Episode 121 | Valuations: What should you know? | Bart Mead, Valuations JLL

All the valuation questions you wanted to ask are finally answered.
Have you wondered how properties are valued and who has the authority to value them? In this episode we speak to veteran valuer Bart Mead, Executive Director of JLL Valuations and Advisory. Bart has 30 years of providing property advice to financial institutions, the government and private individuals. We sit down to discuss the current state of property valuations: how they work, what factors impact the value of a property, and where the future of valuations will be - automated, cheaper and with a click of a button? Listen in to find out.

Here’s what we covered:

• Why valuations underpin the financial system and the greater economy?

• How do valuations give the buyer confidence after purchasing?

• Will valuation in the future be done prior to purchase?

• Will automated valuations be the future for property purchasers?

• Do valuations vary greatly?

• What are the different types of valuations?

• What's the process of banks picking valuers?

• How will the Covid-19 Pandemic impact how property is valued?

• How much do banks dictate how valuation should be done?

• Could you take a valuer to court for under/over valuing property?

• How do valuers treat off-the-plan property?

MENTIONED EPISODES:
Episode 62 | Cecille Weldon
Episode 120 | Michael Yardey

HOST LINKS:
Looking for a Sydney Buyers Agent? www.gooddeeds.com.au
Work with Veronica: info@gooddeeds.com.au 

Looking for a Mortgage Broker? www.wealthful.com.au
Work with Chris: hello@wealthful.com.au

Buy the book - AUCTION READY How to buy property at auction even though you’re scared s#!tless:www.getauctionready.com.auUse the coupon ELEPHANT for your 30% listener discount.

EPISODE TRANSCRIPT: 
Please note that this has been transcribed by half-human-half-robot, so brace yourself for typos and the odd bit of weirdness…
This episode was recorded on 16 April, 2020.

Veronica Morgan: You're listening to the elephant in the room property podcast where the big things that never get talked about actually get talked about. I'm Veronica Morgan real estate agent buyer's agent cohost of Foxtel's location, location, location Australia and author of a new book called auction ready, how to buy property at auction. Even though you're scared shitless.

Chris Bates: And I'm Chris Bates, financial planner, mortgage broker, and together we're going to uncover who's really making the decisions when you buy property.

Veronica Morgan: Don't forget that you can access the transcript for this episode on the website as well as download our free full or forecast to report which experts can you trust to get it right. The elephant in the room.com.edu.

Chris Bates: Please stick around for this week's elephant rider bootcamp and we have a cracking Dumbo of the week coming up

Chris Bates: Before we get started. Everything we talk about on this podcast is generally nature and should never be considered to be personal financial advice. If you're looking to get advice, please seek the help of a licensed financial advisor or buyer's agent. They will tailor and document their advice to your personal circumstances. Now let's get cracking.

Veronica Morgan: Have you ever wondered why the bank will give you a preapproval for finance but then say it's subject to evaluation so you find the property you want to buy, you want to make sure the valuation is okay, but when the bank says you need to have actually bought the property before they'll order the valuation. Look to me, this chicken and egg scenario seems madness but it happens all the time and it results in buyers often unwittingly taking on huge risks. I'd love to find out why this is the case today. We've got to discuss this so much more with Bart Mead head of residential and mortgage valuation advisory Australia for J L L Bart has 30 years experience providing property advice to financial institutions, government bodies and private clients. His experience includes a wide variety of generalist valuation work, incorporating valuations of industrial, commercial retail and residential assets. So thank you for joining us today bar. We've got lots of questions for you.

Bart Mead: That's a pleasure. Okay,

Chris Bates: Thank you. But I'm really looking forward to this. I, I'm generally before a podcast, just put down a list of questions that are keen to ask and I could have kept going for days with this situation cause there's so many things around evaluations that are really important for property investors to kind of grasp. But what do you believe why valuation is such an important part to understanding and I guess transacting in the residential property market?

Bart Mead: There's a lot of aspects to that question. And because we started off talking about banks residential property evaluations and waterways actually under pins the financial system and the economy to a certain extent because it does skew the banks of to actually lend money so they can have confidence around their security position which obviously allows a lot of credit to flow into the market. So from a digital aspect, they are quite critical and they do play a very important part. But to me the most important part is that the consumer, the buyer has confidence in what they're doing and the making the right decision for their own future, their own financial position, and ultimately for their own lifestyle.

Chris Bates: So you mentioned there around the banking side, I think that's you know, I guess the bank wants to, if they're going to lend money, they want to make sure that they've got assets to protect them and then they're lending against assets that they could, they could potentially sell the few default. So I guess the valuation part of that's outsourcing that risk to an organization to protect them if things go wrong. But you're also saying it's also on the other side, the customer side for them to have confidence to know that you know, they're buying assets at fair prices. Would you say that's the other part?

Bart Mead: Yeah, no, definitely.

Veronica Morgan: The problem with that, those, that, and this happens in Sydney where I operate is it quite often as I mentioned in the introduction there that it is a situation where the bank won't order that valuation until they've got a signed contract and that that might be with a cooling off period. But quite often it's not, or it's after auction. So how does the valuation then give the buyer confidence? Cause they've already made the decision and paid the money.

Bart Mead: And that's the issue. When generally there's only one valuation being done per transaction. And the reason the banks do it after the fact is traditionally they have advisors that they have confidence in and they will only use certain values. So most banks don't just use any valuer out there in the market. They have their panel of values which they trust and have confidence in their advice them to get a valuation up front. Just logistically doesn't work. Plus it wouldn't be an a very expensive exercise for a bank to a layout. Borrow is to get their own valuations up front. The bank was actually going to cover that cost, which in a lot of situations they do. So that's traditionally the reason the valuation has done after the fact. And unfortunately even if a buyer gets a valuation up front because of that situation, it's highly unlikely the bank will rely on it as well.

