Riddle me this, Bat-bank: who determines value?
GUEST OBSERVATION
Who really sets the end value of the home?
This may well be determined soon enough, putting an end to many discussions held over the years regarding the contested topic. Most say the value is set by “what people want to pay for a home and what a vendor wants to accept”. Others believe the end decision is made by the the valuer. But let us not forget the final player: the bank.
No doubt the sale of the two government-owned Millers Point properties at such vast price points has placed a magnifying glass over the valuation process itself. The recent sales will test everyone’s theories, perceptions and ideals as to who has the final call on the value of the home.
The agents
The agents are, we may say, the first line of clarification when ascertaining what a property is worth. A well versed agent in his or her field of expertise in their patch will promote their worth, first and foremost, by knowing their product.
In the first instance, when looking into the sales at Millers Point, the market opinion and price guide provided was $1,000,000. However, this was later adjusted to $1,300,000. This is a bench mark set by a professional that has years of knowledge and expertise in an area and a specific market. This is also knowledge that valuers often rely on to make their final call. After all, the agents live, breathe, and are in and out of homes in their patch on a day to day basis. Hence, they are a valuable resource to have when searching for a price guide and a professional realistic market opinion.
The valuer
The valuers, on the other hand are utilising a number of resources, which range from agent market opinions to online data of recent sales and no doubt the science of ascertaining building costs-depreciation and land values. It is a very complex and under rewarded process in my opinion, when providing a valuation for a bank post the sale.
The bank
The bank will rely on the final opinion of the valuer and I have a hunch they will also have their internal policies centred round lending criteria to meet with the borrower’s financial position. I would also speculate at this point that most banks will assess the loan process and the Loan to Value Ratio differently. Therefore, they are indirectly providing particular instructions to the valuer.
Now riddle me this, Bat-bank: which parcel of information will you rely on when the purchaser approaches you for the funding? Here is the conundrum as we further explore this enigma:
- Agent’s public opinion “price guide” of what the property is worth; $1,000,000 - $1,300,000 first sale and $1,400,000 - $1,500,000 price guide on second sale.
- Final sales figure; $1,911,000 for the first and $2,560,000 for the second sale.
- Then there is the undisclosed figure if a true valuation was to be conducted by a valuer, without any outside influences by banks or agencies.
If we venture back to the beginning and purely relied on the premise that a home is worth “what someone is prepared to pay and what the vendor is prepared to accept”, there would be no issue whatsoever. However, the valuer is caught between a rock and a hard place as they have to justify their findings to the bank. A major criteria expected by the lender to approve a loan by way of accepting a valuation concerns comparable sales of like property in the area.
Therefore, do they rely on the price achieved in the first property sale, or do they rely on the value of the second? A conundrum to many if this was the only way to ascertain the value of a property. But this is a questionable proposition, as on the surface, it appears to be the major methodology a bank uses to dish out credit. So, Bat-bank, what figure will you accept?
If the bank accepts the latter sales figure, this would mean the first property was sold for peanuts and the person that bought the first home won the lottery. If the sale price of the first home is the benchmark, one can only assume that the valuation of the second home will come in very short.
Then of course there is the other ideal in Gotham-Sydney. The banks will fund all the purchases to create a history and a sample of at least 4-5 sales to justify their reasoning and paperwork to their shareholders. Always be mindful that in most instances but not all, the first few sales in a cluster when sold as individual lots, are the cheapest sales.
Therefore, based on the current precedence, the next homes to go under the hammer may just tip the $3,000,000 mark. I continue to believe $2,700,000 - $3,000,000 was on the money. As the properties continue to rise in value, this can only continue to create further embarrassment to the price guides given by the agencies that sold the first and second home. Now riddle me this, Bat-bank: how will you value the homes?