Sizing Up Your Property Investment

12 tips to get a great property valuation and appraisal by Ms. Ryan for Australia’s API Magazine.

Real estate investors periodically have their properties revalued in order to finance additional property investments. For example, just say your property’s value has gone up by $50,000. Most lenders will let you borrow around 80 per cent of that value ($40,000) which you can use as a deposit for another real estate investment purchase. In order to work out exactly how much they’ll lend you, lenders will often send a property valuer or appraiser around.

So we’ve asked a couple of industry experts for the insider’s word on property valuations also known as property appraisals. How can real estate investors get the highest figure possible?

Phillip Grahame from Herrron Todd White says, “The main things in a valuation [or appraisal] are the size and functionality of the dwelling and the size and location of the land.”

So obviously the chances of a favourable property appraisal or valuation mainly come down to your choice of property investment in the first place. And of course, it also depends on what the property market in general is doing at the time. However, according to our experts, there are a number of things you can do to make sure you pull off the best valuation or property appraisal on the day.

1 Presentation
Grahame says presentation is the most important thing to take care of when you have an upcoming valuation or property real estate appraisal. “(Make sure) the gardens are looking nice and the clutter throughout the hosue is cleaned up and all that sort of thing. Because first impressions, even with property valuers, do count,” he says. “If it’s freshly painted and really neat and tidy and presents well, as it would to a buyer, then we’re going to be more positive on that particular property.”

Mark Ruttner from First Valuation Group agrees, “The owner should provide a property in a state of repair similar to an open for inspection. There’s nothing worse than rolling up to value a house and all the clothes for the last two weeks are on the bedroom floor, the toilet seat is up, dishes from the last week are still sitting in the sink.” Ruttner suggests mowing the lawn and trimming the edges. He also says any external painting should be fully completed, as first impressions can be significantly dampened by incomplete paintwork.

2 Recent Sales Evidence
If you know the sales prices achieved at any recent property sales in your area, have that information available for the property valuer and property appraiser. Ruttner says “One of the best times to et a current valuation is when you have say two or three recent sales that are very similar to that of the property getting valued. Obviously such sales have a direct effect on the arrived value.”

The easiest way to keep tabs on sales in your area is to attend auctions nearby. Whether it’s an auction or a private sale, hold on to the sales brochure when you attend the open home so that your valuer and property appraiser will be able to track down the agent to confirm the selling price.

If you want to be really helpful, Ruttner says it’s great when a property owner puts together a written report detailing three or so comparable sales within about 500 m of the property over the past six months. Grahame agrees that recent sales information is very useful.

He explains, “In most cases we’ll probably be aware of (the sales data) but in some cases we won’t. So if the applicant knows of it, it pays to make the valuer aware of it.”

3 A Rates Notice
According to Ruttner, some valuers and property real estate appraisers like to see a copy of your municipal/council rates. They vary from one place to the next, but there will generally be a “site value” or “unimproved land value” figure reflecting the value of the land only. And sometimes, there will also be an “improved value” based on the land and building. “Those (values) are done on a statistical analysis. So it’s not accurate but it gives us a ball park,” Ruttner says. “It gives the valuer/appraiser a pretty good idea of where it’s sitting in the marketplace.”

4 Be Honest
Grahame says, “We’ve heard every story and trick in the book and we can see through that pretty quickly. I’ve always found in my experience the morehonest the people are, the more we look favourably on the property and the application. If someone’s telling fibs, immediately we see through that and get in a defensive mindset.” For example, Grahame says clients might claim that a neighborhouring property recently sold for $500,000 but the valuer or property appraisal might have evidence that it only sold for $450,000.

5 Make Your Improvements Prior
If you have improvements to make, make them before the valuer comes around. Grahame says there are plenty of people who fall into the category of “the gonnas”. “Next week we’re gonna fix up the bathroom; or next week we’re gonna put on that car port …. What people don’t’ understand is that we have to value it as we find it on that day. We can’t take into account any future improvements they may – or in a lot of cases they may not – do.”

6 Clear Instructions
Grahame says, “If you’ve got plans for future investments and quotes and costings, make sure if you’re going through a lender that the lender requests an ‘as if complete’ valuation. A lot of times (the valuer or property appraiser) goes there and it hasn’t been communicated that’s what’s required and we just value as is on the day.”

7 List of Recent Improvements
Ruttner says, “If improvements have been made to the property over recent times, provide a detailed and written list of works conducted and the cost of these. Even better would be project specs and a building contract, giving the valuer an idea of exactly what has been spent.” While this will often add weight to your application, “also bear in mind that cost does not equal value in all instances,” he cautions.

8 Don’t Overcapitalise
Grahame says, “Obviously improvements and renovations add value. But you’ve got to be careful about overcapitalising. So not spending more on a particular improvement than that particular area can cope with.” For example, “Putting on a large extension will obviously increase the value of the real estate property but it may not increase the value more than what it actually costs. That’s generally dependend on the quality of the area. So if people renovate and improve to put the property in a bracket higher than what most properties in that area sell for, then there’s a chance that they’re overcapitalising. If they’re in a really strong, well regarded area where people are looking to buy in high price brackets, then it’s harder to overcapitalise.”

9 Outdoor Living Areas
“Outdoor living areas are one thing which tend to add more value than cost. So if there’s a well presented and functional living space, that always reflects well on a valuation or appraisal of a real estate investment property,” Grahame says.

10 Kitchen and Bathroom
“Kitchen and bathroom facilities are an obvious one,” Grahame says. “If they’re well presented and don’t have a dated look about them, then that will obviously have a positive impact on the valuation [or property appraisal]”

11 Etiquette
“The inspection in a typical three-bedroom home would take a prudent valuer [or real estate appraiser] not much more than 10 minutes to inspect inside and out, so don’t feel that you have to speak to the valuer to make sure that they haven’t missed any part of the property,” Ruttner says. Some owners feel a need to follow the valuer or property appraiser around pointing out every feature of the dwelling, but Ruttner suggests “don’t try and sell the property to the valuer.”

While you may be pointing out features you feel add value to the property, it’s best to leave it up to the expert to decide which are the salient features. If you waste the valuer’s time or the property appraiser’s time with lots of chatter you may get in the way of them doing their job as thoroughly as possible.

If you want to make sure the valuer has all the information they need, Ruttner suggests that at the end of the visit, you can always ask whether there are any matters the valuer isn’t sure about.

12 Be Patient
“Lastly, don’t ask the valuer what they think it’s worth as they’re leaving,” Ruttner says. After visitng the property, the valuer or appraiser needs to go away and undertake at least two separate methods for determing the property’s value. Two of the most common methods for residential property are “direct comparison” and “summation.” Direct comparison involves analysis of recent sales of similar properties in the area. It may be a straight comparison or a comparison of the rate per square metre (which is the salesprice of each property divided by the land size). In this method the valuer or real estate appraiser takes into account factors which differentiate your property from those in the comparison sample, such as location, size, quality of the dwelling and views.

Using the summation approach, the valuer/property appraiser assesses the land value (sometimes based on a comparison of vacant land sales) and then includes the ‘added value’ of the improvements of the land (ie. buildings). The added value is based on market evidence and is sometimes analysed on a rate per square metre basis. The valuer probably won’t be comfortable giving you an answer until this analysis is complete.

In short
So for optimal results, keep your place neat and tidy, provide any information to the valuer which might support your case, and then leave them in peace to get on with their job.