How independent is a property valuer?

What is a property worth and who determines the end value? Odds on, it’s the valuer.

To most property investors, the phrase “a property is worth what someone is willing to pay and what the vendor is willing to accept” would hold true. This premise does not necessarily hold true with the banks funding the purchase, the agents and particularly the valuer.

How can so many industries hold vastly different opinions over the value of a property?

The Funding Banks Position

Over many years I have attended hundreds of bank valuations for settlement purposes and valuation inspections for re-financing purposes. As a novice I expected identical results. However, experience taught me that the same property may be valued for different purposes and the figures can be 10%-15% apart.

Sometimes one valuer will have a very different opinion to another valuer. Even worse, I have had the same valuer place different values on identical properties only a few weeks apart. Both were the same in style, configuration, position, block and level. How could this be so?

I soon learned it was due to the loan to value ratio (LVR). The funder simply wants to hedge their financial position and loan. It makes sense, the higher the LVR the lower the valuation. Different banks adopt different policies and therefore some are more lenient than others. The rule of thumb for a valuer is, as instructed by the banks, to value at a price point that could be achieved if the property was to be taken to an urgently orchestrated auction.

How is it that lenders settle on what is considered to be an overpriced property? As you dig deeper, the loans requested are typically at low LVRs, usually less than 70% of the sales value of the property. If the bank valuation does come in low however, the buyers are comfortable to tip in the balance. Most overseas investors do not walk away from a settlement as a local buyer would.

The alternative in today’s market is to hedge the loan with lenders mortgage insurance (LMI). Even if the banks do accept a lenient valuation and provide a high LVR, they are protected. The buyer however pays a high price to protect not themselves but the banks interest. This may be seen as typical in a hot property market like we are in now.

The valuer’s role

The role of the valuer is to provide fair and market value of a property. A simple request, but not a simple exercise.

The valuation is performed by an individual that has spent years obtaining a university degree to competently provide a report. However, market conditions and banking requirements negate the proper process of what would otherwise be a textbook valuation.  

Here are some of the difficulties and insights I have been able to hear firsthand from valuers over the years:

• Time pressures to perform a well-structured inspection. Typically a valuer will only spend on average five to 10 minutes at the property. More time is spent travelling from one appointment to the next.
• Pressures to adhere to individual banking requirements, as opposed to market forces.
• Pressures of funders paying less, when valuers face greater costs to run a business and provide a service. Increasing costs of personal indemnity insurance and staffing overheads are some of their concerns.

So given these hurdles, how can the valuers do their job in the right manner? The valuation process may constitute measuring the property inside and out properly, ascertaining the value of the construction of the dwelling, working out depreciation of fixtures and fittings, the depreciation of dwelling ratio to appreciation of land ratio, rental returns and most recent sales in the area of like properties and how they compare in all aspects.

Not a lot of time is allocated or adequate reward given by the funder to do a proper assessment. Therefore the valuers rely on the local agents for recent sales data and other forms of online tools/websites. Most importantly, the valuers are reliant on the contract of sale (the front page outlining sale price and special conditions).

Special conditions may note any vendor guarantees such as rents, gifted cars or other incentives. The valuer can also work out from the contract as to who sold it to gauge commissions paid out.

For a valuation of a refinanced property, the valuers are also relying on the documentation which outlines the revaluation amount sought by the owner. Information passed on to the bank by the mortgage broker and by the bank to the valuer.

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How independent is the valuation under the stated conditions?

I will throw my hat in the ring and say, not very independent at all. Allow me to raise the following concerns and you can assess for yourself if the valuations are as independent, accurate and as transparent as we would like to believe they are.

• The bank orders the valuation and pays for the valuation.
• The valuers understand who “the hand that feeds them” is. Therefore, are they persuaded by the policies put in place by the lenders, or will they genuinely adopt a totally arm’s length approach?
• How can valuers make well educated assessments of the property when such little time is spent at the property due to time constraints?
• How in-depth are the valuation reports and how much data is imported to create the report when the rewards are so small in comparison to time spent?

 If you believe the above is entirely a speculation on my part, made from purely a cynical point of view, then one should ask the following question: Why do valuers ask for and need the front page of the contract before writing out their report?

It is a question that underpins my belief that valuers are simply not paid well enough, nor given sufficient time to conduct and produce proper valuation reports. Valuers have become short change researches and quick photo takers, which rely purely on instant data to satisfy their client: the banks.

But not all is lost, as I do take my hat off to the valuers that take time to research the market, have an understanding of construction and keep up with market conditions and trends.  Not dissimilar to the good real estate agents that shine in the high markets as well as in the low turning markets.

So here are my four tips to achieve the most in a property valuation:

• Prepare the property for a valuation as you would for an open house.
• Don’t send the valuer to a tenanted property without being accompanied by the agent. The agent should be equipped with research data to promote desired outcome.
• Do as much homework as you can for the valuer and have the print outs of like properties that will give you the desired outcome, even if it’s for a re-finance situation.
• Always accommodate the valuer with time and don’t make them wait.

If you believe the above is true and you have had similar circumstances as those described, I would like to read your comments.

EDWIN ALMEIDA is managing partner and licensee-in-charge of Just Think Real Estate.

Propell's Bart Mead and Mark Nassif have responded to this article in a piece you can read here.