Are valuers being undervalued? Walk a mile in their shoes and you soon realise they're walking a tightrope between lenders' expectations and brokers' wants. Andrea Lavigne reports on the difficulty of being independent
A necessary evil, overly conservative, painfully slow - valuers take a lot of criticism.
"Valuers are often made the scapegoat when deals don't stack up. Brokers often forget that we're simply the messenger," says Greville Pabst, director of valuation and consultancy firm WBP Property Group.
Love 'em or hate 'em, the independent assessment that valuers provide is integral to the loan application process. But does the relationship between mortgage brokers and valuers have to be non-existent at best and antagonistic at worst?
Members of the valuation industry think not.
The valuation firm LMW Residential says the relationship between brokers and valuers would be much improved by a little education. "Unfortunately many brokers do not understand how a valuer arrives at a figure. It is a very thorough process and increased knowledge of that process would help," the company says.
A better understanding of the valuation industry can actually make life easier for brokers by facilitating faster turnarounds and more accurate reports.
"A lot of people out there - Joe Public, the broker, the real estate agents - think that they're experts, and yes they're entitled to have an opinion to what their property is worth. But the valuer still has to value that property according to longstanding professional standards and protocols. They can't just make up the number or put on the highest price possible," says Charles Guthleben, national valuation manager of Megaw & Hogg National Valuers.
Certified practicing valuers (CPVs) are highly educated professionals who must complete a bachelor degree in property and valuations, followed by two years of supervised work experience under the eye of a licensed valuer.
After completing their education and work experience, they're eligible to sit for an interview by an examination panel for membership to the Australian Property Institute, which approves valuers at different levels.
"Certainly it's a lot more complex than a lot of people understand," explains Ken Raynor, Raine & Horne Valuations. "If a valuer doesn't achieve a certain level of membership they may not be accepted by a certain lending institution."
In addition, valuers are required to undertake continual professional development to maintain their CPV status and take a risk management course every three years.
In NSW, valuers are also required to be registered by the Office of Fair Trading in order to practise.
Aside from education and experience, Geoff Roper, director of Australia Pacific PCS, says, "A valuer needs analytical skills to assess and examine the various implications of sales evidence; detecting skills to ascertain the circumstances and details behind the sales evidence; people skills to assist in the detecting process; communication skills to effectively transport his reasoning and conclusions to his client; and numeracy skills to prepare complex cash flows for development or investment."
Picking a number
As the industry's emphasis on education and experience suggests, determining a property's value isn't simply ticking the boxes.
"Valuation is not an exact science, it's an art," Pabst says.
Despite having precise criteria on which to judge a property, there can be variation between valuations. Australian courts have accepted variations of up to 10% in valuation amounts between valuers.
In an article prepared for mortgage brokers, Pabst says valuations are "professional opinions based on available evidence".
To establish the value of a property, the valuer makes a physical inspection of the property taking measurements, counting rooms, examining fixtures and fittings and making note of any improvements. To come up with a value range, they also look at the property through three lenses: direct comparison, summation and capitalisation of net income.
To make a direct comparison, valuers research recent sales of similar properties in the area, taking into account any minor differences between properties to ensure the comparison is appropriate.
In making a summation, valuers examine the land value plus the depreciated value of the improvements such as garages or swimming pools. Land value includes location, amenities, topography, slope, and size and shape of the house. The value of improvements is measured by looking at the style of improvements, age and overall appearance, among other things.
Finally, valuers consider potential risks to the property before coming up with a valuation range.
"There is a buyer and seller element to market value," Guthleben explains. "Market value is not necessarily the highest price a property could possibly achieve; market value is not necessarily what an interstate investor who has never seen the property is willing to pay through a marketing scheme; market value is actually what the local known market acting rationally will pay."
API defines market value as the estimated amount for which an asset should exchange on the date of valuation between a willing buyer and a willing seller in an arm's-length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently and without compulsion.
Building a relationship
Valuers are sandwiched between lenders and brokers. And while they're integral to the process, they're not always appreciated by either party.
"Valuers sit in the middle. We have on one side the broker who is essentially sales driven and quite often is aggressive in trying to influence a valuer. But our principal duty is to protect the lender and the mortgage insurer, because if it goes belly up, the broker is not going to hand back his commission, but the mortgage insurer or lender - if they've lost money - is going to come after us. So we have to remain independent in the process," Pabst says.
While lenders dictate whether instruction for valuation can be made through a broker, often they prefer that brokers aren't part of the process. Some lenders even instruct valuation firms to inform them if a broker has contacted the company regarding a certain valuation.
"Our dialogue with most brokers is more of a courtesy, keeping them right up to date as to where it is in the process, but that's probably as far as it goes. To be honest, I think it's better to be totally independent. Most of the financial institutions would rather have it that way," says Mark Ruttner, director of FVG Property Consultants & Valuers.
Of course, not all interaction between brokers and valuers is forbidden and negative.
Pabst says there are dozens of good relationships between brokers and valuers and most often these are based on brokers' respect for the perimeters valuers must work in.
"No professional wants to be influenced or told how to do their job," he says. "There are not many, but some of them will say things like it's a 40-square house and you get out there and it's a 20-square house. They don't realise that we actually measure the house."
Pabst tells brokers and valuers that the mortgage industry is very small in terms of who knows who and the speed at which news can travel. A valuer who works hard to provide a great service and maintain strong relationships with brokers and broker groups will benefit from positive word of mouth in the industry and vice versa.
For brokers who do instruct valuers directly, they can foster a positive relationship by providing valuers with accurate information about the property and giving them 24 to 48 hours notice of a job. If a request is urgent, brokers should follow up telephone requests by fax or e-mail.
Guthleben says Megaw & Hogg National Valuers has a very clear and defined query process for brokers who believe a valuation is too conservative.
"The best way for brokers to assist this process is to provide quality information and additional comparable sales that justify why they think it's worth more," he says. "Sometimes they simply want, or hope for the valuation to be higher because their client needs an extra $5,000 to avoid mortgage insurance or the customer wants to borrow more money than the security property can substantiate."
Guthleben adds, "The value of the house is not determined by what the customer wants to borrow or what the bank wants to lend or when mortgage insurance kicks in. The value of a property is actually what someone is willing to pay for it on the open market."
Pabst agrees. If brokers want valuers to take a second look at the valuation they need to have a good reason.
"If you're going to have an argument, back it up with some evidence," he says. "Show me the sales that can support us putting the valuation up high. If they produce that evidence we're more than happy to review."