Bart Mead: So you're in the situation where there needs to be two valuations done. So that the sense of reason why we have the situation in or the dilemma. However, over the last 15 years, the valuation landscape has changed quite dramatically where it really has corporatized. There is a much smaller number of firms in Australia servicing the banks, which means we're probably getting closer to a point where the consumer will be able to get a valuation in confidence and hopefully transfer all the way through the mortgage process that had a phase change for banks and financial institutions to change their process. But that is a real viable option and would provide a much better customer experience. And as you're talking today, you know, how do we make sure that the consumer is getting the right confidence and good experience? And that's one way we're always see that our future can change which actually provides a much better experience and a much more secure decision making process for the purchaser.

Chris Bates: You're saying that that potentially prior to purchasing in the future, that could be a better option because there's only a smaller number of firms where we could have a more, almost a range or a purchase price that would be fair for that property that a buyer could pay to know that then the bank would, would land on that valuation. Like you know, cause you can't go to the dollar because there's always negotiation. There's always, you know, I guess it's, and then, you know, if you said you at 1.6 right and then someone goes and offers 1.65 under competition, then the bank lending lends on 1.6 and we're going to have all problems with settlement and things like that. So how would you, how would you factor in something like competition and the whole, even the process of auction? You know, it's the scarcity pushing up prices and people overpaying. So

Bart Mead: We have looked at this with a couple of banks where evaluation is done prior to a sale or prior to an auction. And once the property is actually sold and the valuation makes its way from the purchaser to the bank, the bank would come back to us and say, well you did evaluation here at 1.6 they paid 1.65 are you prepared to adjust to menu evaluation to the 1.65 for first weed purposes? And in most cases values would say, well that's within that range. So I'll adopt that actual purchase price, you know, 1.2 million. Well, when the value of probably say, well hold on, there's something a bit out of line, I'm not going to extend my mortgage at the purchase price. So it's doable. It's a change in the process. But again, it's something that in this current environment we working it is doing

Veronica Morgan: So. But are you suggesting that in the future if buyers had the opportunity to get evaluation prior to purchase and obviously there's a affordability issue here in terms of just general cost of of getting valuations. Are you sort of thinking or you're seeing a future where auto valves will play a part in this?

Bart Mead: When you say order value, you mean automated valuation models? I do. I'll go back to your first point. The cost of evaluation is very low for the voice. The individuals feeding, considering the amount of money they're about to spend or invest. So I think from a cost perspective, evaluation is probably the one, the cheapest and best value. Bits of advice someone can give. Like in Australia everyone expects everything to be for free because no one, yeah, they pocket to pay for anything. And I would suggest the majority of people don't even see the agent's commission as an expense to them because they're not taking it out of their pocket. It's something that I've never seen that disappears. So that's a, that's the first issue. But I believe the cost isn't a barrier. It's just the, the conditioning, the mindset that we have when it comes to property in Australia.

Chris Bates: Definitely with the cost. I think the problem is with the cost is if you buy a property in an area where you've got a highly likelihood and there's not that much competition, you're going to get the transaction done. Then paying $2,000 for evaluation is actually a dollar well spent because you know, you're highly likely going to get the property, but in a hot auction market of say Sydney or Melbourne, it's probably likely not going to get that property. And so not only do you have to pay the valuation, but you have to pay building and you also have to get the contract check, et cetera. So every time you go to an auction, you're going to be outweighing, you know, substantially more. And then that's gonna accumulate over say four or five properties while you miss out.

Veronica Morgan: You could argue, Chris said, if you've got the valuation done first, you save a lot of money and building in person contract reviews. Because a lot of the reason people miss out on auction is because they believe what the agent's quoting without really fully understanding what the property might be worth. So here's a couple of different ways to look at it.

Chris Bates: This one, so you wouldn't get property right? I wouldn't be willing to pay that. I mean, you might end up paying more what you need to pay.

Bart Mead: Yeah know and you are right when, when you are meeting on a number of properties, you know the costs do increase and you know, you are exposed to more outlines. I still think the overall expenditure is still quite small. The actual transaction. And I do believe that you getting the right property at the right price is worth spending money on.

Veronica Morgan: You're preaching to the converted here on that one. But I'm, I'm curious because you could have two valuations that were very different from each other. So how can that come about if everybody's using the same, and I know residential is a little bit more straightforward than say, commercial or retail or industrial. But how can that come about that you can have an, I've seen them, I've seen valuations for the same property vary quite wildly. So what are some scenarios where that might happen?

Bart Mead: Now you're ask me very difficult questions?

Veronica Morgan: That's what we're here for.

Bart Mead: Yes, you are correct that you do see it and it is very possible because you are relying on individuals and their opinion. And, and then that's the issue with valuation. And I'll come back to your question around automated valuation models, but that the fundamental floor in valuation is that you are asking an individual opinion. And every individual visit opinion is going to be different and every individual will have different biases and prejudice even when it's, say profession and what they do all day. So why? So that's a reason you get those differences. And that's in, as I said, that's a fundamental floor in our profession. Coming back to your question earlier about automated valuation models, I do believe they will be a big part of our profession going forward. We have alone automated evaluations for render rental values and capital values on residential properties. And the reason we have those is said that the cornerstone or L data and analytics stack and products and using that we have built what we call our property intelligence report, which basically sits around an individual's brain because the value in the value his head is so valuable. But to make sure that we're not just relying on an individual's opinion surrounding that we have this very sophisticated, robust data analytics environment that tells us if that value is opinions offline, it's not fitting in with what all our data is telling us.

