In practical terms, a property is worth what someone will pay for it. But sometimes you need a ballpark figure before the negotiations get underway.
A property valuation is a detailed report of a property’s market value. This is defined as the estimated sale price “between a willing buyer and a willing seller in an arm’s length transaction, after proper marketing and where the parties had each acted knowledgeably, prudently and without compulsion”.
As the careful wording of that definition implies, the final sale price is usually different from the valuation contained in the report, as it’s near impossible to predict how people’s emotions, market knowledge and other motivations might affect negotiations.
When would I need a property valuation?
A property valuation offers benefits to both buyer and seller. In providing a clear indication of a property’s market value, it reduces a buyer’s risk of paying over the odds for a property; in offering a detailed analysis of a property’s weaknesses, it can help a seller decide which renovations to make to enhance a property’s value.
That said, the most common reason why people need a property valuation is because their mortgage lender (usually a bank) requests one.
The property valuation serves as a “risk report” for the lending institution, to ensure the security value of the property covers the loan.
The bank needs to be confident that it can recover any outstanding amount owned on the property, should the buyer default on their mortgage.
Some lenders still have in-house valuers, or use internal algorithms or desktop assessments. However, in the majority of cases, [the property valuation] is outsourced to independent valuation companies who are recognised on the lender’s panel.
Property valuations are also often required for financial reporting, for tax compliance, for family law mediation and for determining the amount of compensation given to land owners for easements or land acquisition.
How is a property valuation calculated?
A direct comparison with recent comparable sales forms the backbone of most residential property valuations, though valuers will also take into account the following attributes:
- the size of the property
- the number and type of rooms
- the fixtures and fittings
- the structure and condition of the building(s)
- the standard of the fit-out and the property’s architectural style
- ease of access to the property
- planning restrictions
- the property’s location and level of amenity
- the size of the land
- the aspect, topography and layout of the block
First, valuers use a handful of recent comparable sales to give them a ballpark figure for the property in question, and then they make adjustments to that figure based on any significant differences found between the above attributes of the properties.
The sales are analysed in terms of land attributes, improvements, location and planning controls… [and are then] compared to the property being valued.
However, other property types can require different approaches. For example, commercial property requires more financial analysis and development sites can require more planning consultancy.
Valuers will also visit the property in question, so that they can assess the condition of the building and make a note of any structural faults and nuances that might affect its market value.