most professions, valuers may belong to a professional membership body such as the Australian Property Institute (API).

To become a Certified Practising Valuer, an individual needs a relevant tertiary degree; a minimum of two years’ relevant valuation experience; continuing professional education; and must adhere to the API’s Code of Ethics and Rules of Conduct.

How Is A Valuation Completed?

Contrary to popular belief, most valuations still involve a physical inspection of the property both inside and out.

The valuer will take measurements of the home and individual rooms, plot size, etc and will assess the condition of the building and the location of the plot.

"Most valuations still involve a physical inspection of the property."Once the physical inspection is completed the valuer may then assess the value of the property based on a number of factors.

Firstly they will research the recent sales of similar properties in the area, and assess the differences from the property under review in terms of size, condition and location.

They will also be aware of recent or potential changes in the local area, the economic and interest rate environment, that could affect current values.

Also, they may apply the summation method. This is where the valuation calculation involves adding together the value of the land with the net or depreciated value of the buildings, swimming pool, garages, granny flats etc (known as “improvements”) that are on the land.

Valuation for Finance

A popular reason for completing a valuation is to assess the value of the property for a new home loan or the refinance of an existing home loan.

Lenders require these valuations so that they can gain comfort that the asset against which they secure their loan is sufficient in value. The reasoning is simple. If the borrower defaults on the loan, then the lender ultimately has the right to sell the asset to pay back the loan.

Therefore the higher the estimated loan to value ratio (LVR), the more thorough the valuation will be. Generally speaking, an estimated LVR of 80% or more will require a comprehensive valuation as this is seen as a riskier lend.

Disputing A Valuation

Because the value of our property is an emotional issue, plus the figure may significantly affect an ability to purchase or refinance a property, then sometimes people may dispute the valuation figure.

Whilst it is rare to be able to seek a second opinion from another valuer that would satisfy the lender, it is possible to go back to the valuer and query the figure. For an “appeal” to be successful, however, there would need to be some convincing additional evidence or the highlighting of an important error within the assessment.

Ultimately, if the valuer is a member of a body such as the API, then there is a dispute resolution process to follow.

For most of the time, however, the relationship with the valuer will be a professional one where the final valuation is fair, expected and understood.