Ep 40. The Truth about Valuations with James O’Brien
In this episode, Michelle chats with James O’Brien from Shore Financial about property valuations and how they can make or break property deals.
Here’s what you’ll learn from today’s episode:
We explore the existing flaws in property valuation and the subjective nature that often gives rise to disputes surrounding valuations in the lending process.
Why understanding the challenges posed by valuers unfamiliar with local markets and their rushed assessment process can impact valuations.
What goes into detailed pricing research
Learn about the significant influence of valuations on property deals
Speakers in today’s episode:
Michelle May - Michelle May Buyers Agents
James O’ Brien - Shore Financial
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Please note that any views or opinions presented in this podcast are solely those of the speakers, and do not necessarily represent those of any business. These views and opinions are general in nature, and do not take account of your personal objectives, financial situation and needs. Please consider whether it applies in your circumstances and seek professional advice wherever appropriate.
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VIEW TRANSCRIPT
Michelle May: Hi, and welcome to another episode of the Buy Your Side podcast, the property podcast to help you make smarter property buying decisions. My name is Michelle May and I am the principal of Michelle May Buyer's Agents here in Sydney. Now, I'm not sure if you remember, but in episode 35, James O'Brien was my guest.
James is a broker at Shore Financial, and we work together on a regular basis with some of our clients. We were talking about releasing equity and what you need to do if you are a Mum and Dad, for example, own a property and they wanna help you out. And we touched a little bit on valuations.
Now I record this at home on an online program. And that day the recording wouldn't stop so much to my surprise. It actually recorded James and I's conversation after we had sort of finished that episode. And we continue talking about valuations because James and I are both passionate on that subject, as you'll hear in a minute.
It was such a good conversation with some real interesting points that James made and my point of view as well that I thought I didn't really want you to miss out on it. So here's the episode. I hope it's helpful. Let me know what you think.
James O'Brien: The valuation story is real. I think it's the most flawed or subjective part of the lending process
Michelle May: I would have to agree 100% because so often when clients have gone unconditional and then the valuer comes out, they're not even local. They don't even know the local market.
And I was talking to one of them, a young kid who also did private valuations, so you could book him. He was saying that in a day he'd have to do like a crazy amount, which left him literally with about half an hour per property to value a property and going out there, and all this time.
I mean, our pricing research, we take three to four hours, if not more per property to ensure that the price range we put on it is accurate.
James O'Brien: Is that before you even visit the property?
Michelle May: How I work is because I've got Naomi, my assistant; she's my research person, so I go to a property and then if the client likes it, I go and tell her what the parameters are. So if it's a two bed, two bath, one car apartment, I'll say to her, okay, it's this square meterage on title. So we first look in the building, we go back two years to see what's happening in the building because you know, some buildings perform differently than others.
Depending on whether it's Art Deco or just a really well-managed building, particularly Potts Point or the city where people just upgrade within the building 'cause they love it so much. The Three Sisters on Victoria Street is one such case, for example.
And then we look at the recent sales in the suburb, and then we look at what's happened to the median of the suburbs since those sales occurred. And then we adjust it accordingly, and then we do summation valuations. So we go, what's superior, what's inferior, what's comparable?
And then it's not an exact science, you know? Because particularly when there's a view involved, or a school catchment area, do you know what I mean?
James O'Brien: A lot of those are things that the Core Logic's not going to pick up on because Core Logic's not going to observe the view or the newly renovated interior, the new hot water system has been put in, or whatever. I've had desktop valuations that have been done by a bank because essentially the desktop valuations are really drawing the majority of their information from CoreLogic.
So it's picking up the configuration of the property, two bed, two bath, one car, comparing it to the other two bed, two bath, one car. Then I get a valuer to go out there, a valuer on behalf of the same bank. I've said, I don't want to use this desktop, I want a valuer to go and have a look because the clients have spent money on the property. And again, there can be a $200,000, $300,000 variance - clients spent a hundred grand fitting the place out. Core Logic hasn't noticed the view of the water that the property has, and when a valuer turns up, they go, oh, I know what people are going to pay for this, they're going pay more. And then even then you get several valuers to go out and they've got different levels. But it's interesting to hear the amount of work that you guys put into it compared to a valuer who's making the decision for a lender. They pop out and they've got, how much time did you say?
