Mark’s Expertise on How a Property Is Valued

Mark Ruttner is recognised as one of Melbourne’s leading mortgage valuers, property advisors and advocates in relation to Residential and Commercial real estate property.

Mark is also the Managing Director of FVG Property who are into a broad range of property related services – including property valuation.

We have a transcript of our discussion below for you to read through if you haven’t been able to have a listen to the free audio podcast.

Andrew’s chat with Mark Ruttner about how a property is valued

Andrew Mirams:
I’m sitting here today with Mark Ruttner, the managing director of FVG Property Group. Good morning Mark!

Mark Ruttner:
Good morning Andrew. How are you?

Andrew:
I’m well. Thanks for joining us today. Mark’s specialty with his group is along the lines of commercial and residential evaluations. He’s on the panel of a number of lenders and I guess in the current market, evaluations are always a key criteria to what clients think their house is worth etc. So we thought we’d get it in from the horse’s mouth and get the boss to tell us what exactly he looks for and let’s start with a residential evaluation..

Mark:
Great! Yes, it’s always on the tip of everyone’s tongue from a property evaluation point of view and what they should and what they should be looking for before they purchase a property. I guess Andrew from my point of view, the first thing I would recommend to anyone that’s looking regardless if it’s a residential property or a commercial property in this sort of climate or what we’ve seen over the last 12-month period, I really strongly recommend that you get a property valuer to come out and have a look at the property perhaps before you put your signature on a contract or perhaps a little bit before you get down to the nitty gritty of making a decision on a property.

Andrew:
Is that area specific.. or is that property specific…?

Mark:
I think in this general climate, I’d probably be saying to people unless they’re very experienced traders in property… I’d be saying – look get a property valuer to go out, have a look. Even if you’ve got a verbal acknowledgment from somebody that’s an independent third party, gives you an idea of a property, property value, etc, etc, it just gives you a comfort zone. So it’s not location. It’s not specific as to market segment.  Again, I’m just sort of indicating from an economic point of view at the time. It’s probably not a bad thing.

From a residential valuation point of view, I won’t give you valuations 101 but I’ll give you a quick overview of perhaps what a valuer should or shouldn’t be doing. Obviously we’re instructed to value in most instances at current market value. That can be for a variety of purposes but we’ll assume for the purchase of a property.

A valuer will go out there. Before going out to the property I would say every valuer in Melbourne would do a research on the property and they will include very simple things of getting sales that have been affected or actual sales over the last 0-6 month period. Those sales need to be comparable, comparable probably as to location, land size and hopefully building size. The valuer would check zoning to see if there’s any restrictions on title, maybe a single dwelling covenant which has an effect on value or any covenant or any easements on the property, analyse out those sales and then the valuer actually makes an appointment to go through the property. So he physically inspects the property.

That process on a physical going through a property – and again depending on the end value that we’re talking about – probably takes about 10, 15 minutes for a valuer to go through. The valuer walks from – if you like – from the front door to the back door, goes through each of the areas, and takes a brief description of each of the areas in the house itself. He’s looking for the quality of finish, fixtures, fittings and obviously there’s a variety from high end to low end. So we’re looking for (things like) stone (bench) tops, quality of carpets, quality of layout, quality of natural light etc, etc.

The valuer walks through, takes his description, next thing the valuer will do is take a physical measurement of the land allotment to check that the land that you’re actually purchasing is in accordance with the title details as to land (size) and obviously from a value point of view – pretty important because most of the value is attributable to the land component and then conversely does a measurement of the building improvement. After that, the valuer gets back in the car. He’ll probably have probably 0 to say 3-4 sales which have already been analysed and hopefully they are within abutting streets of the property that’s under consideration. He will have a look at those externally. Deem if they are comparable, go back to the office, analyse out the sales.

So the analysis is if you like and again, not giving a lecture on that – but on an overall land basis – on an overall land and building basis and then a portion to the subject property on the value of the property that we value and I can say with pretty much surety from the valuers that I know in Melbourne. Most of the valuers regardless if it’s FVG or any other firm will be within a 10% parity of market value…

Andrew:
Would it been fair to say other than an off market sale or a real high end sale that a great majority of purchases on the market so either at auction or private sale generally, generally get valued around the purchase price because that’s what someone is willing to pay for it.

