Property valuation is the method of determining the fair market value of real estate based on sales data at a price at which a competent seller is willing to sell his or her property for less than a buyer is willing to pay. It is usually done at the request of an individual or a bank looking to finance the purchase of a property.
One will require the assistance and support of a professionally licensed valuer to come up with a fair price value for a piece of real estate; be it a house, condominium, commercial building or a piece of land. It is typically created as a report that contains property information such as pricing, land size, physical details on the design and condition of the dwelling, details on any specific problems that may need to be addressed – as well as comparative sales data in the region.
Why is it Important?
If you are a first-time homebuyer or a seasoned property investor, valuations can play a major role in your difficult foray into the real estate industry. Both the seller and the buyer need a reliable estimate of a property's valuation, especially the buyer, so that he or she may make a justifiable counteroffer and decide if the upfront expense is within their budget.
As a result, as a homeowner, obtaining a property valuation is a critical step in avoiding paying needless and unforeseen expenses. A bank's 90 percent (or lower) lending margin is often dependent on the property's value rather than the selling price. Since it's doubtful that a seller can sell below fair value, a lower home price means a lower debt amount; as a result, the buyer will have to come up with more funds to offset the upfront expenses.
For example, let's say you've fallen in love with a home. You and the seller reach an agreement on a price of RM500,000 after some back-and-forth discussions. A 90% home loan will include an RM50,000 down payment in addition to other entry costs.
Here is where the valuation comes in: you will need a housing loan report from a company that has been approved by the bank you are negotiating with. If the valuation firm had valued the house at RM450,000, then you would only be able to get a loan for 90% of that amount. It means that if you were to purchase the property, you would have to pay the difference of RM95,000. Not the RM50,000 you had expected.
In the event that the buyer decides not to buy the property, the booking fee made before the property is valuated will be forfeited.
Tip: Insist on a clause in the seller's or agent's booking receipt that states "entitlement to a refund" of the booking deposit in the case of a failed loan application.
Determining the Value and the Process
- Loan application
- Bank instruction to valuer
- Valuer checks property surrounding based on JPPH data
- Valuer inspects the property
- Property valuation report goes to the bank
- Bank lends the loan amount based on the valuation report
Another crucial point to remember is that a valuer would use the most recent transacted purchase values from JPPH (Valuation & Property Services) from purchases collected over the previous three to six months to make the necessary changes depending on the property's condition and value-added from renovations (if any). As a result, properties in the same region that are close to each other will not all have the same value.
Part Art, Part Science
Whether valuing to purchase or sell, buyers must have a thorough understanding of how valuations are performed and what characteristics to look for. In general, and depending on the land, a valuer will consider the following considerations when determining the valuation:
- Location – accessibility, development potential
- Size – land and building
- Number of bedrooms and bathrooms
- Amenities & Facilities – if any
- Floor Level & Type of Tenant Mix – for apartments and condominiums
The neighbourhood and surrounding developments play very important roles. The presence of nearby supermarkets, such as 99 Speedmart, has a significant impact on a property's valuation. The same can be said for urban areas that house large supermarkets, banks, and colleges.
What about characteristics and conditions that detract from a property's value? T-junctions, high voltage wires, septic tanks, sewage storage zones, oxidation ponds, and proximity to squatter areas are all factors to consider. Noise and air emissions from heavy industrial fields, landfill dumps, or roads may also depreciate land value.
This is, however, beginning to change. While several of these factors used to be a conundrum for past buyers and developers, the options for the ideal environment are increasingly limited these days.
Many people mistake cost for value, but the fact is that the cost of construction work is not equal to the property's market value. The property's market value is determined by several variables, including supply and demand, recent property sales, location, and form of improvements. One of the considerations is the price.
Another misconception is that property buyers and investors are eligible to obtain bank loans of up to 90% of the purchase price for their first and second property. The truth is that not everyone qualifies for this. The bank would weigh two things into consideration when making its decision.
- The financial status of the borrower
- The value of the property
What Should You Do as a Buyer?
Above all, remember that valuing a property should be handled by a competent valuer. But what if you just want to know a ballpark figure for a particular property so you can budget before paying the booking fee? It is not a bad idea to do any self-due diligence to see if a property is worth considering in the first place.
Tip: Start with a reputable real estate agent when shopping for comparable assets. They will be the perfect place to look at recent sales so you can compare them to the property you like.
Here are some pointers on how to value a property.
- Compare apples to apples – To make a meaningful distinction, find a suitable property. In this case, “suitable” refers to a property that is conveniently located in the same neighbourhood. If this property is not accessible, you will have to look for one in the next neighbourhood.
- Look for a property in your chosen area. – One that had recently sold, not one that had recently been listed. Transacted values should be seen as a benchmark because they are, theoretically, far closer to fair market value.
- Look out for its physical attributes – Attributes which were mentioned earlier. If necessary, look around to find out who had previously lived in the property to learn more about its condition.
- Be prepared to make changes – You should have a comparable property by now to allow a fair market comparison. But what if you cannot find one that meets any of these requirements? Then you should choose the one that is nearest to you and make changes to all the attributes.
- Do not be afraid to ask for justification – You can still challenge a seller or agent about whether the property is worth the asking price if you do your homework first and trust what you know.
Regardless, if there are so many factors and you are having trouble finding a comparable property, it is best to hire a professional valuer that has a lot of experience making these changes depending on the various characteristics and other features that might be applicable that we have likely overlooked. Be sure you hire a reputable and experienced valuer because the process is not cheap, and any mistakes can be expensive.
The views and opinions expressed in this article are those of the authors and not intended to malign any company, individual or necessarily reflect the official policy or position of any agency or organization. Focal Times is a subsidiary of Maxworld Consulting Sdn Bhd, a regional organization founded by a mixture of agile and experienced corporate finance, venture capital and industrial experts. This establishment focuses on sharing current banking affairs, latest property developments and updates and more.