Chris Bates: Yeah.

Bart Mead: So that's why we get the best of the individual's local knowledge. So property intelligence that we've got the data, we've got the analytics ensuring that we're managing that risk and that well, our opinions are more consistent and then sort of jumping all over the place as you would if you had five, six, 1,000 different individuals giving their own view. So I don't know if that makes sense.

Chris Bates: Yeah, no it does.

Bart Mead: But, but we are moving into an era where we've combined property intelligence with artificial intelligence. You see a lot of data tech companies out there talking about artificial intelligence and machine learning, which is great. But if you haven't got that property intelligence, if you don't have that domain knowledge, if you don't have that local knowledge artificial intelligence isn't going to give you the results you need. So we're been working for a number of years on integrating that property intelligence into artificial intelligence which hopefully in the future will ensure that we don't have those big variations in valuations that you currently see.

Chris Bates: I think that's really important. I think there's a lot of these AVMs sort of models. All the banks have jumped on board, you know, a and Z, et cetera, get a property report. And when we, you know, Veronica would look at these and look at it comparing to the actual property value, they're all over the place. And secondly the reason why I believe is a lot of them are that local knowledge and they're actually putting their value on the things they should be putting value on. I the better street or the better frontage or North face. The layout and things like that. And so, you know, and the rain was so very anyway for quality assets, but for say bulk standard apartments where there's 10 thousands of them or hundreds of thousands of million area you know, those models are probably more likely to be suitable. And so I think there are a lot of industries, it's about using the, the technology plus the local knowledge, the local expertise in whatever industry things to be a much better model. But in terms of actual bank valuation there's not just one top evaluation. I think clients get confused. They sometimes think that every day is the same, but there's different versions like desktop drive, buyers, et cetera. Can you please explain the differences? And what would that most banks do

Bart Mead: If not more than happy with that? So currently saying, say three weeks ago there was four types of evaluation, so thanks to, so there's the automated valuation model, which is just computer generated. There is a desktop valuation where a value will assess the value of a property from their desk using whatever information is available to hand. Then there was curbside valuations, whether they would drive and sit outside the property, even view it externally. Then there was a full physical valuation whether they would go internally and inspect the property, measure of talk to the owner, et cetera. On the 30th of March, the Australian property Institute put out a state of emergency protocol, which allows virtual inspections because of the code 19 virus.

Chris Bates: Yeah.

Bart Mead: There's also the option to do a virtual inspection. So yeah, as you would see the quality of those valuations as far as accuracy the confidence level increases as you go up that this, so the, the automated has the lowest level of confidence. The forecast has the highest level of confidence around the accuracy of that valuation. So banks will use a different valuation type depending on the loan to value ratio for the loan. Also the client, the amount of time the client's been with them. So they'll look at a number of different variables to determine what level of valuation they use.

Chris Bates: It's a good point because recently they would actually use that, always go for valuation you know, pay the cost and just get it done. But I noticed a bit of a trend last year and a couple of years that the banks would just loosely, you just do desktop hours and look at the contract price and the property address and just say, yeah, we're happy with contact price. But that seem a real risk on market. And now that we're going into a market where banks are pulling out a lending and thinking about all their risks those things are going up and we know, again, now they're looking for full vowels all the time to, to lower their risk. But so recently a client, we've got a low bow on a property and then the client just said, why can't we just use this value or, right. And one of the value that they prefer or they know is that a valuation on the property before that's been favorable, banks actually keep that conflict of interest there where it's independent. And what's the process around banks picking values?

Bart Mead: So the banks do have panels. So they will select value is who will do their work and they will then allocate those values on the geographic vices. So generally a postcode or a essay, two or three type a geographic basis, then they'll allocate a percentage of the work. So there might be, yeah, I saw that over Sydney. There's three valuers who do the work for the bank in that suburb and they might allocate 40% of the work to one value valuer, 30 to another, and that will be on the right patient basis. So the system when it decides it needs a full valuation in that suburb, it will just randomly select one of those three values and make sure that on a proportional basis it goes per the allocation. So that way the purchase of refinancing has no idea who is actually going to get the valuation by Diana, what's going to be one of those three firms that they don't know, which, and even the people in the bank don't have influence, I bet who is actually going to get that property. So that's how the banks do it. Too many to risk. I say that's a little bit sad. Health profession isn't trusted that the banks to that extent to make sure they feel secure, that there's no fraud or underwater activity going on between a borrower and a valuer. Yeah, that's, that's the way they currently operate.

Chris Bates: Yeah. I think it's no, because valuations do have such a big impact on how much people can borrow. So you know, if you did have someone that was bent basically playing the system and you could always go use that same value or for example you know, you would find that there's potential problems and there has been you know, potential property spruikers and they've used flaws in valuation models over the last couple of years. To leverage their clients. There's been cases online you can read about it where they've seen that banks are doing auto evaluations on properties under certain values. And then being able to gain the system. So, you know, it's, it's just valuations are so important to keep independence there I believe just because it's such a, it's the trust factor around what banks can land.