Mark:
Look I think that’s a relevant point. The exception to the rule that a valuers will come below exactly what you’re saying. I mean if a property’s being sold at public auction, you got one or two bidders that are actually bidding. I mean it’s the best way of indicating market value.

Andrew:
Yes. Well something’s worth what someone is willing to pay.

Mark:
Correct. Correct. So look the exception – I mean look, I do hear around the tracks obviously that valuation are coming in low from a contract point of view but again it’s a rarity and would have to be a very good reason.

Andrew:
From our experience here, we find that it’s a little bit more variable. I guess if we’re doing a refinance and the property is an existing clients – they already own their property or they have a mortgage. For some reason they’ve spent $20,000 in the renovations over the journey over the last 5 years and (they might) think that adds double to what they paid for their house. Managing client’s expectation is something we do with some little tools that we use but that’s probably where we see more variations – in that refinance market. People have either overspent, got some credit cards after Christmas or something like that and either they know a little bit – and you know a little bit of information is dangerous! – they they think they can fool us by putting an inflated valuation on it. Ultimately it is opinion but it is opinion backed up by evidence isn’t it?

Mark:
I think we find that. I think most of the variances that we see from a client’s expectation and a valuation do come in the form of a refinance. Again look from FVG property’s point of view and I probably speak for the whole profession – I think most valuers are actually happy to talk to clients about how the values come in – why it has come in at a certain amount. As you suggest, I think vendor’s expectation or owners’ expectations are always a little bit high. I know personally my house is worth more than any other house in the street and everyone’s got the same opinions.

Andrew:
We all have the rose colored glasses sometimes, don’t we?

Mark:
Correct. Absolutely.

Andrew:
And I think that the real key is having a good relationship with valuers. I know a lot of the local valuers around here. I actually now know quite a few of them. Obviously I have a great relationship with yourself so I can always pick up the phone and say what do you think? I think that’s key, isn’t it? You know – understanding what the parameters are you know or if they think it’s worth a million and I can only justify $800K.. Why? And if you can justify that, the clients, while they might not ever be happy because you’re telling them that their house is worth $200,000 less than they thought. Sometimes they are the ones playing the game. Others are generally surprised. Some people just don’t know.

Mark:
Correct. And look i think you’ve hit it in one. I mean the valuers job is not to come out with a figure that they personally believe. It’s actually based on evidence and I always say to our clients.. look we do our own due diligence. We formulate our evidence. But if there’s something that we’re not aware of, if there’s a sale that hasn’t been brought to our attention and we discover that in conversation, we’re more than happy to conduct due diligence on that further sale and information and you know what? It probably has an effect. Maybe there could be an increase in value for what we thought it was worth. So all relevant points.

Andrew:
Yeah look I think that’s a great little snapshot on what a valuer looks at in the residential market in terms of just establishing true value for a property. I think contract or certainly on market purchases are a great guide to what something is worth but then more that refinance or people changing and there is a lot of that happening. Banks are pretty active on offering great specials and deals at the minute so there’s a little bit of that going on. So it’s just managing expectations as well.

That’s great. You do a lot of work in the commercial property sector. Now that’s a really interesting sector. Obviously, not as much activity as the residential market. It seems to have much wider fluctuations which is why if you ever buy that there’s lower ratios that banks will lend to you. I mean when the highs are high, they’re right up there and when the lows are low, they tend to bottom out but what are the things that can compromise the commercial, industrial, office or the retail market?

Mark:
Retail market? You know Andrew it’s a question that I don’t know if we’ll get through the whole answer today. We probably need 3 or 4 pod-casts to really get to the answer but in simple terms… we’re seeing more and more people starting to move into the commercial sector and look there’s various reasons that i think they are. I mean I think the return base is probably been looking at a little bit higher returning perhaps a residential but in saying that, I think you need to be quasi experienced. I wouldn’t recommend to everybody that’s looking to acquire property to go straight to a commercial property acquisition  but look, I’ll give you a quick overview, a little bit different I guess from the residential side of things that are usually an owner occupier or investor base. Primarily with commercial property, again you have those distinct market segments of owner occupier and investor but probably investor base is probably where most of the commercial transactions are –

Andrew:
And especially with the last few years with self-managed super funds coming in because the return they get.. there is no outgoings because the tenant pays.. that’s quite a good market for super funds to hold in. Buying the right property of course.

