Valuation is important when buying or selling property, as it can be the key to securing a mortgage, investors or buyers. An appraisal is carried out by a qualified, independent professional who gives an unbiased estimate of the true or fair market value of a property.
Why do it?
Establishing a property’s value can be necessary in several scenarios, from buyers looking for financing, listing a property for sale, investment analysis, property insurance and taxation. When purchasing property, the appraisal process is generally one of the first steps and it may be required by a mortgage lender or financier before funds are confirmed. The valuation can also be used to ensure that the loan amount is not greater than what a property is worth.
Appraisals also help investors track the appreciation or depreciation of a property investment, providing information that can influence how long an owner keeps a property or when to sell it. If a property has depreciated in value, one of the few advantages is reduced tax rate.
There are different approaches to valuing property. The most common method is sales comparison, or market data approach, which uses sales history and location. Adjustments will be made to take into account discrepancies, such as condition, between comparable properties.
Another method is income capitalisation, where the property is valued based on the income it can generate, usually in terms of rent. This method is used mainly as lenders need to know that the income will be able to cover expenses and mortgage payments.
Another approach is the cost approach, which assumes that a buyer will not pay more than what it costs to build a property plus the cost of the land.
When the asset is valued less than what you paid
If the appraised value of a property is significantly lower than the agreed price, this can delay purchase. It can work in favour of a buyer in terms of negotiating a lower price, unless there is a cash buyer ready to pay the full price, although this is an unlikely scenario. In this situation, getting a second opinion from another appraiser can be helpful.
A property’s value will not necessarily equal its cost (everything you spend to purchase the property) or price (the amount you paid for the property itself). These can affect the value, but will not determine it and the actual value can be significantly higher or lower.
If the appraisal process goes smoothly, it is a significant step towards completion of your property. However, if an appraisal is significantly lower than the agreed sales price, then it’s worth giving the transaction a serious second thought while you have the chance.