Bart Mead: I do agree with that, but what I see profession has changed a lot and I can't use, We've corporatized an awful lot and there's no way in the world JLL again, a risk their reputation, $250 bank valuation fee by trying to do the wrong thing besides I believe the days of value valuers writing fee as people would say for 200, $250 is gone. The banks around using those bigger corporate firms that they can trust. So for that interest income instance, we have three firms doing that suburb in Sydney. If you're a purchaser and you know that those three little three, the valuation for the bank in amongst time that you go and engage one of those upfront, they do your evaluation, you purchase a property, it goes through the system. The bank says, well yeah, we know them, we trust them, we'll get, get confirmation from them. They're happy for us to use it for more purposes. It seems like a pretty simple process. Everyone has competence, everyone has trust, everyone is doing the right thing. Yeah that'd be a risk management and mitigation around that. But that's where I do see that we've moved away from that era where a lot of small valuation firms, you need to have trustee shoes to now be a corporates who aren't going to risk their reputation and their business over a couple of hundred dollars. Which will allow a much better experience for both the purchaser and the lender.

Veronica Morgan: And just on that, the couple of hundred dollars. Cause of course anecdotally we keep hearing about, you know, the, the banks have driven the cost of valuations down for themselves obviously. And in terms of negotiating deals with individual valuation firms such as JLL, I guess. But what are the, you know, I mean, look, I know in my business we're not values, but when we do price research, it really, it's so rigorous to do it properly. It takes hours. You know, you can't pay staff, you can't have offices, you can't you know, you can't, I could never do a an appraisal even for $250. How does evaluation from me, I guess, you know, what are you looking for in terms of the, to give you the confidence to be able to give a price because you can't possibly go into it in the depth that say we do.

Bart Mead: The valuation profession is extremely efficient. And this isn't just jail. This is, you know, probation. We are extremely efficient. We fin use of technology the use of data because if we weren't, we wouldn't be viable. We wouldn't be able to survive. So we as a profession and I, and I don't want to bag out profession goes. So I'm a big believer in it, but we're not very good at selling our value. We've never been selling to the banks. The value we add to them. They almost see us as a commodity. Whether they're buying valuations rule is paper and it's all price driven because we weren't that sophisticated. Valuers would eat on prime. So because of that we had to become super efficient. We had to be been used, the technology we have been being used as of data and we had to keep our value was in very concentrated geographic areas. So they built up a big pool of property intelligence in their own head with the support of the data, the technology to allow us to actually survive financially. So and of course we do five volumes allows evaluators to be again more efficient and have more competence around what they're doing and most failures. I knew some of the time when they arrived at a property, they've been pretty competent about what the number is. So it is a repaint on the road, analyzing sales, looking at the properties, knowing their market really well.

Veronica Morgan: Yeah. Because I think that local knowledge is, is obviously really, really key to that. But the technology obviously as well. But yeah, I mean I know that I've, I've in the over the years I've met value is of varying levels of experience and you know the newbies and you know, the, the ones that really get it and you can just see that those that get it and have been around a long time. Obviously you're going to form an opinion a lot quicker or an educated opinion. But in terms of the recent sales, so you're not going to go through every single recent sale that might relate to a property. So you are, you basically is the typical format to say rocker. We've got to find that one. That's one superior one that's inferior, one that's comparable or equivalent. Is that the typical way it's done?

Bart Mead: When you look at evaluation, yes. That's what's done because that's the process that you need to follow to, you know, to take the boxes from a process. A governance compliance perspective, but a value we'll have up to 30 valuation of 30 sales in the file they received for that property. They willing, we'll have having the spectrum probably into 15 of those themselves prior. So again, they do have a deep understanding and knowledge of the market. So it isn't about just picking a sale and saying, Oh, I'm going to compare it to that. They are actually putting it to what they did yesterday, what they did last week, what they did last month. And because you are doing it all day every day, you know, you are a lot more efficient. I'm not arguing that the prices are right, that the prices shouldn't be higher. We as a profession have to be able to show value and why people want to pay us more. Rather than, you know, complying that the fees are too low. But we've also got make sure that we maintain a high level of quality and a high level of confidence around the values we are actually putting out there

Veronica Morgan: In the, in a rising market. If you're looking at recent recent sales, there's obviously a lag effect and coming valuations keep coming in low and you guys from what I understand, you can't look at exchange sales. You could only look at settled sales. Correct. and then like, yeah, and likewise in a falling market, the lag effect could mean that your prices are a bit high. What, what's, what, how does that compensated for given the fact that you can only use, you know what I'll call an old sale, you know what I mean? Cause it's not, it's something three months ago is not, is not yesterday.

Bart Mead: Okay. So coming back to comparable but going to report. So when you put a sale in a report, because she needed to take the view that every valuation you do, you could end up in court and the court will only accept, yeah. Registered, settled, sales held off. You are looking at what's on the market. You can put in your report and the settled sales, so sales sort of transaction but haven't actually settled or haven't gone through the government process. So you can't use them as your primary sales evidence that you can certainly use those to come up with your opinion. And you can actually put those within the valuation report as well. And that's what that is we'll do in a market that's rising and falling to try to make sure that they are at market level. But you will see sales in those reports don't really, will often don't reflect the value because there's the opinions being based on what's actually happening in the market, not one solid two months ago, three months ago. So, so value is do try to make sure that the value they're actually putting on his ads today state not three months ago.

