What are the different property valuation types Banks use?

Having a genuine idea of what your home is worth may sound more like a nice-to-know piece of information than anything else, but in many cases, it can actually be essential.

Whether you’re buying or selling a home, looking to refinance your mortgage or wanting to access equity you’ve accrued, a formal property valuation can be a key part of the process.

So, what do existing homeowners and potential buyers need to know about the different types of valuations that exist and the process involved?

Read on for a run-through of some of the fundamental elements of property valuations.

1. What is a property valuation?

In short, a property valuation is an independent analysis conducted by a professional valuer designed to provide an assessment of a property’s market value.

2. When are property valuations needed?

There are a plenty of situations in which a formal property valuation could be useful or even necessary. Here are some of more common ones:

Buying or selling a property

Perhaps the most obvious is during the buying or selling process of a property.

For instance, a seller may organise a valuation to provide them with a guide when listing their property for sale, while a buyer may be interested in ensuring that a home they plan to bid on in is priced accurately and fairly.

The mortgage process

Property valuations are a critical part of the mortgage approval process – whether that’s someone taking out a brand new loan or refinancing an existing one.

In this situation, lenders need to be confident of the value of the asset (the property) being used as security, so they may either require a valuation or assessment depending on the risk involved.

Tapping into equity

It’s a similar situation for homeowners who are looking to make use of any equity they may have built up over the years to borrow from their lender.

That could be to do anything from conducting home renovations to purchasing an investment property.

In order to see how much equity has been built up though, the lender will need to get an idea of the current market value of the property.

Family court matters

Professional valuers can be called upon during matters like divorces in order to independently assess the market value of a property during the separation of assets.

“With something like a family law situation, one party will be hoping for more, in terms of the value, and one party will be hoping for less, in order to benefit their settlement position.

“What can be helpful in that environment is if both parties instruct a valuer to undertake the valuation. That reinforces the independence and the valuer’s duty is actually to the court, not either party.”

3. What is assessed during a property valuation?

The thoroughness of a valuation will ultimately depend on the level of depth required by a client. However, in the case of residential property valuations, a valuer would typically look at:

• Layout and size: This not only includes the layout of the home, the size of the building and the plot of land it’s on, but the aspect of the property and even the shape of the land
• Development potential: If it’s called for, a valuer may look at whether the property has any future development potential or restrictions that would impede development
• Condition and risks: Are there any risks or essential repairs that may impact market appeal? For example, a missing roof tile that – while relatively cheap to fix – could put the structure at risk
• Comparable sales: How have homes with similar attributes in the area performed recently when they’ve gone on the market
• Location: Where the property is situated in a particular suburb or town and whether the local economy is strong, stable and likely to uphold demand for properties
• Market direction: Is there strong and continued growth affecting property values in the area, or is growth subdued or non-existent

All of the above information will form the basis of the analysis which, along with measurements of the home and photos of key features (such as rooms like kitchens and bathrooms or any notable defects) will be presented the valuer’s report.

4. How do valuations differ from price estimates or appraisals?

There are a number of different ways for owners to get an idea of the value of their property – each with differences that may be worth appreciating.

Formal valuations

Formal valuations are performed in person by independent, professional valuers. The assessment is likely to include an analysis of many of the features outlined above in order to provide a reliable indication of a property’s market value.

Desktop assessments

In some situations, lenders may decide that a full valuation of a property is unnecessary because the borrower is relatively low risk. Instead, they might employ a valuer to conduct what is known as a desktop assessment.

In a desktop assessment, the valuer doesn’t inspect the property, so it doesn’t qualify to be termed a valuation. But that may be perfectly fine for the purpose and the risk profile.

Any valuer undertaking a desktop assessment is required to have the relevant knowledge, skills and experience gained by undertaking valuations in the locality though. So, it’s not acceptable for a valuer based in Adelaide to do a desktop of a property in Canberra.

Automated Valuation Models

Some homeowners will have come across price estimates on property platforms like Domain or realestate.com.au in the past. These platforms use Automated Valuation Models (AVMs).

An AVM will look at a tremendous volume of data held within a property database to come up with a likely price estimate. These can be quite accurate, but the data quality varies from location to location, because some markets are more active than others.

It’s also important to note that an AVM does not follow professional valuation standards. It’s a statistical algorithm-based analysis, but it does not follow the recognised valuation approach.

So, if you’re wondering what your house is worth and the AVM tells you a million dollars, that might be reasonably accurate. But if you’re making a financial commitment by selling your property, you’ll have to consider whether you’re happy using that or getting a professional valuation.

Real estate price appraisals

Many owners are likely to have received flyers in their letterboxes offering free price appraisals from their local real estate agents.

So just how accurate are these? Ultimately that will depend on the skill of the individual, but it’s worth bearing in mind that real estate agents aren’t necessarily qualified valuers.

Real estate agents will, in some cases, be looking to secure you as a client when providing you with an appraisal figure.

Now I’m not suggesting that they deliberately inflate their estimates, but clearly one of their aims will be to secure you as a client against the competition.

5. How much will a property valuation cost?

The price of a property valuation will vary from case to case depending on the complexity of the assessment and even the location of the property (if it’s in a more remote location that requires travel).

If you’re an individual looking for a valuation of your house for your own interest, I would suggest that it would be in the hundreds of dollars, but less than $1000.

If you’re in a family law situation, which is more complex, I would suggest that it is probably going to be above $1000.”