Half an hour per property.
Michelle May: That's what he was telling me. Like at the height of the boom. Literally had about half an hour to evaluate a property, which to me is just insane. And also on top of which, if you are not a local valuer, if you're not regularly in a particular patch, how the bloody hell are you supposed to know,
James O'Brien: Mate, there's no way.
Michelle May: And this is exactly why I don't cross the bridge, for example.
Beause I don't feel confident evaluating properties in that location, because I don't know enough, I'm not there often enough. But then you see with those valuations, have you noticed that in the last period of time, the risk has been dialed up.
James O'Brien: Yeah, although, I will say the process for a valuation on a purchase is totally different to the process for a valuation of an equity release. Equity release, or a refinance, you've got the valuer going out there and that's when they come back at all different amounts because the valuer is actually giving the property the fair market value based on their research and knowledge. Whereas for a purchase, 99.9% of the time, they are just issuing a value at the contract price. That's it. And so I think, the vast majority of the time, if it's for a purchase, they will look at comparable sales in the area and go, oh, look, it's within 20%. It's either 10% higher or 10% lower than the average, that's fine, we're happy with that. We'll say, yes, this property's worth 1.5 or 2.5, and they'll essentially, it's just rubber stamping a contract of sale.
Michelle May: Which it irks me as well, because I tell you what, I've been to so many auctions over the years where I've just, like, literally internally, I've gone, please stop bidding. Please stop bidding. Because I see two cock fighters, both dads going toe to toe, and the property goes. Literally, I've seen people white as a sheet afterwards, and then yet it gets the seal of approval because it was fair market value at auction.
That makes a massive assumption that everyone who goes to auction is a sane person.
Because people recognise the fact it's a highly emotive environment, stressful environment.
James O'Brien: I'm fortunate. I haven't had that happen to me. I've heard stories from colleagues where they have looked after the finance for people in those auction sort of situations and, valuations for purchasers do come back low. I had two in 2021. The crazy year of, you know, 20% price increase. One of them, the valuation came back $30,000 lower than what they'd paid.
My client had excess borrowing capacity and excess cash and they went, you know what, take 30 grand, we'll just borrow a bit less money, it's fine. The other one was in a rural area where there wasn't a comparable sale for 24 months. So the valuation came back much lower, but again, it was fine. My client was borrowing at like 50% or something, so it didn't matter, you do get it from time to time.
Fortunately, I haven't had any of those full on ones, but I have heard of people paying four mil and then the valuation comes back at three and a half . I can't remember the solutions that my colleagues have applied, but it would be, first and foremost, you'd just go to other banks and get other valuations done. That would be your first problem solved.
Michelle May: I'm very proud to say that none of our valuations, or none of our pricing research, because I'm not allowed to call it valuation because I'm not a valuer, but none of our pricing research for myself or my team has ever come back in my career. It's always on the money.
And the one thing that people get disappointed about, they go, well, the valuation came back for exactly what we paid for it, I was expecting that we were going to get a valuation that was higher. And I'm like, but that would be like giving you instant equity, they're not going do that. Oh yeah, that makes sense. So it's like, ah, you don't get the bonus. But the fact that it's come back on the money, that's all we need to know.
James O'Brien: It's the same thing when someone's bought a house in a fire sale. They paid $1.5m for a property that should be worth $1.8m. And then the valuation comes back in at $1.5m and they go, what, no way, I'm sure I got a better deal. You're like, no, mate, that's not how it works.
Michelle May: For us, it's all about the client. The client needs to be happy and we need to know that we've done a good job and we know how well we've done. But the ultimate icing on the cake for me is when local agents call me and go, did you buy that? How the hell did you buy it for that money? You know? Well done. You know, that's it, we've done our job.
There you have it. When you put a buyers agent and a mortgage broker in a room together and they're really passionate about what they do, they just keep talking even after they think they've stopped the episode. I hope you found this episode helpful. A little look behind, what's really going on in the industry.
If you have any questions, as always hit me up on hello@buyyourside.com.au. I would love to hear from you. And did you know, I'm also on TikTok. I do some videos on there with things that I just come across on a day-to-day basis and would love to get your like or follow on there as well. It's Buy Your Side. And thanks again for listening. Till next time.