Veronica Morgan: And, and then it's a still, I mean do apply the effect of the, some of the older sales up. Do you look at what market growth has been in the area? And even then what, what measurement do you use? I guess, is it a challenge, but is that, does that sort of go into the process as well or is it more based around what, what evidence in terms of sales,

Bart Mead: Primarily it didn't see heavens, but that's way, you know, with walkway doing we are looking at all the data, what's actually happening, what are the drivers what's actually changing in the market, you know, what are the days on market, what's the stock levels even, what's unemployment doing during indexing into our modeling. So the value is of getting the benefit of, you know, big data, machine learning, artificial intelligence around that data. So then they can say opinion based on that rather than the individual saying, well, my at two months old, I think this has actually happened, so I'm gonna put this number on it just because that's what I think. So in fact, that thinking of with actual data, so again, the patient is sophisticating will becoming a much more sophisticated, not only from a corporate level but from a technology and dabble level.

Chris Bates: So the covert scenario you know, I agree with Veronica that in a rising market and a falling market, you can start becoming outdated extremely fast. But also in, in markets like now where there's external sort of market risks and our evaluations have them in them, have recent market correction, you know, market volatility what's happening in that local economy. And then what is the, that segment that you're buying, like what's happening in the houses versus the apartment, but how much does that impact the final valuation when a lot of opinion based on what may or may not happen in the future. And depending on whether you're a doomsday or you're a more Oculus that's going to impact your behavioral biases, which impacts your evaluation. And so how much does that personal opinion impact the evaluation? Or could it just be based on like the past I and what is actually just happened?

Bart Mead: Yes, I had, I said earlier you know, value is, have their own biases, prejudices and they interpret markets differently. But the psyche around evaluation and that's why we, we hold tight to settle sales. So you actually facing actual evidence and you're making it a point in time. So every evaluation is appointing, towing. The diet's actually done. So if the world changes tomorrow things need to be reassessed. So, so we have to take into account what is actually going on. We are doing a pointing tall assessment. We are basing it on, you know, those concrete pieces of evidence that then factoring in what has actually happened since that date. Forecasting is something that I'm a believer in and believes that we need as a, as a profession to be better at. But at this point in time, we don't actually go beyond today because it's too unknown.

Bart Mead: Things like the code that, you know, it does throw out a lot of unanswered questions, but you look at while the month is falling, so is supply. And we expect supply will keep falling because people who can afford to take their properties off the market will take them off the market. And that'll keep things relatively balanced. A lot of the things that government doing hopefully gonna prevent a lot of issues around rental properties people being able to maintain them or which will give that stability. So for value right at the minute would be saying, well this is a counter and evidence, this is what I think it is now. But all my comments about, you know, on the certainty the risks is ICI to decide in the buyer bank thing, decide what they're going to do with it after that.

Chris Bates: So more of that just letting you know that this is what's happening in the market right now. But and so if they're willing to take on that risk, they just need to be aware that there is a lot of volatility. There is a potential negative sentiment out there. But our valuation based on recent sales, it's not based on where we think the price is going to be in the future, which is, which I think the right way. But I feel a lot of valuations we've been getting recently, especially on refinances and even some purchases, the value has come in there and said, well, you know, where we think it's going, which it's pretty dangerous when that starts happening because you start getting really low vowels on purchases and things like that.

Bart Mead: And that's interesting. So I'm glad you actually said that to me because I'm a director of the Australian property Institute and I have been watching our business and we're certainly not dropping values as such as a result of uncertainty. So I'll, I'll Mike show that that message comes out from the Australian property Institute. That value is can't factoring uncertainty into their evaluations at the moment. Cause that's the sort of thing that can do as much damage to an economy as banks not lending. And that's probably not the reason you sent that to me, but I will actually look at that as well.

Veronica Morgan: It's very interesting that actually, because you know, on the ground we often see sort of some odd things with valuations and and yes, some level of speculation from the value or which is sort of interesting, but I wonder how much do banks dictate how the valuation should be done, you know, do they come to you and say, right, well we want, you know, the climate is, is uncertain. We want to mitigate risks. So therefore we want ultra conservative valuations. And I don't know how they'd frame that. Do they say 20% lower what you would otherwise put on? I mean, I don't know how, how it would work, but is there some, some sort of framework or guideline that banks actually turn around to valuation companies such as yourself and say, right, well this is it, this is the climate. And then in this climate, these are the sorts of valuations we want or the sort of approach we want evaluations.

Bart Mead: No. and I know you'll find it very young in the

Veronica Morgan: Thank you.

Bart Mead: The banks actually evaluate and they refer to them as bank valuations and they would actually take 10 or 20% off the top. And that's what they use for lending that were none for the last 20 years. You know, banks are very commercial, they're very competitive and they want valuations to be as accurate as possible because they want to be able to manage, say, a risk, but they want to be able to lend. So go out and say we want a conservative valuation would actually take them as a market so it doesn't happen. I know that there's a perception of times, and I think it's often back to those days when a bank valuation a day you would do a valuation at a hundred. The bank had knockoff it of 20, then they'd lend on that 80 happening anymore. The only areas where you do see banks having specific instructions around evaluation will be brain you a property where they say, we're going to lend on that as soon as someone moves into it. It's a secondhand property. So we want to value using sales of secondhand property. Might be six months old, property might be nine month old property as, I don't want to valued using sales of brand new property. That's the only area or where you know, property mopping solid with the lease back where you don't, that you, that the value of the lease. So they're the only examples I can think of off the top of my head where a bank gives additional instructions on how the value of property,

Chris Bates: Yeah, I mean anecdotal evidence, we've, we've logged some applic you know, refinances. Thanks. And the evaluations always seem to come in lower than some other banks, but technically there shouldn't be any bias there. Technically it should be. And so, and it should be randomly allocated so you shouldn't say it, but I guess it comes back to one of your points earlier where you said every valuation could get taken to court. And so the value is, you know, I don't know if I was doing my job and there was a risk that I could get taken to court for overvaluing a property. Wouldn't you say that potentially they would potentially want to put a small evaluation on it because that hedges their risk? Or do you think that that has happened on a scale that, you know, cause there's always people that are looking to protect themselves. So do you think that happens?

