Property valuations, replacement value & equity finance mortgage
05th December 2007
It is hard to gauge the mood of the moment. Some agents have mentioned that they are experiencing a short lull - possibly due to the election and the rate rise - while others are saying they have not stopped. Who knows - but my guess is that some people are waiting for the new year to make any big decisions.
Last mail-out I said I was going to talk about property valuations. When property values start to rise a buyer needs to know that they are paying fair value for a purchase and not be taken in by what agents hype or what is known as "undue vender expectation". As you know an agent is expected to get for his client (the vender) the best possible price and will never tell a potential buyer that they are paying well over market value. That is the job of the buyers agent who is working solely for the buyer.
So - how is a property valued?
Mostly it is just an agreement between the listing agent and the seller on what they both think the property is worth. It is easier to value a normal suburban house in a busy neighborhood as you can go on previous sales of a similar nature. But when a property is unique or different, renovated or highly sought after then different rules may apply. An agent will be happy to come to your house and value it for free. However, (Shock! Horror!) it has been know that some agents may inflate their market valuations in order to get the business.
The Internet has changed the real estate business in many ways. It is now possible to get your own approximate market valuations online. Three sites offer this service and they have managed to collate information on previous sales and activity in the market you are in. They stress that the computer modeling cannot take into account all the factors like a building's condition or recent renovations. They are:
Australian Property Monitors $69.95
RP Data $79.95
Another way to have a property valued is to get a professional valuer in. A valuer can attain a better estimate of the property because they break down a property into its three main components:
1. the cost of the vacant land
2. replacement value of the house and any other improvements
Sometimes it can be a subjective decision on how much premium to add on for having these three factors together in one place. Also how do you value a view? Is it possible to pay an extra $100,000 to have an ocean view. Around here - it seams so. Or how much is it to see the Byron Light House or the sound of the ocean to help you to sleep? It can vary form person to person. I know of people who hated the light of the lighthouse flashing through their windows or the sound of the ocean kept them up at night. Its horses for courses and the valuation of these factors are open to interpretation.
A valuer can cost you anything from around $300 for a normal 3 bedroom home to over $1000 for a property above $1M or for farmland or large acreage.
The main valuers in the Northern Rivers are:
Hoolahans in Ballina and Lismore 6686 6130
Allsops in Lismore 6621 8933
Bennett and Frogley in Byron 6680 9969
My rule of thumb is to deduct 5% off the valuation provided by an agent and add 5% to a valuation provided by a professional valuer. They often are fairly conservative in their estimates.
Another interesting variable in home valuation is costing the replacement value of a building. This cost has changed mainly because of the rapidly escalating cost of building materials. Also good builders in this area are not short of work so have just been escalating their prices. I have had a few stories come across my desk of people delaying plans to build only to find that costs have gone up so much they have not been able to proceed. I find it amusing that everyone hears about the wealth pouring into the big aussie companies like BHP and Blue Steel but fail to realise how that impacts them until they decide to go and build a house. Builders have told me that materials like colorbond roofing and copper wiring have risen over 50% in the last couple of years.
So these costs have caused building expenses to rise quite substantially. A project home builder like Parry Homes have been impacted less than independent builders. They used to be able to build brick veneer on concrete slab for under $800 a square metre and now are around $1000 M2. To build a good quality home with hardwood floors and better than average fittings will now cost between $1500 - $2000 M2 - less for the garage and decks. A couple of years ago you could build a good quality, architect designed home for $1000 to $1200 a M2.
Equity Finance Mortgage
One of the newer finance options being offered by boutique loan lenders is the Equity Finance Mortgage - EFM. I don't see the advantage of this one for anyone other than people who find it hard gathering the full deposit. Basically the lender coughs up some of the depsoit money but then shares in the equity increase when the property is finally sold. Of course, the banks cut themselves a good deal and for investing 20% of the deposit money and then having the mortgagee pay 100% of the interest payments they can expect to earn up to 40% of the capital gain come selling time. But still this may be a good option for first home buyers who just need a little leg up with that deposit. Please give me a call if you are in this position. We will put you in the best deal available at least - either an EFM or something else that can get you in the deal without too much pain.
This is not true for the other specialty loans I have talked about in the past. Both the Cash Flow Loan and the Reverse Mortgage can be quite onerous for the borrower unless looked at the fine print closely. The Cash Flow Loan is where you can get a discount on the interest paid in the first couple of years but is then added on when the honeymoon rate expires. This is the loan variety that was oversold in the States and is the main cause of the sub prime debacle over there. As these low rates expire and the poor punters that where suckered into these loans wake up to the increased rate, many will have to sell into a rapidly deflating property market.
The reverse mortgage has been developed to assist the large number of retirees who are sitting on substantial equity in their home. The idea is that they can have a single payout or a monthly stipend so they can access that equity without having to worry about interest payments. But of course there is no free lunch and come time to settle the bill when the owner shuffles off the mortal coil and their heirs find out that a substantial slice has been eaten up with higher than normal interest rates and broker fees. This loan may suit some elderly people who are not astute money managers but for the majority there is a much better way to access a line of credit for this purpose without being saddled with the extra costs.