What is the science behind valuations?

The science of valuations, well, it’s more of an oxymoron than a question but it remains a question that even I’d like help in answering. To understand the process better we held an education session for Team Blue Wealth run by a highly experienced valuer with over 20 years’ experience and significant industry involvement. Much of the below information has been taken from his presentation which gave us an insight into the process of valuations.

There are a number of ways a valuation can be conducted. These include the various valuation methods; the adoption of the correct method is left up to the discretion of the valuer and depends heavily on the type of property being valued. Whichever method is adopted, the valuation is completed to find the fair market value (market value) of the property. This is articulated as:

“Market value is the estimated amount for which an asset should exchange on the valuation date between a willing buyer and a willing seller in an arm’s length transaction, after proper marketing and where parties had each acted knowledgeably, prudently, and without compulsion.” (Pa. 30, IVS 2011)

To arrive at the ‘fair market value’ of a residential dwelling, the direct comparison method is the most accurate method. This involves finding like-for-like similar comparable properties that have sold within close proximity to the subject site. To correctly complete this method a valuer must analyse the sales, adjust, calculate difference’s and arrive at an estimated value. Things to consider when adjusting the values include:

  • Location
  • Aspect
  • Improvements
  • Design
  • Size
  • Condition
  • Features
  • Distance to amenities
  • Services available
  • Rates & strata
  • Circumstances behind sales

The extent to which a valuer considers these factors depends on the quality of the valuer and/or how much time the valuer is willing or able to spend on the valuation. A valuer is instructed by a party to complete a valuation for various purposes. Some purposes include:

  • Mortgage purposes – where a bank instructs a valuer to find the ‘market value’ of a property to determine loan amounts
  • Compulsory acquisition – in instances where the government is acquiring a property, valuations are to be conducted by both parties to find the fair compensation
  • Property tax – To assess the taxes associated with a property dependant on their values (land tax)
  • Independent valuations – These can be undertaken prior to buying or selling a property

Most relevant to Blue Wealth is the valuation process for mortgage purposes on an off-the-plan purchase. Off-the-plan property valuations are known as the most complex types of valuations. The comparison of a new property against established comparable sales makes the adjustment process more difficult. Typically, valuations conducted for a bank are tendered out at one of the lowest prices in the valuation industry. Essentially, you’re coupling the least profitable valuation with the most complex property type. The trade off can be a strong deterrent to the quality of the valuation and the depth of which a valuer goes into the factors listed above when adjusting the value.

Valuation firms who are on the bank panels value their position there based on the volume of valuation jobs they receive. Protecting their place on the banks panel is critical to maintaining high levels of contracted work. If a valuer was working in the best interest of the bank, a valuer would be more likely to lean towards a more conservative figure. When completing a bank valuation, a valuer is acting on behalf of a bank therefore a conservative, more subjective approach is likely to be adopted.

The reality is that not much science is used in everyday bank valuations. It is largely a subjective opinion. The disparity and inconsistencies in valuations are often an indicator of how much work a valuer puts into a valuation report. There is no single correct figure for a valuation. The valuers work to derive a range for the fair market value. Generally, a range of 10% either way of the final valuation which keeps them protected if taken to court about a figure.

I believe it’s fair to assume that subconsciously a valuation is skewed to whichever end of the range is best suited to the person the valuation is conducted for.

The above inconsistencies in bank valuations is evidence of the lack of science behind the process. This is why we’ve developed our research methodology. We saw many examples of this inconsistency in Sydney 7 and 8 years ago, where valuations would come in below purchase price. What followed, was a period where the median house price in Sydney grew more than 70%.

If you’re in the process of building a portfolio you encounter a valuation issue, it’s critical that you maintain perspective and understand that it may not be a fair indication of the property’s value. We encourage you discuss any issues with us to work towards a solution.


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