As a Developer, there are times when you need to know how much a property is worth. Understanding property value is a fundamental skill in property development feasibility.
Now, a standard response is "it's worth whatever somebody is willing to pay for it", and that's definitely true.
Still, if you're considering buying, selling or refinancing a property, then you need to get a reasonable idea of worth so you can do your feasibility numbers. You also need an idea of what someone is likely to pay for the end product you're developing. Accurate price estimates help reduce risk in property development projects.
Two words that get used a lot to determine the worth of a property are Valuation and Appraisal. But although they are often interchanged, they're actually two quite different and very distinct things.
Appraisals
Appraisals are conducted by Real Estate Agents. They use their knowledge of the local market and recent sales to determine a price range they believe a property falls within.
They also have an idea how many people are currently looking for a property like yours, so can determine the level of demand and how that's likely to affect price.
All sounds quite straightforward and accurate, right? Well, yes, until you realise the reason most agents prepare an appraisal - it's because they want you to list your property with them.
Or, if you're wanting comparables for your end product, they might inflate the numbers in the hope that your development feasibility will look much more profitable and so encourage you to buy the property you're currently assessing. Relying solely on agent appraisals can distort property development feasibility calculations.
In other words, assume any appraisal you get from a Real Estate Agent is on the high side, knowing the numbers quoted are more about igniting your greed gland, rather than being one hundred percent accurate. Vendors almost always want to sell their property for top dollar, and agents know it. So the temptation to inflate an appraisal in order to win a listing is huge.
Good agents won't do this, but it takes time for you to build a relationship with an agent to the level where you know you can trust them. When you do, they're worth nurturing!
Valuation
You can only have a valuation prepared by a registered Valuer. It takes a four-year degree to qualify, so their valuation is considered accurate enough to be used for legal purposes, and is considered legally binding.
So if you need to find out the worth of a property as part of an ownership transfer, you would get a valuation done by a Valuer. Anyone who's applied for finance will know that a bank requires a valuation as part of the loan application process.
Bottom line, a valuation is based on a whole range of marketplace data, so the end result isn't swayed by any desire to list your property.
Having said that, Valuers are using data from sales that have already occurred. Which means that in a fast-moving market, they may be behind the times. They also know that the valuation is often used by banks to protect themselves from being out of pocket, and as a result are much more likely to give a conservative figure. That conservative valuation can seriously impact your borrowing capacity as a developer.
Online Estimators
Tricked you! There's actually a third option, which is to use an online estimator to get a sense of what a property is worth. You might still have to dig around a little to find one of these, but with recent releases such as "Domain For Owners" they're becoming much easier to find.
Estimators are very much "buyer beware" though. Estimates are based on recent comparable sales, using data such as size, location and features. Which is probably reasonable if the property you're looking at is the same as ten others in the street. And if the market is on a plateau.
But if it's not? That's where the estimator starts to get a little less accurate. What if the property you're looking at has expensive, high-end fittings, whereas most properties in the area don't? A stunning view? Some other unique feature, good or bad, which substantially affects what someone would pay for it? The market's running hot and prices are climbing quickly?
As I said, sometimes online estimators are good for a rough ballpark number, but that's about all. They should only be used as a starting point for property development analysis.
If you're still new to assessing property values and comparable sales, our FREE 7-Step Development FORMULA course walks through feasibility basics and a lot more.
Bottom line - an appraisal is usually done by a Real Estate Agent, is an opinion, and is likely to be on the high side. A valuation is done by a Valuer, based on a range of market data, is legally binding and is likely to be on the conservative side.
And an Online Estimator can be anything from very accurate to completely inaccurate.
Which all makes life as a Property Developer a lot harder, and is a good reason why learning how to work out what a property is roughly worth, whether buying or selling, is a very important skill to learn.
But at least now you know the difference between an Appraisal and a Valuation!
Now, a standard response is "it's worth whatever somebody is willing to pay for it", and that's definitely true.
Still, if you're considering buying, selling or refinancing a property, then you need to get a reasonable idea of worth so you can do your feasibility numbers. You also need an idea of what someone is likely to pay for the end product you're developing. Accurate price estimates help reduce risk in property development projects.
Two words that get used a lot to determine the worth of a property are Valuation and Appraisal. But although they are often interchanged, they're actually two quite different and very distinct things.
Appraisals
Appraisals are conducted by Real Estate Agents. They use their knowledge of the local market and recent sales to determine a price range they believe a property falls within.
They also have an idea how many people are currently looking for a property like yours, so can determine the level of demand and how that's likely to affect price.
All sounds quite straightforward and accurate, right? Well, yes, until you realise the reason most agents prepare an appraisal - it's because they want you to list your property with them.
Or, if you're wanting comparables for your end product, they might inflate the numbers in the hope that your development feasibility will look much more profitable and so encourage you to buy the property you're currently assessing. Relying solely on agent appraisals can distort property development feasibility calculations.
In other words, assume any appraisal you get from a Real Estate Agent is on the high side, knowing the numbers quoted are more about igniting your greed gland, rather than being one hundred percent accurate. Vendors almost always want to sell their property for top dollar, and agents know it. So the temptation to inflate an appraisal in order to win a listing is huge.
Good agents won't do this, but it takes time for you to build a relationship with an agent to the level where you know you can trust them. When you do, they're worth nurturing!
Valuation
You can only have a valuation prepared by a registered Valuer. It takes a four-year degree to qualify, so their valuation is considered accurate enough to be used for legal purposes, and is considered legally binding.
So if you need to find out the worth of a property as part of an ownership transfer, you would get a valuation done by a Valuer. Anyone who's applied for finance will know that a bank requires a valuation as part of the loan application process.
Bottom line, a valuation is based on a whole range of marketplace data, so the end result isn't swayed by any desire to list your property.
Having said that, Valuers are using data from sales that have already occurred. Which means that in a fast-moving market, they may be behind the times. They also know that the valuation is often used by banks to protect themselves from being out of pocket, and as a result are much more likely to give a conservative figure. That conservative valuation can seriously impact your borrowing capacity as a developer.
Online EstimatorsTricked you! There's actually a third option, which is to use an online estimator to get a sense of what a property is worth. You might still have to dig around a little to find one of these, but with recent releases such as "Domain For Owners" they're becoming much easier to find.
Estimators are very much "buyer beware" though. Estimates are based on recent comparable sales, using data such as size, location and features. Which is probably reasonable if the property you're looking at is the same as ten others in the street. And if the market is on a plateau.
But if it's not? That's where the estimator starts to get a little less accurate. What if the property you're looking at has expensive, high-end fittings, whereas most properties in the area don't? A stunning view? Some other unique feature, good or bad, which substantially affects what someone would pay for it? The market's running hot and prices are climbing quickly?
As I said, sometimes online estimators are good for a rough ballpark number, but that's about all. They should only be used as a starting point for property development analysis.
If you're still new to assessing property values and comparable sales, our FREE 7-Step Development FORMULA course walks through feasibility basics and a lot more.
Bottom line - an appraisal is usually done by a Real Estate Agent, is an opinion, and is likely to be on the high side. A valuation is done by a Valuer, based on a range of market data, is legally binding and is likely to be on the conservative side.
And an Online Estimator can be anything from very accurate to completely inaccurate.
Which all makes life as a Property Developer a lot harder, and is a good reason why learning how to work out what a property is roughly worth, whether buying or selling, is a very important skill to learn.
But at least now you know the difference between an Appraisal and a Valuation!
