Why Property Valuations Differ from Market Appraisals
For buyers, sellers and borrowers, the difference between a valuation and a market appraisal can affect finance approval, price expectations and sale strategy. Understanding why the figures differ may help you use each one for the right decision.
What is a property valuation?
A property valuation is a formal assessment of a property's value prepared by a qualified property valuer.
Valuations are commonly required for purposes such as:
· Mortgage lending
· Family law matters
· Estate and deceased estate purposes
· Taxation and financial reporting
· Litigation and dispute resolution
A valuation generally involves an independent assessment of the property's characteristics, its location, comparable sales and relevant market evidence.
Importantly, a valuation is usually prepared as at a specific date. Property markets can change quickly, so a valuation is generally completed when required so that it reflects current market conditions.
What is a market appraisal?
A market appraisal, sometimes called an agent's appraisal, is prepared by a real estate agent to provide an indication of what a property might achieve if offered for sale in the current market.
The appraisal is typically based on the agent's knowledge of the local market, recent comparable sales, current competition, buyer demand and their experience with similar properties.
A market appraisal is often used to help determine:
· An appropriate asking price
· A marketing strategy
· Expected buyer interest
· A likely sale range
Unlike a formal valuation, an agent's appraisal is not an independent valuation for lending or statutory purposes. The agent is working within the context of a potential sale. Their assessment may therefore consider factors such as buyer sentiment, marketing strategy and the likely outcome of a particular sales campaign.
Why the amounts can be different?
Valuations and market appraisals can differ for several reasons.
1. Different purposes
The most important distinction is the purpose of the assessment.
A valuer is typically asked to determine an independent opinion of value based on recognised valuation principles and available market evidence.
A real estate agent is often trying to estimate what the property could achieve in a particular sales campaign.
These are related questions, but they are not necessarily identical. For example, a valuer may conclude that a property has a market value of $1.2 million, while an agent may believe that a well-managed campaign could achieve $1.25 million. The difference does not automatically mean one professional has made an error.
2. Different methodologies
Valuers and agents may also approach the property from different perspectives.
A valuer usually relies heavily on verified comparable sales and objective evidence, adjusting for differences between the subject property and each comparable sale.
An agent may however place greater emphasis on current buyer demand, competition, enquiry levels and likely buyer behaviour.
Both approaches can provide useful information, but they are designed for different purposes.
3. Comparable sales can produce different conclusions
Comparable sales are an important part of property assessment. However, finding a truly comparable property is difficult.
Two houses may appear similar but differ significantly in:
· Land size
· Building quality
· Renovation level
· Floor plan
· Views
· Position within the suburb
· Street appeal
· Development potential
A valuer and an agent may select different comparable properties or place different weight on the same sales. This can lead to different conclusions.
Why might a valuation be lower than an appraisal?
One common situation is where an agent believes a property could sell for $1.6 million, but a lender's valuation comes in at $1.4 million.
This does not necessarily mean that the property is “only worth” $1.4 million.
The valuer may have relied heavily on recent settled sales that provide evidence of approximately $1.4 million, whereas the agent may believe that current buyer competition could push the property closer to $1.6 million.
For a lender, however, the valuation serves a different purpose. The lender is assessing the property as security for a loan and may take a conservative approach based on available market evidence and the requirements of the valuation instruction.
Why might a valuation be higher than an appraisal?
The opposite can also occur.
An agent may suggest a property could achieve $900,000, while a formal valuation determines a figure of $950,000.
The agent may be deliberately recommending a lower marketing range to encourage stronger buyer interest or achieve a particular sales strategy.
Alternatively, the valuer may have identified comparable evidence or property characteristics that support a higher figure.
Again, the difference does not necessarily mean that either professional is incorrect.
The importance of understanding the “value” being discussed
A major source of confusion is the assumption that a property has one precise value. In practice, value is often an informed opinion shaped by the purpose of the assessment, the date and the assumptions used. A formal valuation may state the property’s market value as at a particular date, while a market appraisal may estimate the sale range a property could achieve in a current campaign. These statements answer slightly different questions.
Which figure should you rely on?
That depends on what you are trying to achieve.
If you are obtaining finance, dealing with a legal matter or requiring an independent assessment, a formal valuation may be the appropriate figure.
If you are preparing to sell and want to understand likely buyer demand, pricing strategy and the potential sale outcome, a market appraisal from an experienced local agent can be extremely valuable.
In some circumstances, obtaining both can provide a more complete picture.
Rather than asking which figure is “right”, it is often more useful to ask why are the figures different?
Look at the valuation date, comparable sales, assumptions, property condition, market conditions and the purpose for which each assessment was prepared.
The bottom line
A property valuation and a market appraisal are not necessarily competing opinions. They are assessments designed for different purposes.
A valuation is generally prepared for a formal purpose, such as lending, legal, tax or reporting requirements. A market appraisal is generally prepared to estimate the likely sale outcome in the current market.
Differences between the two figures are therefore not unusual.
The most important thing is to understand what each figure represents, when it was prepared, how it was calculated and what it is intended to be used for.
When those factors are considered, a difference between a valuation and a market appraisal becomes much easier to understand. It can also reveal a useful insight into both the property's underlying value and its potential market performance.
