Understanding property valuation
A home seller's asking price and what their property is actually worth can be two very different things.
This is why understanding property valuation is an important part of buying a house in Australia.
What is property valuation?
As the name implies, property valuation is the process of assigning a monetary value to a piece of real estate. The textbook definition of property value is "the agreed value from an arm's length transaction between a willing buyer and willing seller, not in forced situation." You'll want to ensure a comprehensive property valuation is conducted regardless of how you pay for your home, but if you plan on borrowing money in order to purchase real estate, a property valuation will most likely be required.
Property valuations come in the form of a detailed report that includes relevant information relating to the physical condition of the building and comparative prices for sales of similar homes in the area.
Not only can a property valuation provide you with more information regarding a home and its worth, it can also help with property negotiations. After all, if a property valuation reveals a home is worth much less than its asking price, having thorough research to back this up can help you obtain a lower price. Valuation is not an exact science and this is where savvy buyers can really take advantage of the market. Buyers will generally pay more for a view, for proximity to amenities and other key features. Your task as the buyer is to work just how much "extra" that ocean view, the walk to the bus stop or local shops is really worth.
Types of property valuations
While real estate agents representing a vendor will be able to assist with coming up with an appraisal price, this is not the same as an official valuation carried out by a licensed professional.
In addition to valuations carried out by industry professionals, home buyers can also utilise information from an automated valuation model (AVM). This is a computer estimate that is much cheaper for home buyers to obtain.
"The [AVM] has three advantages over the full valuation: They're much cheaper, they provide instant results, and you don't have the issues of someone concerned about fraud or highballing or lowballing an estimate," RP Data Valuations/Government Solutions Manager Chris Spanos recently told Australian Broker.
However, Spanos also said that since properties are unique, a full internal inspection remains the industry "gold standard".
I am very cautious of AVMs because they will not take into account a host of factors that determine true value. The property in question may have been renovated, rebuilt or have additional features not previously reflected in the sale price. The previous sale price may have been out of line with market conditions (i.e. distress sale or off-market sale). A physical inspection of the property is the best way to help determine current value. "Desk top" or "Drive-by" valuations do not work well in my opinion.
Buyers need to be aware that bank valuations will typically be more conservative. The bank is trying to protect its interests in a property security so there is absolutely no advantage if the property is valued too high. The bank wants to know that if the buyer defaulted on the loan, how could they get their money back without any loss of capital. This is why banks like to see the 20 per cent deposit and loan to valuation ratios below 80 per cent.
The trick to getting a good valuation is showing the valuer the most recent and most relevant comparable sales in a suburb. The more evidence the better.