In this article, I’m going to write about the flexibility of the property valuation.
At the time of writing this article, it’s 13th of January 2019 probably some of you are preparing to sell property. It means that you will start looking to establish the ground work.
I am sharing some advice and thoughts on how property valuation works, practices and some lousy habits. What many home sellers commonly do as a mistake by being not well prepared. Not having knowledge and understanding of the process. And why all of that is leading to a loss of time and nerves accompanied by a bad experience with surveyors, price depreciation and low turnover.
Before we start diving deep let’s first look who are valuers (surveyors) and why they are so crucial according to law and all governed bodies. They have to be members of the Royal Institution of Chartered Surveyors in the UK and Chartered Surveyors is their professional title. Treated as experts that can establish the value of your property.
But what is property market value?
PROPERTY MARKET VALUE
Market value is the estimated amount of an asset or liability should exchange on the valuation date between willing buyer or seller in a transaction after marketing and where both parties had acted knowledgeably and without compulsion. Is described best at RICS Red Book.
Generally, the purpose of property valuation is to identify and make evidence of comparables of the property that can withstand the scrutiny from the client, the market and where it is necessary.
This diagram is showing how many different types of value is addressed to well-designed properties.
THE FLEXIBILITY OF PROPERTY VALUATIONS
Like it or not valuations are based on an assumption from the valuer. Which follows a checklist and long list of considerations and believes based on broad generalisation and established economic principles.
Let me know if I explained it too complicated.
And by looking and comparing with similar items on the market. In other words, the buyer should pay not more than the real costs.
Does this sound flexible to you?
By recommendation of RICS:
When identifying, analysing and applying the comparable evidence, the potential purchaser and valuer should seek to ensure that it is: • comprehensive – ideally some comparables rather than a single transaction or event • very similar – preferably identical to the item being valued • recent – i.e. representative of the current market • the result of an arm’s length transaction in the open market • verifiable, so far as practicable • consistent with local market practice.
The valuation methods are flexible, but they may not be precise and have a degree of uncertainty all the time.
Even if the valuer follows the provided evidence and checklist strictly and he’s very experienced it can miss an accurate indication of the value of the property or the asset.
As well as that they may act on behalf of a third party, which can have an additional effect on the seller.
It is a commonly used practice by buyers to negotiate over the price. I know, it might look like not fair but in reality is legal. There are some exaggerated parts, just because property markets are not perfect and generally characterised by a lack of comprehensive information.
For example, the person to whom you are selling to, your mortgage lender or bank. Either way, the instructing party would expect from the surveyor to do the valuation more on the pessimistic side rather than an optimistic one with the chance of realism. Yes, does not look like fair play 🙂
EXPERIENCE IN CASE OF UNIQUE REAL ESTATE VALUATIONS
The Valuers when dealing with unique property scenarios where they are mended, upgraded or just different, even when all the provided by the regulatory bodies are met. The skills of the vlauer are of greater importance.
Do your homework sale strategy
You (the home seller) by not having a clear strategy, not being prepared may be in trouble by losing some of the value of your asset, by relying only on outside factors.
Often the surveyor may mess up the properties values based on their beliefs and not on their knowledge.
Do you think this is the human factor in the business?
PRINCIPLES OF THE PROPERTY VALUATIONS
Due to the nature of the business of the valuers, they should be aware of the general approach while doing a particular valuation. All property valuers should be well familiar with RICS Valuation – Professional Standards (the ‘Red Book’, 2012) VS 6, Valuation reports, for standards and guidance on valuation reporting.
You can download it yourself from here: https://www.rics.org/uk/upholding-professional-standards/sector-standards/valuation/red-book/red-book-2017/
The level of the evaluation and it’s correctness it’s highly dependent on the valuers with their level of experience in analysing data and the approach taken into consideration.
The heart of property valuation it’s called comparable evidence. Today in 2019 in most of the developing markets, similar evidence is somewhat difficult to obtain, and many valuers may be less familiar with it.
In my opinion the UK evaluation process it has its positive side and negative sides which by knowing how to play you can get a positive and correct result almost every time.
ADDITIONAL PROPERTY INFORMATION ON INTERNATIONAL VALUATIONS
For example the difference between the property valuation in the UK and Germany it might seem to be similar by methods, but it has one big difference.
In Germany, it is defined as the average price which could be expected in a normal market condition.
Where in the UK it is defined as the best price which could be reasonably expected in today’s market condition. This means for the German’s valuers that there is a moment of consideration whether the current market is either moving smoothly or being deformed by irregular factors.
Whether we like it or not property appraisals are essential as a standard, and we have to understand that they are not made by a few eccentric decisions that are taken by someone. Their purpose is to make somehow the property market understandable to some possible degree.
UK evaluation standard comes from the property investment culture of the Nation which concentrates upon total returns and accordingly pays a lot of attention to short-term progress in capital values.
While in Germany the property is fundamentally looked like an alternative to corporate bonds and which puts as much importance upon the income return as total returns which regards property transactions are costly and seek to minimise turnover in portfolios. Any period shorter than three years and is treated as frivolous.
