Property ValuationsMarket Valuations V's Mortgage Valuations Discover how to buy investment property at the property valuations mortgage price. What is a property really worth? With respect to market valuations, it depends on how much you want a property and how motivated the vendor is for a sale. Please don’t confuse a market property valuations with mortgage valuations; we will look at the differences below. The correct definition of a property’s value would be the price at which a willing, informed seller would freely dispose of the property and the price at which a willing, informed buyer would freely pay for the property. If those two parties were to agree then that would be a genuine measure of a property’s worth. Unfortunately it is very difficult to accurately predict what that figure is. By comparison it is very easy to value shares. One XYZ Company share is identical to another XYZ Company share. They are priced identically and the prices the buyers and sellers agree on are openly published. With property, no two properties are exactly alike. Even identical units standing side by side will be different. They may have a different facing, one may be closer to a noisy road than the other, one may be facing the pool and the other not. They are never exactly alike so it is difficult to do a direct price comparison. Then there are different methods to value a property. There is a direct comparison with recent sales. Again the problem is finding similar properties to compare with which are in a similar area and sold recently. The problems with this method are compounded by the time it takes for sales data to be made available, sometimes as long as 6 months so not only are we trying to find similar properties for comparison but some of our information is outdated. Property values can move greatly in 6 months. There is a summation method. This is a calculation of the replacement cost of the building plus the estimated value of the land. The summation method is sometimes used to double check the direct comparison method. Another method is the capitalisation of rental. This is more common with commercial property as their value is in the return on investment rather than someone falling in love with the home. The hypothetical development method uses an estimate of the land’s value if it was developed to it’s maximum potential. This method is more for larger blocks and subdivisions. We add to this constantly moving playing field the commercial pressures valuers are under. The banks pay them very little per valuation so the time they can spend on each is limited which sometimes leads to them cutting corners and producing inaccurate or irrelevant valuations. The valuers can also be held personally responsible if a property is “over” valued and the bank cannot retrieve their funds in a foreclosure. That fact makes valuers err on the side of caution. Valuers deliberately reduce their property valuations to manage their personal liability risk. Add to all these variables the instructions that the banks give the valuer in the first place. The bank requires a valuation based on a 30 day sale, that is “what price would we get if we had to guarantee a sale within 30 days”. This is commonly referred to as a “fire sale”. It doesn’t necessarily have any relation to what it may sell for in the open market. Normally a bank (or mortgage) valuation is conservative, usually coming in at 5% (or even 7%) lower than the contract price. This is a combination of all the above factors but mainly the result of (1) the banks instructions, (2) the valuers need to reduce their liability and (3) the time pressures put on the valuers. I recall one instance where I was told the valuer was instructed to value low because the bank already had too many properties in that area under loans. Nothing to do with the property at all.The problem with all this is that everybody in the property and finance industries are at the mercy of this one person’s opinion… and one person’s opinion may vary greatly to anothers. I have seen identical townhouses standing side by side valued $50,000 different. It may be an educated opinion but it is still just one person’s opinion and it affects everybody involved in the property transaction. Banks will only lend a percentage of the property valuations figure, not the contract price so it is necessary to be aware of possible variances and allow a margin to cover these. Remember, just because a valuer values your property down doesn’t mean it is the correct, fair market value (or price). It is just the result of all the many and varied factors that can influence that one person’s opinion.
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