Bart Mead: I think it would be a very small percentage. Yeah. There's probably as much risk of being sued for undervaluing something as there is overvaluing or something. So I, I believe it also balances itself out and that's why they, you is, you know, do try to be as close to the real value as I possibly can. Believe value is a gallery out there to be conservative. And I don't believe that he was going out there to put on a high number so someone can do a deal. I do believe for so many different races, forces from sides that they do, they'll be as accurate as possible. Often it's not an easy job.

Chris Bates: No, no. And that's the thing, you're either doing so many evaluations a day, maybe, you know, five to 10 potentially. You know, depending on how busy they are and how fast the market's moving. But I think you touched on a really interesting point which we wanted to talk about and that's new property. You know, our listeners are all converted and would not go anywhere near off the plan property. We just don't believe that's a great investment for most people. And even right now a lot of people who were bought off the plan prior to covert and now lost their jobs are going to be freaking out because their deposits at risk if they can't settle plus other things. So with off the plan property, what are some of the risks, especially around evaluation that you see are quite prolific? Because you know what, I've looked at core logic stats, you know, potentially over 50% of properties in some cities are coming in with low valuations. And can you please explain why that issue really exists and how prolific it is?

Bart Mead: Yes. I think that's a really easy one cause it's all about predicting the future. And when you're buying off the plane, you don't really know what's going to happen between the time you sign up and the time you settle. So that that's the real risk and that's the danger. And you see plenty of times and plenty of people who make exceptionally good money off the plan because the market's going the right way or things have changed to the betterment of them, the property over that period. And at the same time when the market goes the wrong way it becomes extremely difficult. And you know, there's no doubt you are seeing a number of valuations coming in below the contracted price. But we're also seeing and you know, with our data and we do a lot of GIS mapping. We have done a number of I'm trying to think of the wrong word for a couple of the banks to show them where they lending is in the city, in off the plan apartments and where the values are coming in, below and above.

Bart Mead: And you will find, it will be certain locations in the city, certain types of properties, certain quality of building, and you can have another building where the values are coming up above the actual contracted price. So yeah, mostly it's about the location, the quality. Yeah. What market, you know, what was, what was the apartment design for too as far as finer occupies investors, et cetera, et cetera. So it comes down to, again, knowing what you're trying to buy, the reason you're buying it, the location but there's still a high risk with an off the plan that it couldn't go down as much as it could go up and no one's going to know until you get to that point.

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Chris Bates: Yeah. I mean, I think the big risk is if you buy a real scarce off the plan that's in a great location, that's a great building. And it's very scarce and it may be suits a real affluent owner occupier and there's not enough of those in the market, then yeah, those valuations are potentially going to be more solid if the market stays strong, but you know, things that are built for investors that are also in high density area suburbs. You know, it doesn't take much for fire sales to happen in an area that, like you said, they have to be based on those styles of similar apartments that are in similar buildings. And very

Bart Mead: Sorry. That's where that professional advice up front is so valuable. For people who actually know there is going to be no this fly, this type of property is that if you're gonna buy up the plane, you need to buy this type of property in this location within the city because that's the market that's going to be valuable. So it's at the front. So important. Particularly with Optum purchases.

Veronica Morgan: Yes. Unfortunately there's such a lot of heavy marketing that makes particularly first time buyers and a lot of unsophisticated investors fall for the glossy. You know, the idea of buying brand new and depreciation and no one's ever cooked in that oven. No one's ever sat on that toilet, all that sort of stuff. And they forget that, that they see that there's no risk in that, but there's enormous risk and I'm hoping more and more of that pay those people listen to the podcast so that they can actually learn about those risks. I think twos, one thing that I once heard was that you obviously can't use sale of brand new properties in evaluation as comparable as either. And that sort of goes to what you were saying that in the, in the actual valuation of the brand new property, the using existing stock because nobody's paid a premium for the, you know, those will then put a brand new premium for probably it's a second hand property and you know, and it goes the other way as well. Of course, if you're looking at an apartment, you know, I know I've had arguments with people trying to compare a property and justify, Oh, I, I mostly agents trying to justify a property of an existing apartment the, sorry, justify the asking price of an existing apartment against the new stuff that's selling nearby. And it's like, well, it doesn't work that way and definitely wouldn't stack up if it went to valuation.

Bart Mead: Yeah. And that's the way it is difficult because we've had them off. It is in the market for so long now and there's no doubt. Yeah. A lot of them are getting a premium, which isn't achievable. Yeah. By a really local real estate trying to sell that property again, I'm saying yeah, we do have good quality apartments that will sell again at the price that they've solved for brain. You have, but it gets caught up in the general market and you know, particularly with the bank saying, well, it's too difficult to target. Try to segregate, I say classes within the new apartment. So we just kind of have a single criteria on how we move in silos. Brand new apartments within Australia

Chris Bates: Every week we hear incredible stories of the dumb things, property buyers do, dumb things that end up costing a whole lot of money and, or a whole lot of stress mistakes that can be avoided. Please, Bob, can you give us an example of a property Dumbo? We can all learn what not to do from these stories.