The UK evaluation standard is founded on the belief that because properties relatively illiquid assets compared with the financial assets, it is a high-risk asset and that. Investor’s priority should be to play the market cycle by buying at the bottom and selling at the top.
ASPECTS OF THE PROPERTY VALUATIONS
Not all property valuations can fully meet the criteria. This is because no two houses or flats (apartments) can be the same, even if they are side by side with an identical design.
Their condition and aspect will be different, which will come as a difference in the valuation.
And to make the equation more complex, factors as building type, construction type, materials used, efficiency, size, location and number of occupants must be taken into consideration.
In my opinion, the real problem comes when the real estate markets are lacking transparency. Real estate companies do not disclose publicly most of the vital information for their customer while making tons of profit on their back. There is some available information, but as it lacks detailed information, only assumptions can be made.
Don’t worry, and this is a global issue in almost all countries.
Maybe this is the law of the jungle? I don’t think so.
And finally, we’ve come to the point!
HOW TO PREVENT PROPERTY DOWN VALUATION RESULTS?
I assume by now you would be reasonably convinced that You as [home seller] should be equipped with knowledge, strategy and it is a good idea to wear your lucky shoes.
As I explained why perfect property valuation is almost edging on the border of utopia because it’s a summary of a property’s circumstances at a particular time in the concept and assumptions by market value.
Property Valuation note
Take a note here and remember: The better the evidence, therefore the better the process and assumptions.
This is a citation from designcouncil.org.uk which I like:
A study by the Property Council of Australia examined whether there is a relationship between good design and good financial returns. Eight buildings were chosen by a design selection panel as examples of high-quality design. An independent development finance expert examined them for their financial returns. All showed above-average returns. The authors of the report concluded that while the good design does not guarantee a financially successful project, it greatly increases a project’s chance of becoming a financial winner.
Certainty in challenged markets as up-to-date January 2019 in such circumstances valuations are produced by detailed commentary on the issues, merely to help the buyers to understand the figure given.
The value of the property changes over time, and it is subject to profit or loss following the market. Any decision that differs from the norm will play effect according to the current market events. These changes may be a positive or negative figure.
90% of the sellers and home-owners are at risk losing the value of their assets in:
- fast-changing market circumstances
- physical changes caused by nature
- physical and structural changes induced by intention for an upgrade
- regulatory changes
- future developments of the country
All these factors affect the valuer’s opinion as an informed observer. Therefore most of the valuers have given local regions which they work in.
Property Valuation note
Take a note here: Some very experienced valuers can make a note about near future potential changes of the marketability of the property in certain situations.
All the mix of events, expertise, market changes and tons of unpredicted circumstances at any given moment means that firmly basis are at risk to be precise and even different apart two weeks of the valuer’s visiting your property.
YOUR ROLE: As the seller, your job is to help and support the valuer with enough evidence, comparables and help them to form their opinion more onto the positive side. Remember, they are still human, not machines. But all this “game” might be challenging if you are not well prepared.
THE KEY ELEMENT OF PROPERTY VALUATION
By now you should know – nothing is straightforward.
The value of your property is highly dependent on current supply and demand. You are almost always in competition with other deals placed on the market, with similar characteristics and even with other marketplaces.
The relationship between the buyers and valuer are open and straight, with expectations from the client to challenge the appraisal and tilt it on their favour.
It is expected from the valuer to deliver the best information and figure by combining expertise, skills and possible future risks based on which the client will take important decisions.
The key here is that you as a seller can prevent or I may say, HELP the valuer to see the potential of your asset by giving them what they are looking for – signs of progress and not neglecting and decay.
Although your effort is not limitless and you can’t seek from a small 2-bed house to achieve the value of a castle, numerous strategies can have a positive effect.
Property Valuation improvement example
A clear example where you can see the possible potential value in improving parts of your house. Words are powerless.
WHAT NOT DO TO WHILE HAVING PROPERTY VALUATION
- A bad practice that I often hear by disappointed sellers is to question valuers competence while being with them. This may have only an adverse effect to you, instead of having made some progress.
- Many opinions out there are that the estate agent is trained and capable of doing “airy valuation” or they might look beyond your pile of dirty clothes.
Well, I have to disappoint you, this might be your worst decision. Estate Agents in the UK does not need to hold qualifications.
Having behind their back one or two estate agent’s courses doesn’t meant they are experts. And these that are experts proven by the time, might guess based on their local knowledge and expertise.
The office information hold for the transactions closing and closed are not systemised properly for 87% of the estate agencies. Alongside with other very important moments as local knowledge (which tends to be a very important part for your appraisal).
With the difference that valuers are trained to spot these.
Another disappointment is even internally not every estate agency will have a system set in place for tracking down all aspects of the property prices, transactions or trends.
Naturally, it’s a little mess.
If some of you are more sensitive may count that as a vague conclusion, but let’s face it. Estate agents ride the waves of the market conditions and have no power over the course.
- Do not read the news. Instead, look at the market results.
We are so dependent on the news agencies, so even some experts are establishing their strategies based on rumours, guessing, statistics and real-time events.
What is your experience with property valuation?
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