Puzzle Finance Blog

The top 10 property valuation myths

If you think more rooms equals higher value or that a pool holds no value, read on as Propell National Valuers debunks the most common property valuation misconceptions

1. “Swimming pools add no value”

This is a generalisation which cannot be applied to all properties.  In some areas there may be evidence that buyers are prepared to pay more for a pool, however in other areas this may not be the case.

Prestige homes or suburbs catering to families may see the added value in pools, whereas inner city or coastal properties may not.

Consider the potential target market for your property. Pools can provide an opportunity for leisure with family and friends and encourage a healthy and active lifestyle – a feature that will attract a certain market. Just keep it well maintained and landscaped to maximise value.  

2. “Bank valuations are always conservative”

A bank will engage an external valuer to provide an unbiased valuation on your property. Valuers must act independently and should not be influenced by the party seeking the valuation or concerned with the reasons why a valuation has been requested.

A valuation report can be challenged in court and must be backed by comparative market data, therefore a valuer must be able to justify their valuation figure by providing evidence of comparable sales in an area. In compiling a valuation report, valuers must adhere to a strict process heavily reliant on factual data and appropriate methodology.

3. “Valuers don’t spend enough time in a home to give a solid valuation”

Before visiting a property a valuer will undertake extensive background research on your local market. Valuers have access to software and data which allows them to check recent sales data in your area and will have knowledge of comparable properties.

When the valuer arrives at your property they will have a very specific checklist of items they are looking for and may only require 20-30 minutes at your property to compile this information. The additional research the valuer has undertaken should be evident in the valuation report they provide to you.

4. “More bedrooms = more value”

Often property owners make the mistake of believing their property is worth more than another in their area because it has more bedrooms.

Thirty years ago this certainly was a consideration when home design was less sophisticated and family sizes on average were larger. In today’s market, property owners often choose to convert a spare bedroom into a study or office, home theatre or storage room, and there’s a trend to convert garages to bedrooms to accommodate older teens and adult children with personal space away from the main living area.  

When comparing two properties, especially units, total floor area may be a better indication of value rather than the number of bedrooms in a dwelling. Valuers also consider location-based factors such as street appeal, street access and views when comparing properties. 

5. “The valuation doesn’t reflect my home’s presentation”

Buyers have very personal preferences when it comes to interior design. It is very common for property owners to spend $20,000 painting the inside of their home in bright, bold colours expecting their home to increase in value by at least the same amount.

While the property owner may love their new colour scheme, buyers may not share their enthusiasm. For this reason valuers factor in design trends when valuing a property, and most will agree that neutral colours present best. Property owners are also urged to stay away from exotic furnishings for the purposes of adding value to their property, as this too is subjective. 

6. “Property prices never go backwards"

This view is often held by young investors who have only experienced strong market conditions.

Many parts of Australia were fortunate during the 2000's to experience an unprecedented boom in property prices that seemed like it might continue forever. While in the long run property markets tend to go forward due to scarcity of land and increasing population, they tend to be cyclical in nature and often go backwards in the interim as experienced in late 2008 into 2010.

Economic factors both domestically and internationally can have a rapid and damaging impact on local property markets. A severe economic downturn in China, for instance, could see a decrease in demand for Australia’s resources. In some mining communities that would likely result in a decrease in property prices and rental yields.

7. "Commercial property is riskier than residential property"

This is a broad generalisation which should not be a guiding principal for investors. A well located retail showroom with a long lease and annualised rental increase could be a very sound investment. While the property may not see an increase in value during a downturn, the long term lease will help to ensure reasonable returns during this period.

Conversely, the marketers of a new residential unit development in an inner city area may claim to offer a risk free investment.  However a large amount of units may be in development in the area and could quickly lead to an oversupply.  Commercial and residential properties should be evaluated on their own merits.

8. "Market Value is the same as sale price"

Market value is an estimate of the price a property would likely attract in a rational and competitive market place. Sale price is the actual figure a property is sold for. As an example someone sells a property for $500,000 (sale price) when near identical properties have been valued between $490,000 and $510,000 (market value) in the same area.

The reason for a disparity between a valuation and sale price could result from human factors relating to the sale. A buyer may feel a personal connection with a property and happily pay above market value, or alternatively, a buyer may have personal circumstances which compel them to sell quickly and accept an offer below market value.

9. "Investors should only buy for capital growth"

While capital growth should always be considered in line with your wealth creation strategy, rental yields for a property should never be overlooked. Strong rental yields produce a greater cash flow, and therefore allow investors to pay off mortgages sooner and have access to cash flow for future investments.

In general, areas with higher capital growth are based in metropolitan areas, are more expensive than their regional counterparts and generate lower rental returns. A property in an area with strong rental yields can still deliver a good return on investment when property prices are stagnant or falling. The deciding factor of which one is of greater importance should be based upon your individual investment strategy and current requirements.

10. “Buying interstate is a great way to diversify"

Buying properties interstate can mitigate the risk of some local factors, but investors should be aware that all properties are affected by the macro economy. Interest rates, inflation, taxes and large international events can all have significant impacts on property prices in any location.

This was evident in the wake of the Global Financial Crisis when property prices across Australia were negatively impacted. It is also important to consider that markets can vary within states and investing in different cities or towns can provide diversification. For example the resources boom in Queensland has seen many mining towns outperform Brisbane’s residential property market in recent years, so looking further afield in your own state could be worth considering.

Posted by VIP - Australian Broker Online on 12th September, 2012 | Comments | Trackbacks

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