Understanding house valuations
Understanding the role of the property valuer is crucial to any owner or investor – particularly those beginning their journey and looking to enjoy a lifetime of real estate investment.
And, according to recent reports, this cohort is on the rise.
The QBE Australian Housing Outlook 2018-2021 report noted an increase in the importance of millennial buyers and their finance requirements.
The report said first home buyer lending had increased by 28 per cent nationally during 2018.
This was in the wake of tougher borrowing conditions for investors overall as banks tightened criteria – lending to investors had dropped 11 per cent.
In fact, millennials should prove to be the nation’s biggest force for house price movements over the next three years, steamrolling over Gen X by sheer weight of numbers.
So, if you are at the start of your journey, getting your head around the role of the valuer is vital – and that starts with the valuation inspection.
What is a bank valuation?
At its most rudimentary, the bank valuation helps underwrite how much the financier will lend and under what conditions.
The valuer is looking to determine what your property could achieve for sale on the open market over a reasonable timeframe.
The bank will use this figure, so they know that if you default on the loan, they’ll be able to get their money bank.
As well as the figure, the valuer is also charged with highlighting risks around the property so the financier can make some determination on the security of the property’s value.
For example, is the property located on a main road? Is it in a market sector that’s at risk of oversupply? Are there physical problems with the home that will make it difficult to sell?
All of these elements will be highlighted in the valuation report and have a direct effect on whether you qualify for a loan or not.
As an investor, you will be striving to maximise your valuation result – both in terms of the figure and the risk ratings.
It’s difficult to achieve this outcome if you don’t understand exactly what valuers do, and don’t, look for when inspecting a property.
What valuers look for
The valuer is concerned with a number of things during the inspection.
Their goal is to define and measure the subject property’s physical and locational attributes.
This allows for comparing to other homes that have recently sold in the same location in order to determine a likely sale price for the subject.
This inspection is also a chance to identify those risk elements I’ve highlighted above.
1. Three components functionally
In terms of a property, the valuer looks at three components – land, dwelling and ancillaries, which are improvements to the land other than the house (e.g. landscaping, fencing, drive way).
At inspection, their job is to measure and quantity these components.
They will look at plans to determine site dimension and will stand on the block to assess outlook, and topography.
They want to get a feel for its useable space and exposure.
With the house, they will measure up and draw a plan of the home.
They want to ensure the layout is maximised, that rooms are of adequate size, and that the feel and flow work.
With ancillaries, its again about useability.
Is the fence high enough to reduce exposure? Is landscaping complimentary or overrun? Is the garden shed accessible and useable?
A functional assessment of the land and its improvements paints a picture of a property’s saleability.
2. Important condition and maintenance
While running their ruler over the home and ancillaries, the valuer is also taking in their general wear and tear.
Most importantly, they want to determine if there are any necessary repairs required to bring the property up to a reasonable standard.
The approach is the same as would be applied by a prospective buyer.
They’re asking themselves, “What sort of value discount should be allowed given the expense of repairs or upgrades needed?”
If your paintwork is peeling and the carpet worn through, they’ll make note.
If there’s substantial damage to the pergola roof or the fence has been taken out by a fallen tree, they’ll highlight it.
While they aren’t detailing the exact cost of every item, each notation adds up and will be factored in when looking at comparable sales.
3. Major repair
The valuer will also be looking for dramatic repairs needed to a home.
If there’s no operational bathroom in the home, it’s about to become a problem for your loan (don’t laugh – it’s happened before).
Are there major structural problems? Perhaps the deck boards are wearing through or an external stairway is at risk of collapse?
These major structural black marks will be taken in and while they may result in a lower figure, they may also result in a higher risk rating, too, which can put your loan approval in jeopardy.
4. Non-compliant structures
Among everything else, the valuer will be looking for improvements to the property that may not be council approved.
While they cannot play the role of a certifier or inspector, they may spot a DIY pergola that’s shoddily built, or structural work that’s obviously of the “home handyman” variety.
This will, again, result in risk highlights that put your approval in danger.
So, you must ensure all your works are compliant and approved.
5. Location and position
Among all the physical attributes of the property, the valuer is also taking in its geographic elements.
They are considering where it’s located in terms of its own suburb.
Is there ready access to services and facilities? Is it a walk or a drive to the hot local café hub? Is there constant noise from a nearby road?
They’re also considering surrounding uses of your property’s position.
If your neighbour is a service station or electrical substation, expect that to be highlighted, too.
Anything positive or negative about location will be taken in and allowed for in the comparison process.
What they’re not looking for
While valuers will take in the important check-list items above, there are elements that might bother OCD-type owners to quake but won’t cause the valuer concern.
1. Cleanliness… within reason
A valuer once told me that it seems those most concerned about the cleanliness of their home had the least to worry about, and vice versa.
Homes are lived in by owners or tenants, and valuers do not expect showroom quality.
A mildly long lawn and unswept landing aren’t going to make a lick of difference to the end result.
That said, I would still recommend you take the time to make the place presentable.
It doesn’t take much to do a vacuum, wipe down the cupboards, and put away the dishes – being at least a little house-proud helps.
While these items won’t change your end figure, the valuer will, even subconsciously, think if the little items are being given attention, then the big items are, too.
Also, extremely untidy and “hoarder” houses will be dramatically marked down.
If you can’t do an inspection for all the dirty washing and old newspapers that block your view, then expect a high risk rating and no loan approval.
2. Minor repairs and maintenance
A chipped tile, a damaged curtain rail and a missing cupboard handle are annoying, but easily fixed.
Small stuff like this won’t worry the assessor.
The litmus test is, again, to think like an incoming buyer.
If they are willing to write-off these minor fixes when making an offer, then the valuer probably will as well.
When it comes time for a valuation, being forewarned and forearmed helps bring the result you need.
Concentrate on the important stuff.
Fix what you can and have answers prepared for the rest.
Valuers are professional inspectors – they don’t miss much.
If you can reduce the risk and increase the appeal, you improve your chance of achieving a desirable outcome.
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