Number 6 in a series of short articles by a Victorian author, educator and real estate agent.
What are Property Valuations?
Value is a tricky thing in real estate. How do you judge? Who judges? Is it important? When is it important?
Property is different than a lot of other purchases you make. The value is what someone is prepared to pay. You could add up all the bits and pieces that make up the property and say the total is $x dollars. 'The market' may disagree and not want to pay that much or because of position, scarcity or a whole lot of other factors the market may be prepared to pay much more than your total.
What is valuable in in the eye of the beholder. Location is probably the first on the list. Supply and demand is also very important. If there are 2 properties available and 4 buyers want them the price starts to creep up. If there are 100 of them and only 10 buyers guess what happens? If the vendor wants to sell the price has 'to meet the market' in other words come down in price.
There are also fashions, which influence value. Kitchens and bathroom are important as they are seen as expensive to replace. Media rooms may be popular this year but next year it may be butler's pantries for example. Swimming pools added value in some suburbs but lowered it in others and for a while people were filling them in.
In apartments it is security, outdoor space and parking which can make a big difference in value.
In real estate it is quite common for a real estate agent to give an opinion on what a property is worth. This is called a market appraisal and is quite different from a ''sworn valuation' which is done by a qualified valuer. Many licensed real estate agents are qualified valuers as well but it is not automatic.
A qualified valuer prepares the sworn valuation in a very methodical way. He/she will measure the dimensions of the land, the total property and each of the rooms within the property. He/she will then compare the property to be valued with similar properties in the same area.
The more recent sales the easier it is for the valuer to get an idea of what 'the market' is prepared to pay for similar properties in the same area. Two buildings may be identical but on a block of land the exact same size in different suburbs will probably have different valuations given.
In a stand alone house the major component of the property value will probably be the land. The valuer will calculate the current value of the land by comparisons, in that suburb and it will be expressed in a $per square metre value. The valuer will then add an amount for the improvements.
Improvement means anything at all build on the block of land. The current cost of building will influence his calculation. Builders quote another $ per square metre figure to build new. They may offer a range of costs depending on the quality of the finishes.
It can be a bit of a shock sometimes when an old house on a large block in a prestige suburb is valued at almost only land value. It seems unfair to give such little value to the old house. I have seen a vendor become upset when offered the same amount as a similar house a couple of doors down. She felt hers was worth much more because she had put new wool carpet in. Unfortunately those sorts of things may not add value but may only help sell the property faster.
Often properties are sold at a price higher than the sworn valuation may say it is worth. This can happen at both auctions and private sales when there are two or more buyers who really want the property and are prepared to pay what I call an emotional premium to secure the property. I have seen this happen when a young mum desperately wanted the house next to her mum's when it came in the market.
There is nothing wrong with paying over the market value as long as you realise there may be consequences. Usually the lender will need a valuation of the property done by a valuer. The lender does not automatically lend you a set percentage of the purchase price, the lender may insist on only lending the percentage of the sworn valuation amount. So if there is a lot of difference between the two you may not be able to borrow as much against the property.
If you are an investor you really need to understand the value of a property, as you should be doing a 'sharp pencil' exercise and not paying more than it is worth. There is no rental return on emotional premiums!
Toni Planinsek, principal of Planinsek Property Group, is happy to answer any queries through social media - Facebook and LinkedIn. She has prepared some free offers to help you on your road to becoming a successful property investor. To access yours go to http://www.toniplaninsek.com.au