Home valuations can be subjective

Valuing land is difficult enough, but there are even more variables when it comes to getting a consistent opinion of the market value of an actual building.

We always counsel long-term passive investors to buy purely on land value, or to buy proven populist homes like Victorians and Edwardians as opposed to new homes.  Why?

Buildings are very much like clothes: they are fashion statements and, as such, various styles go in and out of fashion. Many of us love period homes now, but in the 1960s the thinking was to modernise them and in the process a number of classic buildings were destroyed. Similarly, Art Deco was loved in the 1920s and ‘30s but now has a limited following  – a very passionate one who will pay strong prices, but limited nonetheless.

The value of a home depreciates just as a new car does the moment it is driven from the showroom.  If half your money is spent on the home (the other half on the land) and that home goes out of favour as many do (such as the recent fad to Georgian reproduction homes), then while the land component may be growing in value, the other half of your money is working in a negative direction growth-wise.

To demonstrate the various ways different people can regard the same building, here are the opinions of four famous agents on the value of a 230-square-metre 1970s home, with an en suite and double garage, on a nice block in Inner Melbourne.

Ms Artina Deco: $400,000. “I think this home will be bought by an overseas buyer who would consider this a good solid home.”

Sir Eddy Wardian: $300,000. “I think this home will be bought by a new home buyer and renovated to new. My estimate of its value when renovated is $700,000, and I think it will cost $400,000 to renovate – therefore it is worth $300,000.”

Mr Victor Rian: $200,000. “I think this home will be bought by an investor who will get a 3% rental return, so I have based my calculation on that.”

Cal Bung: Zippo – $0. “I think this home will be bought by a developer who will bulldoze and put up units.”

As for me – my opinion of the market value of this home would depend on where it is located. If it was Balwyn I’d say $300,000 to $400,000, because that’s how overseas buyers from China and India have been assessing similar homes recently.

But if I was in Brighton or Toorak, I’d say between zero and $200,000 because it is more likely to be bulldozed and the site developed. Many great homes in Toorak have no value because they are bulldozed by a new owner with plenty of funds who want to make their own footprint.

While there are no set in stone rules in building value assessment – here are a few guidelines that we follow:

1.       New homes we calculate at replacement value

2.       Near-new homes we calculate at replacement value minus a cosmetic update cost

3.       Homes 20 to 50 years old depend on the suburb. A way of getting a handle on values on these buildings is to build a database of comparable (similar) sales, subtract what you consider to be land values, and build a range of how the market values homes.

4.       1940s to 1970s homes without architectural merit – zero. With merit – difficult!

5.       Pre-1940s period homes that need to be completely gutted – a token amount depending on size

6.       Pre-1940s period homes that need some work – completed value less estimated renovation value

7.       Pre-1940s period homes completely renovated – compare to others in area and if that is not easy we value at replacement cost as if it were a similar quality and sized new home.

Valuing homes and land and emotion is the pursuit of perfection by the imperfect – but the closer you get, the better your decisions and strategies can be.