Valuations 101 (Ep.17)

School’s back in session and this week’s topic includes everything you need to know about valuations. There are many different types, each producing a different result based on the purpose 

In episode 17, the Property Planner, Buyer and Professor dissect the ins and outs of “Valuations 101”. 

Listen as David Johnston, Cate Bakos and Peter Koulizos, take you through the different types of valuations, the consequences of falling short and how you can proactively support a valuer with comparables to manage the risk of a conservative lender valuation 

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Show notes

  • The 4 different types of valuations: 1. Market value; 2. Valuation for aiding taxing purposes; 3. Mortgage purposes; 4. Insurance purposes. The same property can come back with four different values, it depends who’s eyes you’re looking through.  
  • What is market value? The estimated amount for which an asset should exchange on the valuation date between a willing buy and seller arm’s length transaction after properly marketing and when each party acts with knowledge, prudence and without compulsion. 
  • Valuation for tax purposes: refer to your council rates notice!  
  • What’s left out from a council valuation? The brand-new kitchen you just put in. If you don’t need council approval, the council won’t know about it. 
  • Get out your extinguishers! It’s a fire sale – the valuation for mortgage purposes generally is conservative. It is a representation of what the bank would get if they are forced to sell to recoup their costs 
  • Cost to rebuild – insurance valuations. In these situations, the insurer is not concerned with the value of the land, they care solely about what your home will cost to rebuild if it’s damaged.  
  • Diving into market value – the best way to go is to seek comparable properties that have sold recently. But don’t dive too far back into the past, 3-6 months will give you the current value.  
  • What is a comparable property – we’re talking the same suburb, similar land size, building size and condition. Make sure you are comparing apples with apples 
  • Factors that can sway the lender valuations: 
  • Same street, but the house is on the high side of the street – this may sell for more than the house on the low side.  
  • Town planning and zoning restrictions – if you can get 5 townhouses on a block as opposed to 3.  
  • Could the property be used for multiple purposes – eg a doctor’s office.  
  • Does the property have great views and another property in the same street does not? 
  • Don’t rely on anomaly sales! Sale prices can be inflated or undercut by numerous factors – a desperate vendor who is under a time crunch to sell, difficult tenants obstructing access to the property for prospective purchasers, strange conditions in the contract of sale and extremely short or long settlements.  
  • Property nightmares – hoarder houses, rat infestations and creepy histories can negatively impact the market value.  
  • Bank valuations – lowering the quality to bring up the quantity. Not all bank valuations require a valuer to visit a property. A valuation can be performed by an algorithm, by a person at their desk or by driving past the property. How will they know that you just renovated the bathroom? They don’t.  
  • Nothing beats quality comparable sales – if you have a bank valuer coming to your property, collect the comparable sales yourself and offer them to the valuer or via your Strategic Mortage Broker. But tread carefully, the valuer is the expert (and you’re not there to tell them what to do – just to help).  
  •  When you purchase a property, the bank valuation will never come back and say that it’s worth more than what you paid. But they’ll definitely tell you if it’s worth less – but this is pretty rare unless you are buying off the plan!  
  • The highs and lows of valuations – the interesting juxtaposition is that you want your bank valuation to come in high, but you want your council valuation to come in low, for your rates and land tax 
  • Act swiftly! You only have a small window of opportunity to challenge a valuation on your rates notice or land tax. 
  • Bank valuation shortfalls – when the valuer decides you paid too much – how precarious is that risk and how can you work around it? 
  • If you have a top-quality asset, sometimes a bank valuation can disappoint. The fact that you live on an A grade street, have a great floor plan and a north facing backyard may not be represented in the recent property’s that have sold which the valuer must use as comparable.  

Cate Bakos – The Property Buyer’s Golden nugget: Knowing the difference between a valuation and an appraisal. The real estate agent does the appraisal and they’ll do it for free. You can challenge a valuation, but don’t bother questioning the appraisal, it’s a guestimate (and they may be selling cars next year).

Peter Koulizos – The Property Professor’s Golden nugget: Plan ahead if you are thinking of doing renovations or new builds, don’t assume the amount of money you spend, will be directly reflected in the price. Eg if you spend $400,000 – that doesn’t mean the price of your property is going up by $400,000.

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