Why is market value important?
In real estate, managing, maintaining and improving property value is the ultimate goal of most. This is done through the complex, multifaceted property valuation process. With a combination of market and financial analysis, qualified valuers in Sydney can help property owners and investors better manage their valuable assets.
Much like any real estate transaction, there are a number of options available when it comes to who determines fair market value.
These include:
- real estate agents
- banks appraisers
- certified practising valuers (CPVs).
To ensure the accuracy of a valuation, you want to partner with a professional sporting specialised knowledge, training and experience in valuation across all types of property.
The process is dependent on reliable methodologies and market data. These methods include the direct comparison approach, income approach and cost approach. Each valuation requires a tailored approach specific to the type of property and the end goal of the valuation.
For instance, valuations can be performed to:
- buy or sell property
- boost the value of your investment or develop an investment strategy
- calculate the likes of stamp duty or capital gains tax
- negotiate rental contracts
- navigate legal matters such as divorce settlements.
The most important aspect of any valuation is objectivity and transparency. This can only be secured by professionals subject to the appropriate regulations and standards.
What distinguishes a certified valuer from the others?
Typically in Australia, property valuations are best carried out by licensed valuation professionals. However, both real estate agents and bank appraisers can offer similar services.
There are a number of key differences between these options, primarily concerning their intentions, qualifications and areas of expertise.
For instance, bank appraisers and real estate agents are not independent. They work on behalf of banks, mortgage lenders, or real estate agencies. Bank appraisers in specific provide property valuations for loan purposes.
It’s not guaranteed that either sport the requisite level of training or accreditation needed to ensure accuracy in a property valuation.
In addition, neither can ensure transparency or objectivity when appraising property.
Bank appraisers calculate property value for the purpose of validating a home loan. They need to establish whether or not the value of your home would cover the lender in the event you default on your mortgage. Similarly, real estate agents consider their intended commission when calculating market value. Neither process can be considered entirely fair.
All CPVs have undergone a rigorous training and accreditation process.
They are trained and regulated by the Australian Property Institute (API).
This organisation:
- establishes comprehensive quality standards and regulations
- provides oversight and continuous professional development training.
Ultimately, CPVs provide considerably more comprehensive and impartial services for the likes of legal disputes and property-related taxes.
What is fair market value?
Any property valuation is aimed at establishing current market value or retrospective market value.
This refers to the value attached to a property in a real estate transaction between a willing and informed buyer and seller. Whether the valuer determines current or retrospective market value is dependent on the purpose of the valuation.
For example, current market value is used to buy or sell property. Retrospective market value would be used in the likes of a capital gains tax valuation to show the increase in an asset’s value over time.
Determining fair market value involves a thorough physical and analytical review of the property. Key factors for consideration include the property's condition, location, size and other features. The process involves rigorous market comparisons and is tailored to suit both the type of property and the purpose of the valuation.
The goal of calculating market value is to establish an objective basis for determining the price at which a property should be bought or sold in an open and competitive market. This is crucial for property owners, buyers, investors and managers of all kinds.
Valuations and fair market value a critical role in maintaining a fair, thriving property market.
How CPVs determine fair market value
When CPVs conduct a valuation, they employ a series of proven methodologies.
To reiterate, these are:
- the direct comparison approach
- the income approach
- the cost approach.
Each approach may apply to varying degrees depending on the type of property and the goal of the service. These methods cover different factors of the property and taken together can provide an accurate and dependable statement of fair market value.
The direct comparison approach is the most widely used. This is where external and internal factors such as build quality, condition, access to amenities and the area’s reputation come into play.
CPVs utilise extensive market databases to compare these points against those of similar properties that have recently been sold in the area.
The cost approach is another means of establishing market value. Here, the CPV aims to estimate the cost of replacing the asset in question. That means accounting for the price of labour, administration, building materials and land.
Your valuer will also consider any depreciation or other factors that may reduce the value of the property to arrive at a fair market value.
Finally, the income approach is reserved for income-generating assets. As the name implies, this uses a property’s current and potential future earnings to establish its value.
Summary
To conclude, fair market value refers to the amount a property should be bought, sold or rented out in an open and competitive market. This is the crux of any real estate transaction in Australia. It can also be used to calculate your tax obligations or to support various legal matters.
The fair market value of any asset is based on a wide range of internal and external factors. Those include the location, dimensions and quality of the subject property.
Fair market value is determined by certified practising valuers. These diversely qualified professionals are trained graduate members of the API. Unlike bank appraisers and real estate agents, CPVs have the requisite experience to guarantee accuracy and transparency.
For more on the details of calculating value, contact one of our licensed valuers today.