Key Takeaways Of A Professional Perspective
Definition of Value
It is a figure based on what similar and nearby homes have actually sold for, rather than the marketing price guide of an agent.
Establishing Evidence
We will build a set of comparables by identifying three to five similar assets sold within the last six months and a one kilometre radius as part of a robust strategy for home buying.
Adjusting for Variables
We account for factors that influence the worth of an asset, such as the size of the land, aspect, and condition, to create a refined range of price.
Official Assessment
We will distinguish between appraisals and the role of an independent specialist in providing a number that is legally binding.
Risk Mitigation
A formal assessment is used to set a hard limit for bidding, protecting against emotion and financial risk.
Step 1: The Comparative Market Analysis: Building the Evidence Base
The first step in a formal assessment is to establish a base of evidence. This method involves finding recent and directly comparable transactions to create a benchmark. Whether you are looking for a family home or a strategic investment in property, playing guessing games with outdated figures is a risk that buyers of the high end avoid. We prefer securing prime real estate through data. To begin research, the submission of details of the property into various databases is an option, though the simple e-valuation form of our company provides a more nuanced starting point. The process of our team typically works as follows:
- Analysing Intel of Sold Assets: We will scrutinise data from the sold section of portals. This is key because it uses factual information of sales, not aspirational prices for marketing.
- Filtering by Core Criteria: The sales are filtered by the exact suburb, type, and the number of bedrooms to ensure relevance.
- Applying Filters of the Industry: The standard timeframe is sales within the last six months and within a radius of search of one kilometre.
- Isolating Key Comparisons: From this pool, we will isolate three to five properties that are most similar in the size of the land, age, and style to form a set of comparables.
Why this matters: The rule of six months and one kilometre is critical for an accurate assessment. The environment changes quickly, so older sales are less relevant. Median prices in a suburb might look attractive, but they often mask the recent growth or decline of specific streets. Assets over one kilometre away are often in different micro-markets with different factors that influence the price, such as school zones, which can make a summary misleading if an expert does not filter it.
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Step 2: Adjusting for Factors That Influence the Value of a Home
Next, the prices of the similar assets are adjusted to account for differences with the target property. This process uses Value Drivers: the specific factors that influence value by adding or subtracting real dollars. This determines value far more accurately than a simple average. When you are determining the final number, the way a property is judged depends on several physical and legal attributes.
Using Assets to Guide Adjustments
Let us imagine a Target Property has a desirable north-facing backyard and is in a top school zone, but it has an old and dated kitchen. A nearby comparable recently sold for $1,200,000. However, the comparable has a brand new kitchen but a less desirable south-facing backyard. In some cases, we have to even consider depreciation for older improvements or use a cost approach for brand new builds to ensure the valuations are watertight.
Here is an example of how we might adjust the price of the comparable to estimate the value of the target:
Starting with the Price of the Comparable: $1,200,000
- Adjustment 1: Condition (Kitchen)
- The Logic: The comparable is in better condition. The target would need a renovation to match it.
- The Action: We will estimate the cost of a basic renovation of the kitchen, say $30,000, and subtract this from the price of the comparable.
- Adjustment 2: Land and Position (Backyard)
- The Logic: The target is superior due to the north-facing aspect of the land, which is a highly sought-after feature.
- The Action: A feature like this might add a premium of around 3-5 per cent. A three per cent premium would mean adding $36,000.
- Adjustment 3: Location (School Zone)
- The Logic: The target is in a more valuable micro-pocket because it is zoned for a school of the top tier.
- The Action: In this market, we would determine the premium of the school zone is worth $50,000, which would be added to the price of the comparable.
The Final Adjusted Value for this comparable is $1,256,000.
By repeating this for all three to five comparables, a tight and data-driven range of price is created. This highlights the difference between guessing and the rigorous method behind a professional assessment. We are unlocking significant equity by ensuring every acquisition is backed by these cold and hard metrics, allowing buyers to bid with total clarity.
The Final Adjusted Value for this comparable is $1,256,000.
Step 3: Appraisals versus a Certified Assessment
The next part of the process is understanding the number that banks will actually lend against, which is the valuation of the bank. Properly understanding appraisals means recognising that the opinion of an agent is a marketing tool for the seller. Working with the buyer agent and certified valuer of our firm provides a document for legal risk assessment. This provides an independent advantage by protecting both the money of the bank and the capital of the buyer. This is one of the most vital valuations available.
Pro Tip: The standard practice of the industry is to find a specialist through the official directory on the website of the Australian Property Institute. The Australian Property Institute is the governing body that ensures experts are independent. It is wise for buyers not to use an expert recommended by the agent of the seller to avoid any potential conflict of interest.
Analysing a Valuation Shortfall
Step 4: The 'Walk-Away' Price: A Tool to Eliminate Risk
The true figure of the market is a crucial piece of data used to inform a hard limit for bidding. This final step is a strategy designed to protect against getting carried away by emotion and facing the financial risk of a Shortfall of Valuation. This approach that prioritises valuation is central to the strategy for pre-auction of our team, ensuring there is no cent more paid than the worth of the asset. A shortfall occurs when the appraisal of the lender comes in lower than what was paid, creating a gap in funding.
The Risk Explained: What is a Shortfall of Valuation?
A shortfall happens when the figure of the lender is lower than the price of purchase. Because the bank will only lend a percentage, like eighty per cent, of the price of purchase or the official figure, whichever is lower, the buyer is left to fund the gap in cash.
Here is how it has worked with real numbers:
- An auction is won for $1,100,000 with an expected borrow of eighty per cent, which is $880,000.
- The figure of the lender comes back at $1,000,000.
- The bank will now only lend eighty per cent of the figure of one million dollars, which is $800,000.
- The buyer is now $80,000 short and has to find this cash before the settlement.
Obtaining a valuation of the home before bidding is a powerful strategy for defence. The price of sale paid will always be informed by this evidence, protecting against overpaying.
Frequently Asked Questions on Determining Value
An independent valuation and an appraisal of the lender will arrive at very similar figures because both are conducted using the same evidence of sales. The key difference is the purpose of the reports. A private report is a tool for the benefit of the buyer, empowering the search with a clear limit for bidding. In contrast, the assessment of the lender serves to protect the financial exposure of the bank by confirming the security is adequate.
For a standard residence, a private report typically involves a cost between $300 and $600. This fee is a small investment when compared to the potential financial risk of a shortfall. Paying a few hundred dollars for valuations can prevent a gap of tens of thousands of dollars between the price of sale and what a bank is willing to lend.
The primary difference is the function and bias of the individuals. The appraisal of an agent is a marketing tool created for the seller, so it can be optimistic. A certified assessment is a legally binding and independent report of risk for the buyer and the lender. A Certified Practising Valuer has a legal duty to be impartial, whereas the primary obligation of an agent is to achieve the highest price for the seller.
A report is considered valid by most lenders for ninety days from the date of inspection. This timeframe exists because the market is dynamic. New evidence can emerge and conditions can shift, potentially altering the worth of the property of a dwelling. After ninety days, a lender will almost always require an updated assessment to reflect the most current evidence before approving finance.
Ni Advocacy
Melbourne Buyers Agency
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