If you have a question that’s not covered here, feel free to contact us.
- Why are valuations required?
- What do Valuers do?
- Do valuers specialise?
- What training and qualifications do valuers have?
- What does API membership mean?
- What is the difference between a professional valuation and an agent’s appraisal?
- Do valuers sometimes value low?
Why are valuations required?
Real property (land and buildings) comprises the most valuable class of asset held by most individuals and companies. From time to time it becomes critically important to determine the value of these assets (e.g. for securing a loan against them, division of the assets of an estate or marriage). Unlike shares or TV sets each piece of real estate is unique. Properties are complex multi-faceted items, subject to various Government and legal controls (e.g. building regulations, zoning, easements) and also subject to deterioration or potential for redevelopment. The marketplace for residential properties is characterised by substantial unexplained variation due to such factors as personal emotion, uninformed or overzealous buyers and sellers, forced sales (e.g.mortgagee sale), changing economic conditions, or more simply who did or did not get their finance in place in time for the auction.
It is important therefore that any valuation of a property asset be undertaken by someone with specialist knowledge of property and the property market, who has no personal interest in the property themselves, who abides by an appropriate code of ethics and who can be relied upon to provide an accurate, independent determination of the value in a format which will satisfy the needs of the client and stand up in court if challenged. This is where the professional valuer comes in.
The majority of valuation work is done for the purpose of securing a loan by mortgage of the property to a bank or other lender. Each bank has a “panel” of valuation firms which they refer work to under contracted arrangements for fees, turnaround time etc. Valuations are of course required for many reasons other than finance and it is these areas which AHV concentrates on.
What does the Valuer actually do?
In a “full inspection” valuation the valuer will thoroughly inspect the property, taking note of such things as building style, type of construction and construction materials, number of bedrooms, details of living areas, details of fixtures and fittings, along with the age, condition and quality of the various components of the property. They will measure the property to determine the living area and the areas of other important components such as garaging and covered entertaining areas. A detailed description is also taken of external improvements (landscaping, outbuildings), topography and access, the locality of the property and positives and negatives of surrounding land uses. A search of the title will reveal the land area and any encumbrances such as easements and rights of way which might affect use of the land and therefore the value. Other searches will reveal the zoning and other relevant information such as the last sale price. Internal and external photos are taken as a record of the property at the time of inspection.
The next step is to interrogate various sources of information to which the valuer has access in order to identify recent sales of similar properties in the general locality of the subject property, including photos and floor plans of sale properties which are available from the internet and other sources. The valuer will inspect each sale property from the road and if necessary will call local agents to check details of sale properties which might not be readily apparent. Once this information is collated the valuer will make comparisons between each sale property and the subject property, adjusting for variations in living area, age & quality, land area, location issues etc. in order to define a value range for the subject property and ultimately a point of value within that range.
The final step is to complete a report which will have both the market value and value range and which should also include a description of the property including its various positives and negatives, and details of the local property market. Also included is a description of each comparable sale and how it compares to the subject property.
Each of the above steps is guided by a combination of general best practice, Australian Property Institute guidelines and property valuation case-law over the years.
Do valuers specialise?
There are many many types of real property. Residential properties are very different to commercial and the market processes which determine value are fundamentally different – one driven by personal accommodation needs and emotion; the other by income and business returns or commercial accommodation needs. Commercial property is enormously diverse – from office buildings and shopping centres worth hundreds of millions of dollars, to industrial buildings large and small, hotels, hospitals, nursing homes, service stations, cinemas, strip shopping, showrooms, quarries, development land etc. etc.
Each area of commercial valuation involves a different type of asset with different players, different legislative and legal requirements and different drivers of market value. Some of these markets require years of specialisation before valuers become competent in them.
At Adelaide & Hills Valuations we specialise in residential and rural living properties and are not distracted by the demands of commercial valuation work.
What training and qualifications do valuers have?
All valuers must complete a university degree to be able to practice in Australia. Legislation to this effect exists in all states. In South Australia the appropriate qualification is a Bachelor of Business (Property) undertaken at The University of South Australia.
Valuation firms and large clients such as banks require their valuers to be members of the Australian Property Institute (see further details about the API below). Admission as a full member can only be obtained after several years of working in the industry and then having to pass an examination.
What does API membership mean?
Most valuers are members of the Australian Property Institute. Membership of this institute is a requirement by most employers and for valuers wishing to do work for government agencies and major clients such as banks. The API regularly issues valuation guidelines and standards for the various different types of property and they have a detailed code of ethics to which all members must adhere.
There are different levels of membership covering trainee valuers, valuers who do only residential work, valuers who can undertake residential and commercial work etc.
The API runs regular seminars and training sessions and has a Compulsory Professional Development scheme which requires members to do at least 20 hours of professional development training each year.
What is the difference between a professional valuation and an agent’s appraisal?
A real estate agent’s appraisal is a document which generally sets out the credentials of the agent, the manner in which they would market a vendor’s property, and their estimate of the property’s value.
The main purpose of an appraisal is not to give the vendor accurate, unbiased information. Its purpose is to secure the listing for the agent – in other words to get the vendor to sign an agency agreement to sell through their firm. It is normal for a vendor to want the best price possible and leads some to think that the agent which puts the highest value on the property in their appraisal will be the one which can get the best price. In reality of course the property is worth what its worth – the agent with the highest appraisal may just be the one willing to stretch the truth furthest in order to get the listing.
If a property goes on the market too high it may hang around for weeks or months longer than it should – wasting the owners money on advertising and his time on keeping the house at open inspection presentation standard. History shows that such a property can become “stale” – buyers lose interest or think there is something wrong with it, resulting in a lower price than would have been obtained if priced correctly.
Of course you also need to know that the agent is not underselling your property, as this can also occur. The answer is to obtain an independent professional valuation before approaching any agents.
As agents have a vested interest in the property they are appraising, do not have university-level training and are not bound by the sort of comprehensive code of ethics which valuers operate under their appraisals are therefore not accepted by courts, and are unsuitable for purposes other than possible sale of the property.
Do valuers sometimes value low?
The vast majority of valuations are made as close to the actual value as the valuer can get it, without any bias in either direction. There are two situations where this is not the case, and it is these which can lead to a perception by some that valuers sometimes value below market. The first is Government valuations for rates and taxes. These valuations are carried out mostly by computerised systems and are generally much less accurate than valuations conducted by a human being. The Government therefore set them low so that ratepayers won’t trouble them with a lot of objections to their valuations.
The second is bank valuations where the property is unusual or where there is insufficient market evidence. There is a lot riding on a bank valuation. If the valuer gets it wrong the bank could lose money, and the bank may then sue the valuer. Therefore, although most bank valuations are at full market value, there are a few occasions where the valuer may err on the conservative side for very good reason.
For any valuation done for purposes such as setting a selling price, property purchase, estate or marriage settlement etc. a valuer will always strive to value the property as close to actual market value as he can – within the constraints of the sales evidence available.