How do property valuations work?

Whether you're buying, selling, or investing in property, it's important that all parties have a clear idea of the property's value.

There may be many opinions on that, but a formal property valuation often carries the most weight.

What is a property valuation?

A property valuation is a professional assessment of a property's value carried out by a certified valuer. It comes with a detailed report outlining the estimated price a property would likely fetch in the open market between a willing buyer and seller.

Lenders routinely require formal property valuations before they approve a home loan so they can be sure the property is worth what the borrower is prepared to pay for it. After all, when a property is being used as security for your home loan, a lender needs to be sure it will be able to recoup the outstanding loan amount should it need to sell your home in the event you default on your loan.

These valuations, sometimes called bank valuations, tend to deliver more conservative estimates of a property's value as they also take into account the risks the property may pose to a lender. As such, they can sometimes arrive at quite a different price estimate to those bandied around by real estate agents.

See also: Bank valuations vs market value: What's the difference?

How is property valued?

An official property valuation will involve the valuer going to the site and conducting a thorough inspection of the property, both inside and out. Here are some of the factors a valuer will take into account:

Land value

This considers the size of the block, local council zoning, any planning or environmental restrictions, accessibility, geographical topography, aspect, and general layout.

Location

As we well know, location is an all-important factor when it comes to property. A well-located home with access to transport, schools, and lifestyle amenities like cafes and restaurants is going to be worth more than a similar property in an out-of-the-way area. Throw in proximity to a beach or water, or a view and the home will likely be worth more than a similar home in the area that doesn't have those qualities.

Demand

A formal valuation will also take into account how likely the property is to be snapped up by other eager buyers. Demand can wax and wane depending on many factors, including under- or over-supply of housing in particular markets, amenities that attract more buyers to a location, and the area's local economy.

Property condition

While location and land value play significant roles in a property's value, the condition it's in will also have some bearing. A valuer will look at the property's age, the materials a home is built from, how well it's been maintained, and the standard of its fixtures and fittings. This applies to grounds, pools, and fences as well as the home itself.

Size and layout

Included in the valuer's estimate will be the number and types of rooms a property has, its overall layout, and architectural flair.

The valuer will also consider relevant market and other data and employ various valuation methods to arrive at a final valuation figure. This will be accompanied by a formal report providing detailed supporting information.

See also: How do valuers assess your property?

How much do valuations cost?

Property valuations for homes in Australia generally cost between $300 and $600. Prices can be higher for larger homes, commercial properties, or those in rural and remote locations.

Most lenders will include the cost of property valuation as part of the home loan process, and some may even cover it. It will generally be included in broader home loan application fees.

If you're after a formal property valuation for other purposes, such as estate planning or investment analysis, you'll probably have to pick up the tab yourself.

When should you have your property valued?

You should consider having your property valued:

• Before selling or buying: If you're planning to sell your property or purchase a new one, a valuation may help you determine a reasonable selling price or offer amount.

• Refinancing: When refinancing an existing loan, a valuation may be required to establish the property's current value. This might affect the interest rate and terms of your new loan.

• Estate planning and settlement: If you're involved in estate planning or estate settlement, a valuation can ensure fair distribution of assets.

• Investment analysis: If you're considering property investments, valuations can provide information for evaluating potential returns.

Valuation and appraisal - is there a difference?

Although both valuations and appraisals aim to determine a property's market value, they are quite different processes. A house valuation is an official and comprehensive report carried out by a certified valuer that carries legal weight.

An appraisal, on the other hand, is not legally binding and is typically conducted by a real estate agent based on their knowledge of similar properties and recent sales in the market. They are generally free of charge and may not always represent an objective and independent assessment of a property's value, given agents can have their own motivations in arriving at a price.

See also: Property valuation vs appraisal - what's the difference

An appraisal can give you a ballpark figure, but your lender will be focussed on the usually more conservative estimate that comes from an official valuation. What your property is actually worth on the market may be somewhere between the two.

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