The property valuation process is composed of a few distinct steps, applied in varying degrees depending on the needs of the client and the type of property involved. Valuations aim to uncover property's fair market value, which can influence decisions ranging from buying and selling to taxation and financing. The information required to inform and drive the process is multifaceted and requires rigorous investigation and analysis to ensure data quality and results.
This calls on a comprehensive blend of market expertise, industry data and established valuation methodologies. For starters, valuers need access to a complete dataset that includes:
- recent property sales
- local market trends
- economic indicators.
The time it takes to analyse and ensure the validity of this data is a significant portion of the valuation process. However, this is a vital step as it serves as the foundation for their analysis, allowing them to reliably gauge the market's current, past and potential future state.
Raw data is only one piece of the puzzle. The methods used to value property depend on the type of property being assessed and the purpose of the valuation. Popularly used methods include sales comparison, income capitalisation, or cost approach.
Each of these is centred on varying degrees of market and financial analysis.
Finally, physical inspection is essential to most valuations and provides pivotal information on location, size, condition, etc.
The process of market comparison
Detailing your property’s physical and external attributes and comparing them to those of similar properties in the area is perhaps the most significant step in any valuation service.
This is the sales comparison approach. Your valuer will look for data on properties nearby of similar location, size, condition and other relevant characteristics such as sale price, date of sale, number of bedrooms and bathrooms and any unique features.
The most comparable properties, called "comps," should closely resemble the subject property. Valuers must then account for significant differences in features, upgrades or conditions and adjust their comparison accordingly.
For example, they might add value to the subject property if it has an extra bedroom compared to the comps. After adjusting the sale prices of the comps, valuers reconcile these adjusted values to arrive at an estimated market value for the subject property.
This involves weighing the importance of each comp and its adjustments and is supported by a comprehensive physical inspection of the valued property.
From there, valuers can begin to arrive at a reasonably accurate estimate of the property’s market value. This value is considered a realistic and fair assessment as it is based on verifiable market activity.
Should this method not provide enough clarity, valuers will determine the replacement cost of the property in question and its income-generating potential. These are then factored into the equation to provide a more holistic perspective on the building’s true market value.
Watching the economy and local market
The sheer amount of market and economic knowledge valuers need to be privy to deliver an accurate valuation cannot be understated. These factors are pivotal in influencing real estate values and buyer behaviour and are fundamental to the process.
The first thing they watch for is the local property market. As mentioned, they look at recent sales data, but also closely analyse:
- demand and supply dynamics
- fluctuations in property prices
- the time properties spend on the market.
This information helps them make informed estimations of current market conditions.
It’s also important to consider that these kinds of statistics can differ significantly from state to state and even from neighbourhood to neighbourhood. Additionally, area-specific factors like crime rates, neighbourhood safety levels and general desirability are critical.
Valuers review a broad range of economic factors when carrying out a valuation. Among the most relevant to real estate valuers are interest rates, inflation rates and employment figures.
Overall, a robust local economy with job growth typically supports higher property values.
Local zoning laws and regulations must be studied as well. These dictate legal uses for various properties in specific areas and potentially affect real estate values in the area.
In closing, market sentiment and future projects are also analysed. For example, valuers must assess upcoming developments that could positively influence valuers and the general expectations and needs of modern buyers and sellers.
Valuation guidelines
In the Australian context, in Perth and beyond, the one notable body to pay attention to is the Australian Property Institute (API). This organisation shapes the guidelines for objective property valuations.
Firstly, property valuers need to be well-versed in capital gains tax and stamp duty tax. The former is paid on property sales, while the latter is paid on purchases.
The API sets and maintains the industry standards and best practices for property valuation. They also provide training and qualification in valuations and ongoing professional development opportunities for their accredited members.
Valuers must adhere to API's code of ethics and professional conduct to maintain credibility and reliability in their services across all property types. These include transparency and objectivity standards, enabling valuers to deliver legally certified reporting.
Contact your local valuation firm for any questions you may have.