Understand the ins and outs of making a property investment, we consider everything you need to know about valuing your investment.
The valuation of a property is important whether you are buying or selling a property, and can be key to securing a mortgage, investors or buyers. Whatever your involvement in a property decision, it’s important to learn the basics associated with appraisals.
How do you have your property valued?
The value of your property is established by having it appraised. This process determines the market value of the property and it’s prudent to note that it may not always mirror the market price. The process is normally carried out by an independent and qualified appraiser.
Why do it?
Establishing the value of a property can be necessary in a number of scenarios, from buyers looking for financing, listing a property for sale, investment analysis, property insurance and taxation purposes.
For property purchases, the appraisal process is generally one of the first steps in closing a property purchase deal and may be required by your mortgage lender or financer before funds for purchase are confirmed. The valuation may be used to confirm any loan amount prior to completion of purchase, particularly to ensure that a loan amount is not greater than what a property is worth.
An appraisal can prove key in the selling process, as it helps to ascertain the value of the property, ensuring there are no discrepancies between the purchase price and the value, which could otherwise cause delays and disruptions to completing on a property.
Appraisals are also a useful way for investors to track the appreciation – or depreciation as the case may be – of a property investment, providing information which can influence how long an owner keeps a property and when he or she might want to sell it. The valuation can be used for tax purposes, too. If a property has depreciated in value, one of few advantages may be a reduced tax rate, where such costs are based on the value of a property.
What do appraisers take into account?
There are a number of factors to be considered during the appraisal process and an appraiser will gather a range of data in order to determine the value of a property.
There are different approaches to valuing a property. The most common method is the sales comparison or market data approach where sales history and the area or neighbourhood where a property is located informs an appraiser’s valuation of a property. The valuation is derived by comparing similar properties in the immediate area that are of a similar size and that have comparable features and were built around the same time. Though no two properties are exactly the same, adjustments will be made to take into account discrepancies, such as condition, between the comparable properties.
Another method used for property appraisal, particularly for investment properties where a unit is used to generate income, is the income method, or the income capitalisation approach. The property is valued based on the income it is able to generate, usually in terms of rent. This method is used because investors will often be seeking financing and lenders need to know that any income will be able to cover expenses and mortgage payments, ensuring their investment is protected.
Another approach for appraisal is the cost approach which assumes that a buyer will not pay more for a property that it costs to build a house plus the cost of the land on which it is built.
Appraisers will provide a report which features market sales data, public land records and any comparable property sales data used to determine the property’s value as well as basic supply and demand figures and macro-economic trends that may affect the value of a property.
What if your investment is valued at less than you paid for it?
Appraisals can be tricky as they often take place once a price has already been agreed upon by seller and purchaser.
If the appraised value of a property is significantly lower than the agreed price this can delay purchase. It can work in favour of a buyer in terms of negotiating a lower price, unless there is a cash buyer ready and willing to pay the full price, though it’s unlikely anyone will want to overpay for a property. ‘
A second opinion from another appraiser is also an option, particularly if the seller believes the property is significantly more attractive or valuable in some way when compared to other properties in the surrounding area.
The value of a property will not necessarily equal the cost (everything you spent to purchase the property) or the price (the amount you paid for the property itself) of a property. These can affect the value, but will not determine it and the actual value can be significantly higher or lower.
Is there anything else you should bear in mind?
It’s not an exact science but rather an educated and, hopefully, well-researched guess. No two properties are ever exactly the same and an appraisal is based on a number of variable factors.
What are the consequences of your property valuation?
If everything goes smoothly with your appraisal it is a significant step towards completion of your property. However, it’s an important element and if an appraisal is significantly lower that the agreed sales price then it’s worth giving the transaction a serious second thought while you have the chance.