If you ask five different people on how much the exact same house is worth, you will often get five different answers. Valuations can vary widely even among experts. Market value is subjective and someone who has lived in their house for 20 years would value it a lot more than what the banks would. Even as a buyer, good value can depend on what you are looking for. Whether financial factors through capital growth, ability to renovate and sell later on, or intrinsic factors, through location and lifestyle of living, people have different criteria for determining value. Real estate agents will often give you a free property appraisal. These should only be considered as a guide as they have no legal standing in valuations. Professional property valuers on the other hand, are legally responsible for the information they give you and their valuations are more comprehensive.
How exactly do property valuers determine how much a house is worth?
There are three different approaches to value real estate. The most common one is to conduct a comparative market analysis. This includes gathering data of:
- The size of the property
- Number of bedrooms, bathrooms and carparks
- The year the property was built
- The size of the land
- Quality of fixtures and fittings
- Condition and build quality of the property
- Location and levels of surrounding amenities
- The aspect, elevation and layout of the block
To get a good initial estimate of the property, they compare it to at least 3 properties. These 3 properties must be of a similar standard or condition, are sold within 5km of the property and sold within the last 6 months.
After this initial estimate, they can make further adjustments based on any differences found from the above criteria. Property valuers will also visit the property and assess the condition of the building, including any faults which may affect its value.
Another method is the summation method. This is where the property is separated into different parts, land, building and other improvement values and valued individually. Land in a particular location would be valued per square meter and this would be added to the building condition and improvements value per square meter. Every part of the property would be calculated individually and added up, hence the summation method.
The third approach is the income method. This is more common with investment and commercial property. The property is valued by how much income it produces against the gross rent multiplier (GRM). For example, a property would rent for $500 per week. This yields $26000 a year. If the current GRM is around 3%, dividing the annual rental yield by the GRM gives you a value of $866000.
All three methods rely on information in the current market. Most of the time, property valuers choose a primary method and then use another method as validation. These valuation methods give you an outline of what to expect. In the end, the value of a property is how much you are willing to pay for it.
How is off the plan property valued?
Since off the plan property doesn’t exist yet, how can you accurately value it? Valuers will conduct an “As if complete” valuation. This valuation is based on the floorplans, schedule of finishes and contract of the property. They would also compare to similar completed properties nearby. Based on this valuation amount, lenders will approve the loan and conduct a final inspection prior to settlement to check that everything was built accordingly.