Mark:
Totally agree. And it’s been phenomenal. Over the last 12-18 months, we’ve seen – I won’t call it steady – we’ve seen actually a spiking on the self-managed superfund area and look that will continue. I mean I actually see it as a vehicle that lends itself primarily to commercial real estate probably a little bit more than residential and I’m not saying that residential shouldn’t be looked as a segment but definitely from a commercial point of view, from an owner occupier that may be renting today (who) can buy a property that is self-managed, lease it back to himself for the market rental. It just sets all the keys and ticks all the boxes for a transaction.

From a residential and commercial valuation point of view, I guess the major, major difference is from a commercial point is that we’re looking for an income stream. So the job from the valuer from again from what I’ve discussed or what we discussed before was basically obtaining comparable sales as well as obtaining comparable rentals and the key with the commercial property evaluation is determining A) Commercial rental applicable to that property. So again it’s not too dissimilar to a residential in simple terms so the valuer has to go out, determine a market rental which he does by looking at similar properties..

So I guess if we’re looking at a commercial office suite if you like in Sandringham, we would be looking for rentals that have been achieved over the last 0-12 month period, we’d adopt that rental per square meter to the property that we’re looking to purchase and then we go to the market and see what sales have been affected over the last 12 – 18 month period and have a look at yields which is simply – and again i don’t want to get into evaluation 101 – but it’s the rental divided by the sale price which would give us a yield and then we apply that yield to the property….

Andrew:
Is the lease term also important there?

Mark:
Look Andrew great question. This is my personal opinion for 2013. I think investors today, the key factor to commercial decision making is the income stream but I think it really is now starting and I think it sort of answers your question… People are really having a really good look at the tenant. Things are.. or have been… I think this year is going to be a lot better.. but things have been a little bit static, a little bit fragile, business has been under I guess under the pump a little bit. So people are looking at that income stream and sustainability of the income stream through the period of the lease..

I think it’s a great question. I’m telling all my clients to be very, very active in relation to due diligence on who the tenant is and how good they are in the market place.

Andrew:
Because you’ll only earn a yield if you’re getting the cash.

Mark:
Absolutely! Otherwise you are at square one again!

So it’s a pretty simple formula and then look from a commercial point of view if it’s vacant, the valuer allows a rent-free leasing up period. So that in simple terms is if Mark Ruttner is buying a property today, how long will that take me to lease that property up? So I’ve got to have a bit of a short-fall. And then we just take that off the figure and then we recommend to the client the figure. As a check method and again in simple terms, it’s just direct comparison approach which is – if you like – a hundred square meter office suite, it sells for $5,000 per square meter. You just apportion that to the subject property.

So again, without being too in-depth as to the valuation base, it’s all to do with the income steam, the potential income stream.

Andrew:
So obviously like most things, it could still be area driven? For commercial properties now – especially the industrials and the tilt slab factories and the factories and warehouses being around the ring roads and that have seem an explosion around a lot of that land that we couldn’t get rid of (before) those roads (were built) – retail strips obviously have a great (spike) because of the true traffic…

Mark:
Yeah I might have to give you a job. I think you actually pulled up the key factors and look again, you’ hit it in one. Location – you know from a person that owns – if you like – a small business that might have 0 to 10 people working for them, not only do you need on-site car parking, you need transport linkages so you know – like if your office suite is 100 meters away from a local railway station, they’re the key factors we’re looking for.

You know if the staff need to go and have a bite to eat at lunch time or coffee mid-morning you want to be within walking distance or within a retail strip center. So the key factors are location, amenity in a general sense and look, you know I’m a big believer in inner city within that 15, 20 kilometer radius of the CBD. I don’t care if it’s residential or commercial. I don’t think you can go too far wrong.

Andrew:
Absolutely. I think that’s a great insight into what a valuer looks at in both the residential and the commercial markets. Thanks Mark for your time today.

Mark:
Pleasure! Hope to speak to you soon.