Have been reading John McGrath's Ultimate Guide to Real Estate. I've found it very readable with lots of insights. He discusses guidelines for valuing a property at fair market value.
Long ago I read when you buy a property you really are paying for the land. If that's true, where does the actual value of the bricks and mortar figure in the overall valuation?
If I see a block that is 700 square metres, then can I assume a block of 1000 square metres in the same area is proportionately that much more valuable? Obviously the size of the home must have some weighting as well. What about the age of the home? How does a contemporary home built within the last year stack up against a brick home built 30 years ago, say. Personally, I am not interested in an old style home, even though some of the renovated ones look great. I am looking for a contemporary design.
I guess other criteria such as views, proximity to facilities and extras like a shed, say, will have an effect. But really how can you quantify stuff like this? From my limited knowledge I would think looking at comparable sales in the same area is about the best you can do.
I welcome your comments. Thanks.
I guess it also depends on the area. I live and invest primarily in rural areas and would argue that the land value is not the higher determinant of the final price as the land is cheaper but the cost of construction higher than in metropolitan areas.
The final price of a property is very subjective and it is very dependant on the buyer. An owner occupier how may be buying on emotion may value the same property higher than the investor who is looking at how the numbers stack up. Past sales is about a good place to start if you can get an accurate idea of what the sale actually was. What I mean is the block size on RP data may look the same but what was sitting on it.
All the best in becoming an "area expert" and picking those prices.
Tammy
There are several methods of valuing a residential property which are accpeted by proffesional valuers. Two of which include the comparison method of valuation and the summation method. These are often used in conjunction with each other to give an accurate property value. If you wish to derive the land value component of a property you can use the summation method which involves looking at comparable vacant land sales in the same area, and adjusting these values (due to sloping block, corner block, views, proximity to roads, flight paths etc etc etc) to come to a value that reflects the value of your property. Then a valuer would add in the cost of building the property new, which they can find in special builiding guides and then subtract any depreciation (both physical, function etc) to get a fair market value for the property. Also, if you have information on the current value of the property they may sometimes subtract the deprecaited cost of construaction to give a land value.
However, to obtain a rough value of the land component of a property you can find out what the valuer generals office would value the land at for statutory land tax purposes (this valuatoion is completed by the valuer generals office annually).
Hope that answers your question
Sounds like comparable sales, growth trends and current state of the market appears to be the best means. Then in a negotiation depends where you meet on price, I suppose.
What about the age of the home? Contemporary design built in the last year v brick or timber house built 30 years ago? Which is the more valuable and why, all other things being equal?
The age of the home can play a part in the value for a number of reasons. The age is taken into account either by finding comparable properties of a similar age in the comparison method or depreciating the building costs relative to the homes age in the summation method. Basically with age a structure will loose value for a number of reasons, namely things such as changing trends, changing technology (especially in industrial and commercial property), physical obsolescence, functional obsolescence etc.
In relation to your comment about contemporary v older brick and timber; obviously a market will pay more for a modern design, however it again depends on a huge amount of factors. Although professional valuers try to make their valuation as 'scientific' as possible, there is always going to be a small amount of guess work and 'gut instinct' which will play a role in determining the end value of a home. For example, depending on the area overcapitalization may be a large factor that influences the value of a structure in two different locations. In a CBD / waterfront setting a market will value an architecturally designed modern home very highly, however the same structure in a small rural setting with low per capita income may be overcapitalised for the market and although the structure is the same, the value of the house as a component of the entire property value will be significantly less.
This is one flaw in the summation method of valuation as it can easily overlook factors such as overcapitalisation in valuing a property and seems to make the assumption that identical improvements on a property are worth the same value regardless of their location. It seems only to take into account the location when valuing the land component of the property.
JM 'worth' and 'cost' are two different issues – worth equates to the present value of an improvement whereas cost is a known quantity derived from expenditure (actual or estimated). Quite rightly, you point out that it is possible to overcapitalise on a development/improvement – you will need to be aware of the local market and its ability to pay for the development.
Wezwaz, age of the building is taken care of by factoring in depreciation – the depreciation of a 30 year old building would bring the value of the building down by 75% of the new cost (plus/minus any refurbishment/maintenance which would extend its life) whereas a new building would have only depreciated by 5-10% on its replacement value. Some older buildings may also have other aspects to be considered eg heritage/streetscape thus costing much more to replace like for like than a contemporary building.
