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Valuation of Property [Homeowner’s Guide]

Understanding Valuation of Property

Before you decide to sell or buy a real estate property, make sure to calculate its market value to ascertain how much it is worth in the market in the present. Property changes in value with time to reflect the housing and economic trends. Regular property valuation is, therefore, essential.

What is a property valuation though? Think of it as the process of establishing the economic value of real estate. When calculating property value, often a trained and qualified real estate valuer or an agent compiles relevant data and expert opinion to generate a property valuation report.

A comprehensive property valuation reflects the actual market value of the property or in other words, how much a property is worth and could sell for.

As homeowners, if you are interested in buying your first home, selling a previous one or simply interested in knowing the worth of a property, you can benefit from understanding the various ways of property valuation and how to calculate them.

When Do You Need a Property Valuation?

If you’re a real estate owner, you might need a valuation for multiple property management reasons often stemming from the need to calculate market price. Once the market price is determined, it can then be used to determine a property’s selling price and understand the home improvements needed to up its value. It can also be used in calculating tax payments, for financial reporting purposes, mortgage financing or to determine one’s financial situation.
Here are some key reasons to value property:

  • Capital Gains Valuation: Property valuation will help you determine the capital gains you will make as a seller and how much capital gain tax you must pay.
  • Family Law Settlement: During legal proceedings, like family settlement or in establishing the value for a deceased estate, a court order can call for family law property valuation to provide a value as per the Family Law Act 1975 which requires that someone must complete a proper valuation on the estate to establish the property value for settlement and distribution purposes.
  • Bank Request: Banks and other lenders conduct property valuations to use as security for loans and mortgages and calculate the risk of lending. In this way, they can ensure that the property’s market value is sufficient to cover the loan in case of a default and forced sale. Financial institutions also rely on the property valuation report to set interests on home loans.
  • Renovations: Do you have future plans to sell your house or apartment? Often property valuations are conducted to understand the renovations and revamping required for your property to meet a suitable market price before you make the sale.

Property valuation is also a tax and duty requirement by the Australian Tax Office [ATO] and the Victorian government in particular requires owners to perform a property valuation yearly on January 1 with the State Revenue Office of Victoria listing other reasons for property valuation from a legal perspective [i.e. for Duty or Rating purposes].

Types of Property Valuations

The type of valuation method adopted majorly depends on the purpose of the valuation. Properties lack a fixed price tag because markets shift frequently making a property valuation a recurring practice.
Here are the five most common types of property valuation:

Full Market Valuation

A full market valuation is tailored for property buyers and sellers. The value calculated can be on the higher end because the seller wants the best price possible. A full market valuation is expensive and involves comprehensive value calculation after a careful and detailed physical observation of the property. It is the gold standard in property valuation and the report covers all value aspects including location, size, age, structure, rooms, and raw materials used.

Thorough methods of valuation, such as the full market valuation, are usually unnecessary for non-substantive reasons like low-interest loans. Moreover, they have a shelf life of six months before another valuation can be performed to account for changes in market conditions.

Bank Valuation

Bank valuation of property is much different from the full market valuation. It is intended for use by banks often to calculate the loan-to-value ratio [LVR] and understand the risk of lending. LVR is how the banks determine what amount you as a borrower are entitled to in-home loans or mortgages.

To determine LVR, the bank conducts a comparative analysis of the client’s property condition against comparable sales and price estimates in the same area or suburb. Having a high LVR means you can borrow more of your home’s market value, and you could be at risk when interest rates inflate.

Property Appraisal

Qualified and trusted real estate agents, sometimes members of the REIV [Real Estate Industry of Victoria Association] do property appraisals as an estimated value of your property. This type of valuation can be free of charge to convince a potential seller into an enticing offer and is often privately ordered. Think of it as an opinion or idea on the worth of a real estate property and not a valuation that can be submitted to the bank for financial decisions.

Kerbside Valuation

Kerbside, or drive-past valuation, includes inspection of the exterior of the property and looking at comparable sales in the location. Sometimes, the valuer performs the whole valuation from the car, taking photos and recording what they can see. It also does not account for the renovations done on the property.

This service is fast, cheap, and appropriate in scenarios where it is irrelevant to inspect the property’s interiors. Kerbside valuation can be particularly useful to assess a property and determine the amount for refinancing or cashing out equity. Since kerbside valuation is mostly used for low-risk loans, the valuer does not need to be thorough or detailed.

It is, however, considered a more detailed option than desktop valuations which are solely based on data available on similar sales in the area without the element of a physical visit to the property’s location.

Automated Valuation Model

Automated Valuation Model [AVM] refers to property valuation that relies on a software-based system using RP data (e.g. CoreLogic Australia). Statistical and arithmetic models identify patterns in the database to provide property price estimates and a Forecast Standard Deviation (% FSD) which is the measure of accuracy of the estimate provided. The estimate will be more accurate if the FSD is lower, and vice versa.

Real estate agents use AVM as the initial step during property evaluation. There are also AVM online platforms available that provide a method of valuation of property online without meeting a valuer in person.

How to Calculate the Value of a Property

Property valuers look at similar properties and recent sales in the area based on land, location, renovations and improvements, and comparable sales [especially for appraisals and AVM] to the property in question. The property valuer collects this information to compile a three-page valuation report and submit it to the client after a couple of days.

To calculate the property value. The valuer will also have a site visit for a physical inspection and look for the following:

  • Size of land
  • Size of the property [including square units, number of levels, etc.]
  • Number of bedrooms and other room types [e.g. living room, bathroom, kitchen], usable floor space and special features for every room
  • Architectural style and layout of the property
  • Fixture and fittings
  • Building condition and structure
  • Planning controls/zoning of a location [assessing property development permits to see what land can and can’t be used for]
  • Location of and proximity to key amenities [hospitals, grocery stores, post offices, public parks or schools]
  • Accessibility of property [ease of access via road for cars or any other barriers to entry]
  • Risk rating [market risk and environmental factors such as market volatility, and exposure to natural conditions that could affect property value]

Objections to Property Valuation

Sometimes property owners may not be satisfied with the calculated value of their property and may want to file an objection. Homeowners must complete the complaint in writing within two months of the property valuation, clearly stating the reason for objection to be considered.

Each municipality is in charge of presiding over the valuation process, which concerns both the valuations for state tax assessment roles and municipal ratings. Under the Valuation of Land Act 1960 [VLA], the Valuer-General Victoria is assigned the core role of overseeing this action.

For a government mandated valuation that you are not satisfied with, you can electronically file a dispute with the Valuer-General Victoria. The government might issue a notice of recommendation or notice of allowance based on the outcome of the objection. Once the dispute is filed, the property owner may have to pay the cost of the valuation if the Valuer-General deems the property value to be 15% or higher than what was provided initially.

Get Started

Now that you understand the various types and reasons for conducting a thorough or condensed property valuation based on the kind of valuation reports required, you can start on your own by roughly evaluating your property using the many online property valuation tools available.

However, if you need a formal property valuation, it is best to hire a qualified valuer, which can cost between 300-600 AUD and take 2-3 business days for the final and accurate report. As home buyers and investors, you should feel free to reach out to your real estate agents for clarity on any property valuation queries you may have during your real estate journey.

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