Unlike new shoes or a nice meal out, property valuations aren’t really an impulse buy. For most of us, a valuation is something we reluctantly obtain when our banker, broker, lawyer or accountant tells us we have to.
If there’s one thing that really gets people worked up, it’s when the valuation comes back lower than the purchase price. Thankfully it doesn’t happen too often, though when it does there’s usually a good reason. Trust me, I don’t enjoy these difficult conversations one bit and would far rather have satisfied clients.
So why would a valuation come in lower? Isn’t a property worth what someone is willing to pay? No. No it’s not. In fact I wrote an entire blog post on this point which is on our website if you’re interested.
I’m the first to admit that valuation is not an exact science. The best we can hope for is to identify a range of values that are reasonable in the situation. If there is plenty of sales data available, this range might be quite tight, say +/- 2.5%. In other situations where the property is unique, the market is moving up or down quickly, or there is very little sales data, our range might be +/- 10%. Legal precedent allows us up to 15% margin of error in such circumstances, though 10% in a normal market.
Let me give you an example. Let’s say I complete a valuation assignment and conclude that market value lies in the range of $920,000 - $960,000 with the mid-point being $940,000. I would then look to the current agreed purchase price at $945,000 and check to see if there were any special terms - like additional chattels included, or a delayed settlement date that might affect the price paid.
If I remain satisfied that the contract price lies within the identified range, I’m comfortable ascribing a market value at the purchase price. To put $5,000 less than the contract price on a near million-dollar property is in my view a bit petty – while to put $5,000 more would be merely pandering to please the client without justification. It’s either better or worse by a reasonable margin or the contract price generally stands in my view.
Another factor when we select a position within the identified range is the underlying market trend. If the market is trending up, then often we adopt the upper end of the range – and vice versa in a declining market. This accounts for the time lag between sales data being recorded and the date of our valuation.
Some clients are disappointed when they see the valuation matching the contract price. However, most of the time, the market functions well without us and gets the number right. It’s the less common occasions when someone pays too much or sells for too little that our input adds real value.
Reasons the purchaser might be paying too much include if they:
- did not do their homework on comparable sales
- had the information but did not make prudent use of it
- were pressured by the agent or family/friends
- let ego take over to ‘win the auction’
- were impatient after missing out on several other properties
- were unaware of defects to the structure, land or title
- were unaware of Easements or Covenants
- were unaware the cross-lease title flats plan is defective
- are a neighbour paying a premium to amalgamate titles
- had favourable building terms from the developer / vendor
- And many others
Of course, we are only human and do make mistakes from time to time. Clients are welcome to communicate any questions or frustrations they have so we can work through it. Sometimes new information comes to light and the valuation can be amended – but only with good reason.
In summary, valuations aren’t fixed to purchase prices. Most of the time it is worth what’s been agreed – but on some occasions, either the purchaser or vendor are having a very good day indeed and I’m more than happy to say so.
Scott Morison, Registered Valuer