How much is my home worth? Judging a property's value

A median price value will only get you so far when you're judging the true worth of a property, and there are individual factors in each home that determine how much you should pay for it, or expect it to sell for.

It's particularly useful to familiarise yourself with the process as it should enable you to spot the better deals more quickly.

Firstly in this series, let's have a brief look at how the experts approach figuring out an individual property's value. Remember, no matter who the expert is, you'll want to see evidence of their reasoning and the number they provide in black and white.

This article relates to existing property. Stay tuned for how to assess the value of an off-the-plan property.

Valuers

When thinking about valuations, it makes sense that the first thing we often think about are valuers. However, not all valuations are equal and it's commonly said that it's not an 'exact science'.

While you'll be paying for an independent valuation yourself if you feel it's necessary, it may just be worthwhile if you're doing your checks and balances before purchasing. Observer Cameron McEvoy previously provided these five reasons to get an independent valuation.

If you're unsure what information you'll find in a valuation, this PDF download of a long form example from RP Data of what a valuation may look like, and the useful information that you can glean from it, is a great one to sink your teeth into. Having an independent assessor back up, or query, your assumptions and personal analysis can be critical.

RP Data lists four different types of valuation that you'll want to understand:

Full valuation

Short form or pro forma valuation

Restricted valuation (to include “restricted assessment”, “kerbside” and “drive by” valuations)

Desktop (to include electronic valuer review - EVR)

For a detailed analysis into these different forms of valuation, RP Data's white paper 'Comparing the quality of property valuation methodologies' is worth a read. Essentially, as you go down the list, the rigorous nature of the valuation decreases. A full valuation requires a valuer to walk through your property, and take photos, to provide a detailed report. A desktop is just that, it requires them looking on a computer.

What do valuers use to come up with this price?

Recent comparable sales is the key part of this process, according to RP Data.

"Sales comparison is the most common approach to residential property valuation by valuers and is also very frequently used by AVMs. The concept behind the comparison approach is one of substitution: a reasonable buyer will pay no more than the value of a comparable good and a reasonable seller will sell for no less than the value of a comparable good," the paper notes.

This is the superior versus inferior test, and for those with an emotional stake in the property it can be hard to judge this clearly. We'll be delving into this later in the series.

To assess a property’s value, a valuer must inspect the property, record details on the number and type of rooms, along with fixtures, fittings and any improvements, observer Michael Matusik explains in his property valuation 101.  A property’s unique attributes will also be taken into account, such as:

- Location

- Building structure and its condition

- Standard of presentation and fit-out

- Standard of fixtures, fittings and facilities

- Zoning and whether and planning restrictions apply

Valuers tend to come under a lot of flack from the industry. Whether this is rightly so or not is largely debatable, however one of the more common criticisms from the investment space is that valuers are 'conservative'.

For those interested in what it takes to become a valuer, this job guide explains more.  Or, you can see the modules involved in one pathway into becoming a valuer - through a Property Services - Valuation Course advanced diploma with TAFE.

If you're looking to get the most from a valuer, here are some tips:

- Provide them a list of comparable sales (potentially inside the same project, as well as some that are not). While not all valuers will use them, some will.

- Apply for finance six months before completion, not six days and if you find the valuation comes in low it gives you time to get a third and a fourth.

- Attain your own valuation, using a valuer that is on your bank's panel of valuers.

- Ask to see a soft valuation so you can check the comparables used and the comments made.

- Bear in mind that the valuer often has a different valuation for mortgage purposes as opposed to sale purposes.

- Do your research beforehand.  Go out and look at 100 or even 10 before you make a purchase decision. If you've done your research you should be confident it will value up.

Source: CPM Realty

Real estate agents

Real estate agents provide what is known as an 'appraisal', rather than a valuation. When speaking to the more active agents in an area, you will be able to get information on comparable sales that may have only just sold - and are potentially more up to date than those provided as comparables by a valuer.

Local agents will also have an extremely intimate knowledge of the area, as well as the type of buyers and any current changes in interest. This will put you in good stead.

Be aware that if you are looking to purchase, an agent works for the vendor, not for you. For this reason, it's clear that they're likely going to tell you positives about a property and work to get you paying more. That's their job, afterall.

If, however, you're looking for them to put your property on the market, you'll want to be clear with them what they truly expect it can sell for and what they may be able to get for it with clever marketing. Many agents can also suggest smaller improvements that can be made for a better re-sale value.

We recently reported about agents presenting inappropriate comparables, so this is certainly a case of doing your due diligence. Do you really know if that property is comparable if you don't know the local area? Is it on a busy road you don't know about, or is the property on the good or bad side of a suburb?

While buyer's agents work for you, you'll still want to understand their reasoning behind the value they're suggesting.

Online portals

While not an expert per se, online valuation methods are regularly turned to as a first-look quick and easy report. While these valuations can provide useful general information, remember that no one has walked through the property and factors that make it comparable or not comparable may have been lost in translation.

Previously, price estimates added to online listings portals, such as Domain.com.au, have been famously out of sync with list prices. EPS Property Search's Patrick Bright also explains that they don't take into account the size of the block, the shape of the block, the slope, and other fundamental aspects involved in truly assessing value.

In our next articles, we'll have a look at whether that property you're looking at is truly comparable or not, what can make judging value difficult, and what to do if your valuation comes in soft.