Property valuation - The price is right

Brokers need to know how a valuation – particularly an inaccurate one – may affect their client’s ability to secure a loan. The accuracy of the valuation can therefore have a significant impact on a broker’s business.

The Australian valuation industry has attracted increased media attention in recent weeks with the growing use by potential buyers of online valuation tools.

The Real Estate Institute of New South Wales (REINSW) and the Australian Property Institute (API) have both called for the practice of providing free online valuations to be investigated by regulators, including the various state fair trading offices.

The organisations say this is to protect not only the role of registered property valuers but also members of the public who may not understand the complexities involved in completing an independent, professional valuation.

According to RP Data chief executive Graham Mirabito, there are four main ways to value a property:

“The first one is what they call ‘modelled estimates’, an automatic valuation model that we run every week for every property in Australia,” Mr Mirabito says. “It takes about 10 seconds to get a figure using a modelled estimate because you just hit a button and it generates a PDF.

“The second method is an electronic desktop method, which is where data and workflow is sent to a valuer’s desktop. They can then use this data to inform the final valuation.

“You’ve got a third method called a ‘drive-by’ valuation, which is where a valuer physically drives by the property to make sure it actually exists.

“And, finally, you’ve got a full site inspection, which will have a turnaround time of about two or three days.”

Each methodology has its pros and cons. They all vary in price and in the time required to complete, but they can also vary in risk as well, Mr Mirabito says.

“If we’re talking about mortgage lending, the purpose of the valuation is to assess the risk of the collateral that the lender is funding,” he says.

With three key elements used to assess a client’s ability to service a loan – collateral, capacity and credit – the valuation obtained can vary enormously depending on the methodology used and the way in which these elements interact.

The accuracy of the valuation can therefore affect significantly the amount the client is able to borrow.

A low valuation, for example, can affect whether a loan can proceed, and if the valuation is appealed this can delay the approval process. In the meantime, the client may miss out on the property – particularly likely if they don’t have the money to cover the valuation shortfall.

While an appeal can be submitted it is often a futile exercise, according to Anita Marshall, managing director of Advanced Finance Solutions.

“I can only remember one successful valuation appeal in the past 12 months,” Ms Marshall says. “I really do wonder if it’s worth the time and effort required only to be told that the valuer won’t change their opinion on the property.

“Sometimes it means an entire loan needs to be lodged with a different lender so that a different, less conservative valuer is used.”

Situations like this can obviously throw a spanner in the works and have a negative impact on a broker’s productivity.

One way to make sure a valuation hits the mark is to keep a close eye on the property market where clients are buying.

This can also help determine whether a client is overestimating how much their property is worth – a common concern for brokers, as well as for real estate agents.

“We all like to think our homes and investment properties are worth more than they are,” Ms Marshall says. “I don’t think people do this intentionally; it’s what they truly believe their homes are worth.”

If a client does overestimate the value of their property and a loan application is submitted, the valuation is likely to come in low and this usually means a re-work for the loan and a disappointing result for the client.

This mostly affects refinancing, according to Ms Marshall.

“If a client over-inflates the property value it means they may not have as much equity in the property as they thought, and the loan amount may need to be reduced,” she says.

“I recently had a client try to do a refinance and the valuation came in lower than [the amount] he already owes on the property. Ouch!”

There are other benefits for brokers in ensuring their clients receive an accurate valuation.

Helping your clients achieve their investment goals and increasing their equity with the right valuation can actually grow your business, Hegney Property Group executive chairman and founder Gavin Hegney says.

“If a client is able to invest in the right property they create wealth, and if they create wealth they are likely to do more things, including additional borrowing,” Mr Hegney says.

“The only two ways to increase your borrowing capacity are to increase your income or increase your equity,” he says. “Getting an accurate valuation is an important part of growing a client’s equity.

“If you look at two brokers and one has put their clients into high growth, high category investments while the other has clients who take on investments that underperform, in five or 10 years’ time the broker who put his clients into performing investments will be far ahead – not only from a referral point of view, but from what their clients are able to do.

“It can make a huge difference to the outlook for a broker’s loan book.”