Property valuation 101

At last Friday’s Property Council of Australia gig – see here – there was a lot of discussion about valuations currently coming in well under purchase price.  The difference between the price paid by the buyer and the bank valuation is often high – more than 20% – and the differential is spreading.

When asked about this situation, I replied that the solution should be a relatively simple one.  Firstly, bank valuers should be paid more – they carry the risk, not the bank – and this, in theory, would allow them time to conduct the appropriate research, and secondly – as we noted back in November – rental return should determine value, not what a previous buyer paid.

I started tweeting last week – yes, I am slow to cotton on – and asked my small Twitter following whether they would like to hear more about how a bank valuation is actually done The replies were a resounding yes.  So here goes – bank valuations 101.

By the way, you can follow me on Twitter here and each day – assuming there is something to say (you won’t find out what I had for breakfast, nor my favourite TV show or about the book I am currently reading), we will let you know…in 140 characters or fewer! *

If you require finance to complete the purchase of a dwelling, all financiers seek a valuation to ascertain the value of the property that is being offered as security for the loan.  Licensed valuers must base their opinion on hard evidence and take legal responsibility for any information they provide.

Australia’s four major banks have a panel of valuers who are assigned to value a particular property through a process called “Valuation Exchange” (Valex).  Smaller financiers often use the same valuers as the “big four”, although there are many valuers who are not part of the Valex system.

To assess a property’s value, a valuer must inspect the property, record details on the number and type of rooms, along with fixtures, fittings and any improvements.  A property’s unique attributes will also be taken into account, such as:

• location
• building structure and its condition
• standard of presentation and fit-out
• standard of fixtures, fittings and facilities
• zoning and whether and planning restrictions apply

The valuer combines these attributes together with recent comparable sales in the surrounding area and prevailing market conditions to produce a valuation report.  Several photographs must also be taken to support their findings.

The identification of appropriate comparable sales is often the most contentious issue, especially in relation to new apartments purchased off the plan.  There are a number of reasons for this, as detailed below.

• Comparable sales should be recent (less than six months old). This is problematic when the number of sales is low (perhaps because of a limited supply of dwellings for sale) or because of economic factors.  The number of dwelling sales last year in Brisbane, for example, was well below historical averages as a result of the January 2011 flood.  This has meant that identifying the required number of comparable sales has become that much harder.

• Sufficient analysis of alleged comparative sales must occur so that family transfers and distressed sales are not shown as market transactions.  For example, one of our developer clients arranged for one of its newly completed apartments to be valued by several valuers independent of the banks.  The first valuation came in at $720,000.  The second at $730,000 and the third at $595,000!  Why was the third valuation so low?  Because the valuer in question had erroneously based the valuation on a “distressed sale” in a nearby project.  Such sales are considered to be inconsistent with the concept of “market value” as defined in the Australia and New Zealand Valuation and Property Standards.

• Banks and their valuers are reluctant to use developer sales (either made off the plan or after completion) in competing projects as comparable sales.  This is based around the mistaken belief that a developer sale does not represent the “true market“.  In some locations – especially where there is no sales history for dwelling types such as a new subdivision in a green-field area – or where sales volumes are lower than usual – this leads to valuations that do not truly reflect a property’s worth.

However, the Australia and New Zealand Valuation and Property Standards state that where the property to be valued is within a new development and is being purchased from the developer, sales from other comparable developments should be considered as a cross-reference.  In our view, this means developer sales in other projects can be used as sales evidence to support a valuation.

• Valuers usually do not use sales made to interstate and overseas buyers as comparative sales, based again on a mistaken belief that non-local buyers are uneducated and pay higher prices than local buyers.

• In Queensland, clause 27c of the sales contract requires all agents to list how much commission they charge.  Valuers – on instruction from mortgage insurers and banks – often reduce the purchase price by the amount the agent is paid in excess of the standard Queensland sale fee of 2.5%.  This is based around the belief that the developer is increasing the purchase price by anything higher than the standard REIQ commission.  Our understanding is that this clause only applies in Queensland.

Again, as we wrote a few months ago, the distribution of costs should have no bearing on the end value of a product.

Finally, remember that you as a buyer can challenge a valuation if it appears too low.  In particular, keep in mind that comparable sales evidence needs to be “like for like” as far as possible, especially insofar as proximity (to a railway station for example) or height above ground, view, aspect, ceiling height, facilities and so on.  Furthermore, valuers can utilise a much wider range of data than just comparable sales in any valuation report.

*Pretty please (with sugar on top)…join my Twitter space.  My aim is to have more followers than Terry Ryder.  He has 1,432 followers and has posted 1,841 tweets.  I have just 129 followers, with 35 tweets.  I am winning the race at 3.7 followers (v. 0.78) per tweet, but I need numbers!

Michael Matusik is the director of independent property advisory Matusik Property Insights. Matusik has helped over 500 new residential developments come to fruition and writes the weekly  Matusik's Missive. The Matusik Missive is free, however, reprinting, republication or distribution of any portion of this material, or inclusion on any website, is strictly prohibited without the written permission of Matusik Property Insights and may incur a charge.