Why it pays to understand the valuation process – Part 1
How does a professional valuer perform a valuation on a property, what are some of the challenges, and how can property investors use knowledge of the valuation process to their advantage?
The formal valuation process is an integral part of property investment and it pays for property investors to understand the ins and outs.
In this two part series we will look at how a professional valuer performs a valuation on a property, what challenges they face, and, importantly, how property investors can use that knowledge to their advantage.
What is a formal property valuation?
Put simply, a valuation is the estimated market value of the property on the date of valuation, based on what it would sell for under normal circumstances where both the buyer and seller are acting knowledgably and without undue pressure. A valuation is performed by a professional valuer who has no stake in the property and the valuation is generally valid for a period of up to three months.
The difference between a formal valuation and a market appraisal (typically done by a real estate agent) is that a formal valuation can only be done by a qualified valuer with the prescribed education and training. An appraisal is intended to be more of a guide to what the property may fetch if it was sold, based on local knowledge and recent sales evidence.
There are a few different types of valuations, including a Kerbside Valuation, which involves no internal inspection of the property, just a ‘drive-by’, and a Desktop Valuation, which simply consists of research done at a computer. However, let’s focus on a Full Valuation, which involves the valuer undertaking a full inspection of the property, including an internal inspection.
Who uses valuations?
Valuations are most often used by lenders to determine the value of the assets being used as security for a loan, and to calculate how much they are willing to lend. Buyers, sellers and property owners may also order valuations to determine the value of their existing assets or those they plan to acquire.
The inspection process
Let’s take a common scenario where an investor is seeking a loan for a recent house purchase. Before the loan is approved and the amount of the loan finalised, the lender will order a valuation from an independent valuation company selected from its panel (list) of valuers.
The valuer will visit the property and conduct an external and internal inspection, taking pictures and even asking the owner questions about the property. The valuer will evaluate the land component of the property, which can make up a significant proportion of the property’s total value. Among other things, the valuer will assess the size, shape, aspect, and topography of the land as well as the zoning and development potential.
Inside the property, the valuer will measure the size of the building and take note of the number and type of rooms, the property’s age and condition, its fixtures and fittings, its design and layout, and any unique characteristics that could affect the value.
Interestingly, valuers look at many of the same things that a prospective home buyer would look for when assessing a potential purchase. The reason is that overall home buyers make up the majority of the market for real estate and therefore play a major role in determining “market value”.
Valuers are often acting under specific instructions from a lender. For example, they may be instructed to value the property as a single residence even if the property has potential as a duplex or triplex development.
Next month we’ll explain the role that sales evidence plays in the valuation process, some of the challenges faced by valuers and how investors can use this knowledge to their advantage.