There are many people involved in building a property, bringing it to market and eventual settlement.  Builders, planners, architects, marketing groups, purchasers, finance brokers, banks… and the list goes on. All these people are at the mercy of one person’s opinion.

The Valuer!!!

The term “Valuer” is often misleading.  Many people assume, due to the label “Valuer” that this person is going to mathematically compute a recommended retail price for a property.  Nothing of the sort!  The term “Valuer”, when dealing with a financier, refers to someone who assesses the perceived risk involved in a particular transaction.  There are many factors involved that have nothing to do with the property itself.  The biggest single factor in any assessment is the opinion of that one person named “Valuer”.  It is not uncommon for opinions between valuers to differ by 10% or more on the same property.  The property is the same, they both have access to the same documentation and historical data but they come back with two vastly different numbers.  The only variable between them is their opinion.

Included in the valuation report along with an actual dollar value is a series of risk ratings for different criteria, mostly relating to the expected future market conditions.  Even if the valuation figure comes back within close proximity of the contract price, if the valuer’s opinion of any of these other risk criteria is high then the bank can also limit or decline any finance application.  In a bank valuation the “Valuer” isn’t just valuing that property, they are also predicting the likely economic future for the locality!

I recently had an mrd client comment on the low valuation he received on his own home and how it was actually below the council’s latest CIV (Capital Improved Value). The CIV is the total market value of the land plus buildings and other improvement and is calculated every two years using a process governed by the Valuation of Land Act and carried out under the guidance and audit control of the Valuer-General. The valuations are carried out by qualified professionals who hold recognised tertiary qualifications and who have the required practical experience.

I thought it may be useful for me to share what I sent to our client in regards to this matter. Names and other personal details have been changed for privacy considerations.

Hi X

I agree that valuations are an issue. You would have seen my own experiences related in recent articles. You would also be well aware of the issues last year where two identical townhouses standing side by side returned valuations $25k apart using the same bank and the same valuer- just different people working for that valuer. It’s a “professional’s” personal opinion , based on criteria set by the banks, and the bank will rarely vary from it because of the legal implications.

My issue with all this is in the terminology used. I don’t believe that the commonly accepted meaning of “valuation” is appropriate at present.

There are clearly two distinctly different documents here.  Both are misleadingly called “Valuations”:

• The bank “Valuation” for risk minimisation
• The Council “Valuation” for the setting of rates

I personally believe (and I could be wrong) that  the bank is setting a dollar value on their perceived risk, based on the property and on the borrower.

The council value is not really relevant as it’s the councils opinion of the current market value to set rates.  It is in no way related to the bank valuation which is a valuer’s opinion of the banks future risk potential in that particular transaction.

Realistically if the council’s valuation is too high, or values drop markedly what impact does it have on the council? They just collect more rates than they should I guess.

If the bank’s valuation is too high or values fall it has a dramatic effect on the banks security and risk level. Although we see no comparison between the Australian housing market and the US (covered in recent articles), what has happened in America must have some effect on our banks in that they will be more “nervous” about their security and will therefore be more conservative with their valuations.

A bank valuation of $410k when the CIV valuation is $434k is no more a variation than we often see between different valuers and lenders. In my recent apartment purchase at Robina we saw a $72k difference between a valuation done for St George and a valuation done for  Commonwealth Bank; mine was the one that came in $72k short!

In the current “financial crisis” with all the unknowns, banks failing around the world, often taking other banks down with them, I don’t see much chance of us changing their system.

I don’t disagree with your comments, I guess I don’t see anything we can effectively do apart from trying to understand how the system works and make sure we use it to our advantage (or minimise our disadvantage) wherever we can.

Happy Investing,

Martin Bell
mrd Customer Care Program… because investing is personal

Other Links to related “Valuation Articles”

• http://www.investmentmentor.com.au/valuations.htm
• http://investmentmentor.com.au/2008/11/28/valuations-will-somebody-please-explain/
• http://investmentmentor.com.au/2008/11/28/valuations-will-somebody-please-explain/

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