Valuation: One in the same,only different

Rene McLean talks about why there are often differences in valuation figures and what you need to think of when scoping out a potential valuer

While most people recognise that valuation is not an exact science, one would not expect a large deviation from one valuer to another for a fairly standard property, in a similar market.
Whilst a 10% deviation either way has been considered acceptable by some courts, personally I wouldn't expect more than 5% either way for a standard property - if the job is done properly. Bear in mind the sale price isn't necessarily indicative of the exact value (despite what real estate agents will tell you).
The circumstances of the vendor can often result in a lower than market sale if a quick sale is required. Likewise, if the vendor is in no hurry, but a purchaser falls in love with a property, or there is strong com-petition, a higher than market price can be achieved.
Differences in valuations ideally are the result of a difference in opinion, based on more or less the same facts. Unfortunately this is often not the case.
I have seen a number of valuations which are inaccurate due to one or more of the following factors and almost always, the final value is dubious as a result.

No recent sales:
Valuers should have access to the real estate stats which records sales once they go unconditional, but many firms do not subscribe to this information. This means they will be working from sales data which is usually at least two months old. We recently saw a report declined by the bank which initially had seven-month¬old sales and when requested for more recent sales, these were still over three months old.

Incorrectly identifying sales:
The crux of a valuation is the sales data. If this is not identified and analysed correctly, the end result can be skewed. A report we came across had compared sales of home and income properties with a single house resulting in a property which was overvalued by $75,000. Assuming the valuer actually looked at the sales; he clearly did not see the secondary dwellings behind and was not familiar enough with the market to have a gut feel as to the real value.

Lack of local knowledge:
Being unfamiliar with the local area can result in inaccurate values. Ideally valuers should stick with areas they know well and work in all the time. Some valuers take on jobs from one end of the city to another and across all property sectors; these are often sole traders that cannot call on colleagues to cover other areas and do not have enough work to sustain a smaller geographical locality.

Lack of market knowledge:
Valuers need to be very aware of market fluctuations between different property types, price ranges and sub localities. A market commentary must be included as part of the valuation process. I saw a valuation in the last year of a subdivisable multi¬million dollar lifestyle property in which there was absolutely no market commentary. Be very wary of a report which contains no reference to market conditions or inaccurate/out-of-date statements.
Make sure your valuer is an expert in the locality of your property.

Floor area:
Incorrect floor areas will also obviously affect value. One has to seriously question how a value is arrived at when no floor area is mentioned.

No correlation between sales and value of subject:
Sometimes a property might value more than a similar sale due to circumstances of the sale, for example a mortgagee sale - but this needs to be clearly explained in the report.
Whilst valuers are only human, the data, system, checks and most importantly skill, integrity and local knowledge minimises the potential for the above situations affecting the accuracy of a valuation to arise.
While some clients may only be interested in a figure to suit their own ends, the banks are increasingly concerned with sales evidence backing up the report, integrity of the valuation company and whether or not the valuer has professional indemnity (PI) insurance (which is no longer a requirement of valuers, but the bank is extremely unlikely to accept a valuation report if it is known a valuer is uninsured and PI insurance is becoming increasingly difficult and expensive to obtain). If a valuation is unacceptable to the bank, it is of limited use to you. Don't just get the first available valuer or the cheapest; do ask the right questions to ensure you are getting the right advice which is acceptable to the banks.

Rene McLean is a valuer at Property In Depth.

Article from NZ Property Investors December 2009