Residential property valuation can be a complex concept to understand. This guide explains the ins and outs of the process commonly undertaken and the influences on valuations.
Residential property valuation is based on using sales data of properties previously sold of a similar type (lot size, house size, aspect, age, condition) in a comparable location in the previous 6 months. Valuations can vary dramatically for exactly the same property for a number of reasons:
Type of Buyer
Owner occupier or Investor – the lender apportions increased risk of default to an investor and provides instructions to the Valuer to use certain types of sales evidence or criteria that reduces their valuation. The Property Industry has been arguing with the banking regulator about this issue for many years.
Valuers rely on comparable sales for sales evidence. In the absence of comparable sales they will refer to an inferior product to push valuations down.
Loan to value ratio
Whether the client has an LVR of 80% or more and requires mortgage insurance. When there is mortgage insurance required the lender instructs the valuer to be more conservative.
The Mortgage Insurers loan exposure to a suburb
Valuations are subjective opinion and not an exact science. This subjectivity has been tested in court and a variance of up to 15% of the purchase price has been accepted as reasonable. There are many instances where two Valuers have completely different opinions of value on the same property.
Relevance of data
When the property market is in an upswing mode, Valuers are relying on data that can be 6-12 months old and the market has increased in price since that point in time.
Each lender has preferred valuers. Some of the Lenders choose more conservative Valuers to reduce their risk profile.
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