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The property valuation: it’s one of the most important factors in the equation when you want to acquire property, but can it be trusted?
It would be great if we could take exactly what our property valuer says as the truth and not give it another moment's thought, but let me share a story that will show you why valuations aren't always reliable.
A client recently purchased a property in an area I considered a sound investment. In fact, I was so confident that I bought a property in the same area as well.
Strangely, the valuations for the two properties both fell short of the purchase price.
To check the logic, I obtained six other valuations of similar properties with similar values by licensed valuers.
You would think that the valuations would be similar, but they weren't even close. One came in at $20,500 more than the purchase price, and another came in a staggering $57,500 short of the purchase price.
They had the same number of bedrooms and bathrooms, were the same size, and were in the same location. All valuations were requested for the same purpose – 'mortgage security'. The two high and low valuations above came from two valuers who worked for the same prominent firm; in fact, they both worked in the same office.
So what explains the wild discrepancy in valuations?
There are a few reasons:
- Valuations are traditionally backward-looking: they look at historic comparable sales personally chosen by the valuer. The valuation rarely takes into account future demand or supply.
- Lenders can influence the valuation; they provide the valuation criteria, which can affect the valuation.
- With limited comparable sales in this particular area valuers had to use personal judgement, so an objective process became somewhat subjective.
- Valuers are human and, when provided with limited data, they tend to be conservative.
- Great Blog! Thanks for sharing the info with us and keep on updating us.
0 - Hi Tony Kelly, I have always declared myself to be an agent. You state of valuations that " They represent an opinion at the end of the day, but one founded on knowledge, experience and market evidence. " How then do you explain Michaels observation that two valuers from the same office put widely different values on similar properties. Our office, only last month, had two very different valuations from the same office on the SAME property. Why did we have two valuations on the same property ? Because the first contract fell over due to the low valuation !! And if your valuations are based on Knowledge and experience why do our Qld valuers always ask us to show the contract price to them BEFORE they do the valuation. And surprise, surprise they never come in more than the contract price. If we refuse to show them the price we risk alienating the valuer at our peril. They assume God like status in Qld " whatever you do do not offend the valuer "0
- Thanks for sharing the very useful information..
0 - <p>Hi Tony, (and Michael) - I understand your point of view. my main concern with many valuations is that they have simply not been done professionally enough, the consequences of which can be costly for the buyers, the sellers and the banks, although the valuer still gets paid. I have observed good valuers having such tight time restrictions placed on them by their masters (the banks who pay them) for turnaround of the valuation that they have cut corners to meet deadlines. likewise I have seen some outrageous selling prices through marketeers and it astounds me how they get away with it. I assume we all agree though that somewhere in the middle is the markets "happy medium" that applies to the large majority of real estate transactions.</p>0
- <p>Hi Michael, firstly unlike many in the real estate profession I'll declare my interest upfront - I am a valuer. A couple of points to consider in my view are below.</p><p>Given you are a Sydney based "wealth coach" then in the Sydney market these variances may not be huge in percentage terms, and as you will appreciate very similar properties auctioned days or weeks a part can achieve very different results. It is not so much as "looking backwards" as you say, but valuations being evidenced based. The valuation also reports the likely re-sale value (what lenders really need to know) and not just what the numbers on a contract say. Off the plan and new product sales can easily contain allowances or mark-ups for the marketeers and others. We need to remember it is the vendor's and agent's intent to achieve the highest possible price.</p><p>I agree that valuations are not perfect. They represent an opinion at the end of the day, but one founded on knowledge, experience and market evidence. I don't know if you have ever have invited different real estate agents to your home to provide their views on what they could sell your home for – any variance here?</p><p>Property, by its nature is highly variable with no two being exactly the same, unlike listed shares and other tangible assets. I think valuing art and real estate are the most alike professions as beauty can be every much in the eye of the beholder.</p><p>What valuers really bring to the table is knowledge and independence in a transaction process. Can you imagine a world, or an economy where money was lent simply based on what a proposed contract for sale said? One would not want to be caught holding bank shares and we only need see what happened in the US (sub-prime lending) and more recently to Greece to understand how economies and Governments go into cardiac arrest when their banks start to fail and not meet their commitments.</p><p>In Australia and even with APRA working hard, and the lenders applying their own credit rules (that sometimes trigger a valuation as part of a loan application assessment) there seems to be no shortage stories of real estate marketeers, developers and other middle men being able to extract money from an unsuspecting and sometimes ill informed market place. Here is a link from a few weeks ago to one such article - <a href="www.smh.com.au/business/land-banking-com...20150717-gif2v6.html" rel="nofollow">www.smh.com.au/business...</a></p><p>I understand the frustrations that agents, buyers and sellers can have when it comes to valuations, and how some see valuers as an unnecessary speed bump, (literally sometimes as some would like to run us over I am sure) on the road to ownership or commission land. The theme of your blog is not uncommon; I hope I have put an alternate / bigger picture view around valuations in our market and our stable economy.</p>0
ABOUT THE AUTHOR
Michael Bowling
Michael Bowling is a co-founder of Allied Investment Group and specialises in SMSF property investment. Michael started with a small property development project in South Australia in 1993 and now has over 20 years’ experience in the property and finance industries. Allied Investment Group helps ordinary Australians take control of their finances and will hand-hold their clients throughout the entire investment process.
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