Valuation is a complex science and art. Image – Canva
  • In a moving market, valuations may be out of date the day they are published
  • There are many factors that go into a trusted, 'true' valuation
  • Property Research Analyst at AltX Chris Mears provides some advice

Investors and lenders should look beyond the face value of valuation reports in a red-hot market, according to private debt specialist AltX.

Over the past year, Australian dwelling prices have been rising faster than at any time over the past 17 years, at +13.5% according to CoreLogic.

The reasons for this upsurge are well known: historically low interest rates, low housing stock, falling unemployment, elevated consumer confidence and government stimulus measures have all helped push up house prices, even through the latest lockdowns.

The Goldilocks of valuation

Given house price growth rates are showing signs of easing back a bit, valuing property is critical for lenders and investors in property-backed deals. It can be the difference between making a successful investment and losing hard-earned capital.

Working out a property’s ‘true value’ can be difficult.

Although the Australian Property Institute (API) has developed set standards for valuing property for loan security purposes, the process of valuation can get a little murky.

Chris Mears
Chris Mears, AltX, Image supplied

“An ‘as is’ valuation is based on the current state of the property, not taking into consideration any future developments to the building.

“An ‘as if complete’ valuation on the other hand assesses an asset’s value based on what it will be worth when it is renovated, rebuilt or finished.”

Chris Mears, Property Research Analyst at AltX

One valuer might say a four-bedroom house in Coogee, Sydney is worth $5m, while another might value it at $6.5m. They both follow the same guidelines, consider similar evidence yet they come to significantly different price points. Both can justify their valuations as ‘technically’ correct.

But which number can lenders and investors rely on? And does it matter?

For example, one valuer might have a much deeper understanding of the property or area.

There may have been a recent sale to a developer in the same street for instance, which could open up an entirely new market and price point for the property. Another valuer may have a deeper database giving them a better understanding of the relevant and applicable leasing and capitalisation rates.

Valuations are based on data from the date of settlement rather than the date of exchange.

For example, a property that exchanged in August 2020 may only settle in August 2021, in which time market conditions may have changed significantly. Yet a valuer will consider this as a good comparison as the settlement is ‘current’.

With a three-month shelf life, valuation reports are more critical to get right for short-term lending market than the traditional longer-term residential mortgage market.

This is why lenders and investors of property-backed deals need to dig deeper.

“If the valuation is too high and you’ve lent the money, you have a lot to lose. But if it’s too low, you’ll likely miss out on the deal. It’s the Goldilocks of lending – you have to get it just right,” said Mr Mears.

Looking beyond valuation

Valuation is only the first step in assessing a property’s worth. Council records can offer some great insight into what investors might be getting into.

Development applications and consents indicate if approvals have lapsed, or any illegal buildings on the property. Zoning is also an important indicator of the property’s development potential.

It’s also important to have good relationships with local agents who will you give time on the phone.

“Real estate agents are often at the coal face of the particular asset you’re looking at and can provide some useful advice on the market – including insights that might not be publicly available,” said Mr Mears.

“They can give you insights into accurate pricing, and the underlying drivers of the specific market, such as the target buying segment, best or worst streets, time on market, and new developments.

“Agents are also good at helping with comparable sales evidence, and might see or know things specific to the area that valuers might miss. But you also need to read between lines, as they like to talk up prices.”

It’s also important to calculate the liquidity of the asset and its exit potential, in case investors need to free up cash quickly.

While some deals look like a great opportunity, investors need to do their due diligence before jumping in. And in a red-hot market, that matters more than ever before.


Before making any financial decisions, please do your own independent research, taking into account your own situation. This article does not purport to provide financial or taxation advice. See our Terms of Use.

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