At the end of the day, a valuer does determine the value of land in an area but it is determined by an analysis of comparable sales in the area or in a (justified) similar area (if sales data is scarce). The value of the improvements are then added back to finalise the valuation. Remember you are generally not just buying the land it is more often land with improvements unless it is a development site and the improvements are a cost to demolish not an asset. In some cases, demolition costs will reduce the cost of the land by a large proportion eg contaminated sites eg petrol stations, heavy industry, etc.
The VG land value cannot be used as a guide for purposes other than the rating of land (the intention of the valuation) – you are not privy to the directions given to the valuer and cannot rely on this for any other purpose. This is done by the VG on a 3 or 4 year cycle generally (councils then adjust for inflation).
Scott, Good point about worth and cost being two totally different issues. Does that mean that in terms of conducting a valuation you will always be dealing with a properties 'worth', as it is at a defined point in time and is a hypothetical market transaction? How about in the summation method whereby the 'worth' of the property (at a point in time) is essentially defined by the land value less the depreciated construction 'cost' of the improvements? Please clarify as I am interested in your point.
Also, in terms of the VG land value, why would the purpose of the valuation (in this case) influence the value of the land? I would have believed that the VG estimate (although perhaps relatively inaccurate due to the valuation approach used) would still be a fair indicator of land value under the current market value. Are you suggesting it may be a slightly inflated value due to the fact that it would generate more tax? I would have still assumed however that you would be able to use the VG valuation as a rough guide when attempting to calculate the proportion of a properties value that lies within the land and that of which lies within the improvements although i realise that you would not be able to rely on it from a legal standing or anything.
JM – a valuer is not always concerned about the amount that a building is worth – eg you may be more interested in replacement cost if it is a val for insurance purposes hence you are only considering the improvements not the land but generally when using summation you are considering 'the sum of the parts' which includes the building & other improvements in their current state. (PS it is land + depr value of improvements).
In all cases valuations are prepared on the basis of the instructions recieved from the client (hence different types of valuations may appear for the same property with varying results reflecting the instructions eg mortgage security, insurable value, replacement cost etc). The VG generally uses bulk valuation methodologies to prepare statutory valuation notices. It was proven in Maurici v Chief Commissioner of State Revenue that factors such as 'scarcity of vacant land' must be taken into consideration when determining the UCV of a property for the purposes of preparing a val for the VG that is a vacant block of land in the CBD or inner suburbs will be worth more than a similar block which requires clearing of the rundown 'improvements' .
The Maurici case, (earth shattering impact) caused a rewrite in the way that bulk valuation methodology was undertaken so in response to your question "Are you suggesting it may be a slightly inflated value due to the fact that it would generate more tax?" yes and no – Yes if the figure is incorrectly high then it will generate more tax but no in that UCV does not represent 'open market value' due to the difference in methodology used.
As the purpose of the VG's valuation is for statutory purposes the instructions are clearly different from those used for valuation for 'open market' and should not be used even as a yardstick as you are not aware of the complete circumstances of the properties analysed or adjustments made to determine the valuation provided. Pay a couple of hundred dollars to a CPV and get the real deal.
An interesting topic and one that from a Valuers point of view is covered very well by Scott no mate.
The question is for what purpose does Wezwaz require the Valuation for? As Scott No Mates has mentioned Valuers will treat the valuation process in different lights depending on the end use of the valuation. As an example, I saw one done (by a very reputable and well known company) for a Developer for his bank. The Developer decided to use this Valuation to set his selling prices and upon selling one of the units the Buyers bank valuation (believe it or not, done by the same company only a couple of months later) did not value up. To say the least the Developer was not happy and someone got a smack on the wrist for not checking the company records.
If it is for the purpose of Buying or Selling, I believe that agents are generally the best to advise market value. The main reason for this is that they are at the coal face so to speak, they are also able to check for comparable sales. By comparable, I mean they should be able to compare like houses with like houses.
So your comment:- Sounds like comparable sales, growth trends and current state of the market appears to be the best means. is quite correct in my opinion.
Jon
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