Bart Mead: To me, when most people get home, and I think you alluded to it, they emotion. Emotion is extremely dangerous. When you come to, the only time you shouldn't allow emotion to come into your decision is when you're buying your home. I think when you buy your home, emotion shouldn't be a big file, but the, the dollars shouldn't be so important. But everything else in property, you need to take the emotion out of it. You need to do it very much on a financial in a, in a future strategy. And most people make massive mistakes, particularly investment properties because I get emotion involved. So to me, emotion you just got with. They,

Chris Bates: I a why to do that's just, you know, getting an independent evaluation sometimes too upfront to just make sure that you're yeah, at least got the price side of it, right. Not so much whether it's a great asset to buy, but at least knowing that the valuation side is right. Is that one way?

Bart Mead: Yeah, that's certainly one way. And I am a big believer in far as advocacy cause you're getting, you know, again, the professionals who at st job all day, every day give me really good quality advice. Not only just about the price, but why are you buying a property? What's the purpose? When do you expect to get returns? What sort of returns are you on that so that you actually get getting the Roy Price or the right property at the right price? So evaluation's important, but I do believe that random professional property and bias is really important as well.

Chris Bates: Yeah. I mean I think Veronica doesn't need to say she agrees, but anyway, I made in terms of actually valuing the asset in terms of like, where do you think people go wrong? Like, I know that when you split evaluation, most people may have seen evaluation, but you've got the land component and you've got the building component. And potentially it's very easy to get it wrong cause you could overvalue what it costs to replace the building. You could undervalued as well because if it's a heritage building but also the land you could potentially overvalued or undervalued it. Where do you see common mistakes where people are completely missing or overvaluing or overestimating the price of properties?

Bart Mead: I think the biggest mistake is actually breaking up the components of evaluation. And unfortunately when you say evaluation, they've broken up. And it is extremely misleading because of value does not work out the value of a property. By looking at components, they actually come up with the value based on the evidence, the market, everything else. And after that from an academic point of view and often from a banking requirement site break up that valuation, even components. So I think,

Veronica Morgan: And so when you say components, you meaning like the improve the land and then the improvement on that land?

Bart Mead: Exactly. So when you look at evaluation, we'll have a land value, it will have a building value, have ancillary improvements, values are you gonna look at that and go how long? But at least double that.

Veronica Morgan: Yeah. It doesn't always add up, does it? One plus one plus one equals seven.

Bart Mead: So, and the easiest thing to put a real value on is a lane. So generally when you see evaluation and the components, the land will be accurate. The rest of it is depreciated all the rest of it. To come up with the actual market value rather than a some mission stall valuation. So to me the biggest risk is people trying to come up with a value on a property based on what they think the lanes with what it costs for the house and the improvements that give you a number. That's why to Holly or a number, that's why to live yeah. Yeah,

Veronica Morgan: Definitely agree with us. I've seen some crazy, some crazy logic when it comes to CAF process. People should pay. Actually just on that, if we could touch on the idea of land value, it's something that people often say. You often hear people say and we've set it ourselves, you know, the value is in the land, not in the improvement, but then then you look at an art deco apartment or you look at a Victorian terrace or a lovely double fronted weatherboard cottage, which has got scarcity because of the vintage of the home on it. And the improvement has some additional value because of its, because of its age and it can't be replaced. So how do you sort of you know, and, and Hey people say, Oh, I'm going to buy a let house a land package out in the outskirts of the city because it's got land and I can only afford apartment if I buy closer in. How do you sort of explain that better to people about really where the value is in that land?

Bart Mead: Yeah. And, and that's why you genuinely don't have a lot of interviews like this with valuers because value has done quite to talk at a general level because property is so specific and I use, can change dramatically. We think inside a building within apartments, let alone within a straight or a summer or type. So it really, the underlying fundamental in most situations is the land is way the value is and the long term value. But there is no day out. A view from an apartment could be worth so much that it outplays everything regardless of but as you said, the actual building could actually be all a value. So you really do have to look at the individual property has to where the value lies within it. But, you know, at a general level, certainly the land is where it all sits. And even in apartments at some point the value of that plan is kind of outstripped the value of those apartments as a collective. So even in an apartment one day, the land will be the really valuable, valuable, and it, I say something specific about that. Apartment that I would write everything else. But that's why,

Veronica Morgan: Yeah, we do see that in some of some of the older 1960s block, you know, red brick three story walk up blocks. For instance, where depending on where they're located, that the potential for that as a redevelopment site gets to a point. It's the tipping point isn't it really? And then as long as you've got 75% of the owners are in agreement, then some of these buildings end up getting sold to developers and they all take a bit of a tidy profit. So it is interesting and I think we're starting to see a little bit more of that too. Definitely in Sydney.

Bart Mead: Yeah, definitely. It does count. But as you said, the heritage component could be something that will outline a land component for the foreseeable future side of the value is actually in the improvement. Kate really counts down to the individual property as to understanding where the value sits within that property.

Chris Bates: And I mean, that's the, the skill of a value is to actually know the market would be saying, well, there's only 50 terrace in the suburbs. They're highly desirable, you know, only 5% of them transacting every year. So, you know, there's only one property on the market or two properties on the market like this, you know, and that's or it's a North facing backyard and it's a flat block which are rare in the area cause it's all hilly and things like that. And that's the, you know, the small things that make the big difference that pushed the value of one property up over the other. And you know, I, I just really, you have to have a seriously good knowledge of a market to know what the value of a property is for the quality stuff. I think to actually put value on the right things.

