Mark Kelman started investing in property 10 years ago, buying two houses in regional NSW for $92,000 and $53,000. Today, he owns 15 properties, including a block of six units, and is the author of Become a Property Millionaire in your Spare Time (Major Street Publishing). His top tip: thoroughly research the value of properties before buying and renovating.
“Some people just get advice from a real estate agent or friends,” he says. Or they rely on free bank property valuation apps. But the best information comes from property software such as that provided by RP Data, Residex or Australian Property Monitors.
“You have to use the different softwares to really research the price the vendor has paid for the property; to know what the comparative valuations are; and if you are looking to renovate the property you want to know what similar properties, that have been renovated, have gone for in the area so you know exactly what your property is worth when you buy it.”
It’s particularly important if investors want to build a property portfolio quickly.
“The easiest way [to build a portfolio] is to buy a property, add value to it and then refinance,” Kelman says. “But if you want to skip that step you can add value to the property during the settlement period and then have the bank use the end-value in order to do the deal.”
In such situations, it’s handy to have strong relationships with finance professionals. “Mortgage brokers can be very useful if you’re doing creative property deals because the bank’s lending criteria changes all the time,” Kelman says.
“The good brokers, that work with more experienced investors, keep on top of which banks are allowing which strategy and they have good relationships with bank managers.”
The 36-year-old says during the GFC the values placed on his properties came in lower than expected and that slowed the pace of his investment strategy.
“It was basically just a way that the banks could give themselves a bit of extra security,” he says.
As Scott McCray, an adviser at Smartline Personal Mortgage Advisers and an experienced property investor explains: a valuation reflects the expected time frame for selling a property, typically 90 days.
“If it must sell within 30 days, then that’s going to be a different price,” he says.
During the GFC, some banks moved to a 30-day time frame, which affected values. Valuers can err on the side of caution if a property hasn’t been sold for some time.
“Because valuers are independent of the bank, they can be legally liable if they over-value the property.”
Valuations also depend on who is at the helm. “A bank has a panel of valuers – three or four companies that they use – and some companies can be a bit more conservative than others; some individuals can be more conservative than others,” McCray says.
So how do you prevent your plans from being thwarted by a conservative valuation? McCray draws on data from the four property software providers to form a solid opinion of a property’s value for clients.
He may also ask a bank for an upfront valuation before a client applies for a loan, which is better than challenging a lower-than-expected valuation.
“I’d say 99.9 per cent of all challenges get declined,” he says.
Chris Gray is the chief executive of Empire, a property buyer’s agency, as well as an accountant and a mortgage broker, with his own property portfolio. He explains banks may only ask for a “desktop valuation” relying on property software comparative data, rather than doing a “full valuation” where the valuer actually visits the properties.
When he refinanced his portfolio about five years ago, the bank did a desktop valuation, until he insisted on a full valuation because all his properties had been fully renovated. “They then did that and the valuation moved 10 per cent.”
Often a full valuation is only carried out when the loan-to-value ratio is more than 80 per cent. To help present your case to the bank, it can be worthwhile obtaining an independent valuation for bigger deals or portfolios. But Gray warns unless you use a valuer who is on the bank’s panel, it may not be accepted.
- Be aware lenders have different valuation policies.
- Thoroughly research comparative values.
- Forge relationships with experienced mortgage brokers.
- If in doubt, get an upfront valuation.
- Consider an independent valuation for bigger deals or portfolios.