Property valuation is often seen as a moving target that depends on a number of factors, but as James Freudigmann explains, there are still some core guidelines that never change
There are often two market assessments that people refer to when talking about the value of a property – appraisal and valuation.
The appraisal is what a selling agent will provide to you. An appraisal is a market indication based on some comparable sales that the agent is aware of, it is not a true property valuation. If you rely on this and list your property for sale, you will nine times out of ten, find that this appraisal price is not an indication of real value.
A valuation is a calculated figure that includes an assessment of the land value and the improvements, taking into account the depreciation of the property since construction. It also includes sales comparison, construction costs, town planning commentary and a breakdown of living areas, outdoor areas and car areas.
Every day, I see listing prices very rarely in line with the market value of the property. Sellers start with a higher price to see if this can be achieved, then generally speaking the listing or asking price is reduced until there is an offer from a prospective purchaser. A selling agent’s appraisal is generally not an indication of real or market value. Real value or market value is the value of a property assuming that there is a willing buyer and willing seller in an arm’s length transaction. This figure is what is reflected in a valuation.
As reported by Property Valuation
Risk ratings and your bank’s lending decision
Risk ratings are used as a benchmark for lending purposes, so that the bank can determine whether they consider the property to be appropriate security for the lending associated.
There are eight risk ratings that a valuer must assess and classify from low-risk (rating 1) through to high-risk (rating 5). The eight risk ratings are based on:
expected reduced value in the next 2-3 years
market for the area
market segment conditions
volatility of the property
All of these provide a quick summary of the position and quality of your property in the marketplace. Properties with risk ratings of 4 or 5 are considered to be relatively poor security for banks. If your property gets a risk rating of 4 or 5, there is potential for the bank to limit lending or not lend at all.
So how do you protect your property from being assessed as high risk?
A simple coat of paint or landscaping generally won’t impact on the property’s risk rating. It all comes down to what property you buy and where that property is located.
For instance, if you buy on a main arterial road, you are going to get a risk rating of 4 or 5 due to the noise and traffic. If you buy a property that is $3 million in an area where most properties are $500,000, then you are likely to get a number of high risk ratings due to the volatility, limited market segment that the property appeals to and the potential for reduced value in the next few years. It is all about purchasing a calculated investment.
You are always going to struggle to get strong growth and low risk ratings if your property fronts a main road, backs onto a train line or is in the top 5% of the market due to the limited marketability, high vulnerability and volatility when markets move.
To ensure your risk ratings are assessed as low to medium, it is recommended to purchase property that is relatively in line with the remainder of the suburb. I’m not saying buy a vanilla, low-value property but I am saying don’t buy the property that sticks out like a sore thumb. Look for properties that are not out of the ordinary and are well located. Properties should be relatively in line with the rest of the market, with strong appeal to owner occupiers. Every suburb has good and bad areas as well as sought after addresses, so look for properties in close proximity to these areas. Big positives include being close to cafés, schools and transport.