Why banks & agents value your home differently

Have you ever wondered why a home can be listed for one price, valued at another, lender-valued at yet another price and then sold for a figure that leaves everyone scratching their heads?

How can one property have umpteen different prices? How do you know which price is right? Let’s walk through a hypothetical home and see if we can shine a light on the price confusion.

A tale of five prices

Meet the Smith family. They own a home in the city, but are keen for a sea change and plan to buy a property on the coast.

They call their bank to arrange refinancing their home so they can release money to pay for a deposit on their next home.

They also phone their local real estate agent and ask for a price appraisal before deciding to take their home to market. It sells under the hammer at auction. Meanwhile their local council rates notice arrives in the mail and they must pay it before leaving their residence.

Mrs Smith is packing boxes for moving day when she realises her family home has five different ‘prices’, including her personal assessment of its real value. She wonders if she somehow sold for the wrong price.

Why do these variations exist?

The bank value

If your home is or will be mortgaged, your lender will almost certainly need to value it. This gives the lender confidence your asset offers ample security against the borrowed amount if, for some reason, you cannot pay your mortgage and the lender must sell the property to recoup its debt.

It is therefore unsurprising that a bank valuation will usually be conservative, sometimes 10%-20% less than the current selling prices of comparable homes.

A bank valuation will usually be conservative.

In this case, the Smiths’ bank assesses their home and decides its value is $500,000.

The selling agent’s price appraisal

Real estate agents are commonly asked to assess the market value of your property. This will often help a vendor decide who to engage to sell their home.

Before being chosen to act on a vendor’s behalf an agent will typically inspect the home and research comparable sales in the local suburb or town before producing written feedback and a sale price estimation such as “between $X and $X” or “from $X”.

This price guide is useful to a vendor when deciding what price to advertise.

The Smiths’ agent conducts his inspection of their home and, based on current strong demand for three-bedroom sandstone homes under 1km from the local primary school, estimates it will sell for $550,000 to $600,000.

The sale price

Regardless of whether the property is sold via private sale or auction, the price the successful buyer is prepared to pay, and the vendor is willing to accept, on the day the contract is signed is the property’s legally binding sale price.

Hot markets, high demand in certain areas and a big turnout on auction day can all have an effect on the final sale price for a property.

In our scenario a big crowd attends including eight enthusiastic buyers. Bidding is active right from the start and the price quickly surpasses even the agent’s optimistic appraisal. The hammer falls on a bid of $630,000.

 

The local council’s valuation

Every year when a property owner gets their local municipal rates bill they will see on the notice a Capital Improved Value (CIV), site value, net annual value (NAV) and/or gross rental value (GRV).

These figures are calculated using varied methodology including comparable sales data and the bi-annual figures from the State Valuer-General’s offices.

Councils, and water and fire authorities, use these figures to work out how much homeowners owe them for using their infrastructure and services.

According to the Smiths’ rates notice, their property has a CIV of $480,000 – the value of the land and any capital additions such as a house – and a Site Value of $280,000 – land value excluding buildings.

The homeowners’ price

Every property owner will have a ‘wish price’ in their minds when they come to sell.

They usually also have a ‘this-is-the-lowest-I-will-go’ price and usually both of these price points are based on a home’s location, aspect and features, but sometimes vendor price expectations are also influenced by emotion rather than facts.

Mr and Mrs Smith really didn’t know how to price their much-loved family home when they came to selling it.

Every property owner will have a wish price in their minds when they come to sell.

They had been studying price data for their neighbourhood, which showed a median price of $510,000 for three-bedroom houses in their suburb over the past 12 months.

Mrs Smith thought their home’s sale price should reflect the median price figure, but Mr Smith thought the new pool they’d installed last year should add at least another $50,000 to their home’s sale price.

In the end the market will usually decide a property’s value by what a buyer is willing to pay for it at auction or through private sale.