Five great reasons to get an independent valuation

Something I've learned in my property investment endeavors over the years is the importance of always pursuing a maximised investment portfolio.

In life we often hear of the mantra ‘It’s not about the destination, it’s the journey’. This sentiment can, in a way, be applied to property investment.

Whilst the destination is financial freedom, the key thing is that the journey itself is like a ‘Choose Your Own Adventure’ path, with different decisions along the way resulting in different outcomes and ultimately different degrees of ‘financial freedom’.

I make these remarks with the understanding that for most property investors – myself included – property investment is not a get-rich-quick scheme. It is a mid-long term strategy.

It is ‘buy and hold’ strategy that I am referring to. Buy-and-hold, however, is sometimes directly interpreted as, or referred to, as ‘set and forget’. I.e. you purchase a property under specific terms, and those terms remain the same for 20 or 30 years, and you then ‘cash out’ at the end of that term.

This approach used to work well for previous generations of property investors. It can produce some ‘okay’ results still today. But as I mentioned earlier, the journey is where a savvy investor truly maximises the income-producing capacity of a property.

So, whilst 'set and forget' strategies work well for some, those who are constantly pursuing ways to get more out of their properties they hold; year-in/year-out; tend to do better in the end.

And rightly so. The harder you work, the more shopping around you do for better deals, better tenants, improved cash flow, and better renovations; to your property portfolio, the better your gains towards the end. 

There are so many ways to maximise your investment properties during your holding tenure; so today I’ll focus on just one particular element that has worked well for me, and would benefit many other newer investors.

I am referring to independent, or third-party paid valuation reports. Those reading who already invest are probably thinking 'of course, I got one of those when I bought my property', or 'the lender provided that service themselves; they did that for me; this is nothing new; I’ve already done that, what’s next?’.

However, valuations are not only useful just as you are purchasing a property, but throughout the holding journey. They are useful when refinancing, and also in other ways whilst holding properties.

So today I’ll list five reasons why an independent valuation can help investors; and how this can translate to improved cash-flow, or greater overall gains. Independent valuations will always come at an extra cost to the investor – typically around $50-$300 – however, I'll list ways to highlight how this cost should be seen as an investment that can unlock further wealth in an existing property.

1) An independent valuation figure itself

In truth, banks and other lenders will unquestionably always want to know the value of any property, before they feel comfortable giving John or Jane Smith a mortgage product for it.

Unfortunately, however, lender-in-house valuations produced at the time of mortgage issuance, do not always benefit the investor. This is because some lenders, when using their own internal valuers, will low-ball the value of a property, in order to make themselves feel more comfortable and that risk to them is reduced. Lender vals will usually come back lower than true market value, for this reason.

That said; this can actually be a blessing on some occasions, but usually only at the initial property purchase point.

Imagine this scenario; a property is listed for sale at $300K. Jane Smith makes an accepted offer at $290K. When seeking finance though, the lenders' valuation comes in at only $275K. It is possible the true value is higher, however the bank's lower valuation could give Jane alarm bells that the property is not a good investment.

In truth; her negotiated price may be a great buy-rate, but if she could just show the agent that lower valuation to negotiate further down; she'd be well positioned. However, in my experience, internal lender valuers will rarely share with you the actual PDF report. You are usually not entitled to view the full details, because you have not paid for this report yourself.

In other words; they won't give you anything tangible that you can take to a real estate to negotiate harder. Also, lender valuations usually occur after your offer has been accepted, and lender valuers will usually only confirm that the property is either A) worth ‘at least’ what your offer was accepted as, or 2) that it is worth less than your agreed purchase rate. They will never tell you the maximum value. An independent valuation will.

2) Independent paid valuations reveal the true value – and before you finish agent negotiations

Taking the above example but changing Jane’s actions during the buy process, let's assume that Jane got at independent valuation done, for say $100 out of her pocket, prior to entering negotiations with the vendor.

The independent could come showing a true value of $310K. It is listed at $300K, clearly a good deal already now that we know the real value, but Jane cleverly pursues negotiation anyway and secures the property at $290K. Two good things have happened in this instance:

1) She has made an instant equity gain of $20K before even signing a dotted line. As a home buyer this wouldn't be particularly valuable information. But remember, Jane is a budding investor and this is her first property. Creating an instant $20K in equity now, will aid her in twelve months’ time when she goes to purchase property #2. Sure, independent valuations are only valid for three months, but the $20K will stay in the back of Jane’s mind when it comes time to refinance to draw equity for property #2’s purchase.

2) She has not relied on a bank’s valuation which would have been issued after Jane’s $290K offer was accepted. The likely result would have been one line in an email from the lender simply stating ‘the valuer came back agreeing that the property is worth $290K – we are comfortable to proceed with loan approval’. Jane would never have known the future equity unlock potential, and would have to ‘chance it’ again on the next property purchase.

3) Independent valuations are 5-10 pages of PDF goodness

They really are. You get so much data and information for your buck that can better inform your choices. Some of the most important things are:

- Actual market value on the property, perfectly calculated by the valuer running analysis software and tools such as RP Data, and then cross-referencing this with similar recent sales in that street, suburb etc, whilst cross referencing this with a physical internal and external inspection of the property to check condition and features of fixtures and fittings

- Rent rate achievable. Very valuable both for new investment purchases, and to ‘check in’ on existing properties in your portfolio

- Market risk score. These scores measure the security of your property and it’s likelihood to maintain its value over time. These are usually assessed over 8 or more categories with scores ranked out of five

- Internal photos of the rooms. Very handy if you are several years into holding a property, and your agents have been conducting their routine inspections without supplying photos (meaning you must take them at their ‘word’ when they tell you ‘relax, everything is fine!’)

4) Getting new independent valuations done each time you refinance is the way forward

What I was saying earlier about set-and-forget being the lazy investors’ option (well – I didn’t call it lazy, but I am now); is true. Even if you get a paid independent valuation done at the beginning, you can continue to get additional ones done every couple of years. This could be either at points where you want to refinance your portfolio into better mortgage products/deals; or could simply be to check that your rent rate that your managing agent is charging, really is in line with market rates.

For example, I trusted one of my managing agents implicitly with rent rate for that property’s tenant, yet after getting my first independent valuation in four years for that property recently, I discovered that the tenants currently in this property were paying $45 per week below ‘fair market rate’ for that property. The $50 I paid for that particular valuation has not only paid for itself instantly, but with the gradual introduction of rental increases with this tenant, could potentially improve my holding cash flow by $180 per month (before managing agent costs are deducted, of course).

5) Independent valuation costs may be tax deductible at times

Providing that the commissioning of a valuation was done to refinance loans for investment properties, or as part of a pre-renovation depreciation schedule assessment, some of the cost of these reports can be claimed back as tax deductible expenses. Just like the interest on loans attached to investment properties is tax deductible at your appropriate tax rate; so too are other managing costs associated with finance for the investment, which can at times include valuation costs.