Chris Bates: In terms of actually the potential improvements with a property. I've got a client. The moment is, you know, unfortunately I really bad valuation issue that we're dealing with. And a lot of the reasons why he bought, bought the properties. Because it's a very flat walk in Mosman for example. And it's got a da and the DA's already through council, it's already approved, it's ready to go and it will take the property from a mid market to the top premium market. Did DA's get included as part of the valuation process at all or do you think they're just really it's not really a big part of what a valuer would look at.

Bart Mead: I'm not, I definitely have a material effect on the value of a property and it can be in the positive dependent kennels side of me and the negative, but also the a situation where a bank might say, we want you to value it but we want you to disregard the da. But often you will get valuations that do take into account the da because that will have a material effect on what you can do with that property, which hasn't been done, what the value of that property is. But then the purchaser, the owner, the lender and needs to be aware that if that BI is not acted on in the next two or three years or whatever the timeframe is, that data, the PA's and that value will disappear. So again, him included, I can exclude it. Again, it's a situation of the user on that valuation being aware that there might be a finite time on that added value of that da.

Veronica Morgan: It's always a tricky one isn't it? Because people like to, well certainly agents like to sell the idea of potential has been worth something like, well it's only where something if you actually act on it yeah, yeah.

Chris Bates: AI's right like DA's in the area. Like if, if you haven't done that due diligence and I'm sure Veronica, you've seen thousands of quantify without having any idea of how to check the DA's in the area. But you know, how does that impact values if you didn't know the, you know, the apartment next part and block was going to go up, you know, 500 meters a Y or you know, next door is going to knock it down and build townhouses or something. You know, do you look at those sorts of things when you're valuing properties? You know, DAS in the area around

Bart Mead: Not generally for residential evacuations because I lay out a discussion early on the reason the time to actually go an extent and the banks paying for that. So that way they know hiring us to go to that extent sort of thing that should be or could be or would be picked up in the conveyancing process where then the bank would come back to us and say we just discovered that there's going to be a tail go off next door or over the road. Is that going to have material effect? So they're the sort of thing, is that the value? We probably know from their local knowledge, but we don't go into that extent of searching for D or development approvals in the immediate scene. So things we are that would know there or that we might aware of through combined in process.

Veronica Morgan: Right. Well that's interesting because I haven't seen a lot of conveyancing conveyances that pick things like that up. We do that as part of our process with our clients. But yeah, it'd be interesting to know if retrospectively things were picked up and how that would affect evaluation. We really appreciate the time that you've spent with us today, but this has been really good to explain how these things work and you know, and I guess blow a few little misses as well because certainly you know, that idea about bank, the perception of bank vowels, bank valuations being low and where that's come from and you're saying in the last 20 years, it really hasn't been the case because the banks themselves aren't doing the valuations. And so that's a good one because we do hear that quite a lot. And certainly as a sales agent I used to hear it where you go do an appraisal and someone would say, Oh well the bank voted a million and they always come in low. So I'm sort of the inference being I'm expecting you to come in higher. So it's good to get to an understanding of that and certainly an understanding of the process and and you know, I think that, you know, I think the big message really is that valuations are all about confidence and risk management and it's not just the banks, it's the individuals as well who are purchasing the property that need to get that, that confidence, that many of risks. So we really do appreciate your time. Bart can actually add some value.

Chris Bates: Thanks. But no, you've got lots of experience, made, plenty of value. I don't know, heaps of questions yo have in us, so I really appreciate your time, but thank you.

Bart Mead: No trouble.

Chris Bates: We want to make you a better elephant rider and this week's elephant rider training years,

Veronica Morgan: I thought I might touch on that idea. That value is don't check for the da activity of surrounding properties. And I can tell you most conveyancers don't either. The odd one does. But if you're buying a property, say you're buying a house or even an apartment and you look around and you think, okay, well there's an opportunity in the surrounding properties for potentially a loss of view or a loss of privacy or loss of natural light. You need to be able to look into, well what could be built there with most counselors, if you call the office, you ask to speak to the duty planner, you will be able to find out in broad terms what can be done to various properties around you. Because every zone has some restrictions or limitations in terms of what can be built there. So you can get a sense of, well, how high could a building be built there?

Veronica Morgan: Or how many stories could it be, for example. So that's quite different to actually checking for what has been lodged in the surrounding property. So you might find the neighbor has lodged the da or is it or has actually had a pre da meeting with council. So it's quite a lot of information that you can actually get by looking on the development part of the council's website. They all have it in one form or another. Some of them are more detailed than others, some of them go back further than others and you can also always ring the council and have a chat about the surrounding properties of any property that you're looking at buying and it's certainly something you should be doing.

Veronica Morgan: Please join us for our next episode when we're interviewing John Cunningham, he's back. We've interviewed him before. He is a real estate agent, a principal of an agency in Sydney and also ex REI new South Wales. President. John gives some great insights into the changes that real estate agents are having to deal with in dealing with buyers and handling these open home situations with all the restrictions that the coronavirus have placed on open houses and auctions, and there's some little insights that might help buyers also, while they're out looking in these current conditions. Please join us.

Chris Bates: Don't forget, we're on all the social channels. We're on Facebook, we're on LinkedIn, we're on Twitter, or you can connect with us on the elephant in the room.com today, you, the links are all there for you. Please connect and send us a message. We'd love to hear from you until next week. Don't be a Dumbo now remember, everything we talked about on this podcast is generally nature and should never be considered to be personal financial advice. If you're looking to get advice, please seek the help of a licensed financial advisor or buyer's agent who will tailor and document their advice to your personal circumstances with a statement of advice.