Property valuation is always a concern. Inaccurate valuations can potentially mean that investors end up being financially out-of-pocket.
Investors frequently ask me to anticipate the valuation results. Of course, it’s impossible to forecast the results with 100% accuracy, but our aim is to reduce the valuation risk as much as possible.
The most important rule is to buy well with thorough risk assessments!
When we buy property in an auction or in a good market usually the results will be more predictable, with the valuation and purchase price matching. When the market dictates the price direction, the valuers will generally accept it.
Although you are likely to get good results in an auction, it’s important to understand that the banks have their own risk system and are usually not so generous with their valuation assessments. It would be best to allow a variation of 2-5% below the purchase price, which is the case with most deals.
However, if you buy in a good market after an accurate risk assessment for your property, you have a good chance of the valuation matching the purchase price, and if you buy below the market value, you have a good chance of a high valuation, perhaps even more than the purchase price.
In a private treaty, where you are negotiating the price with an agent, there is no competition factor, like you have in an auction. Then if you unwisely buy in the wrong suburb or the wrong asset class, you can expect a lower valuation.
In a hot market the agent might call you to raise your offer 1 or 2 times before presenting the proposals to the vendor, which can indicate market price competition and give the feeling of an auction. However, if you offer too much, you might be exposed to valuation risk. In QLD, where agents can’t disclose other bids, you may end up competing somewhat blindly.
The riskiest valuation deals are the off the plan transactions, when the settlement is in the future, and you can’t foresee where the market will be in 12 months’ time. In a real oversupply market across Australia, when marketing materials give you a false indication about the actual figures, you can face a high valuation risk. You could end up being 5% or even close to 10% down. So be very cautious when you buy a new product without a thorough risk validation.
The good news is that even in a tough market, you could get a second or third valuation where some of the valuers assess the property only based on the look and feel and give it a good valuation that ends up accurately matching the purchase price.
Some valuers use curb side valuations, which means they evaluate the property from across the street. They may not even enter the property or look at the garden or the property’s potential, which clearly isn’t in your favour. However, curb side valuations can also be excellent on other occasions when the suburb is transforming, with few renewal projects, and if your property is attractive on the web – you might even get 10% above.
We don’t want to spend too much on poor valuation results in any deal! Usually, the preference is for the valuation to match the purchase price or be at least 2% below, which is also ok. The crucial point is to buy well, and when I say well, it is to thoroughly assess your property’s risk and return in advance. This means that we don’t give the valuers the chance not to match their valuation to the purchase price.