Valuation vs. appraisal

Valuation and appraisal technically mean the same thing, but they’re done in different ways. Here’s what you need to know.

A valuation and appraisal both determine what the market value of a property should be. Although both of these terms technically mean the same thing, they are done in different ways.

Valuation

A valuation is a formal report done by an accredited valuer who is registered and has completed the necessary training. Lenders use a valuation to ensure the property you want to buy is a suitable security for a loan and that its market value is sufficient to cover the mortgage if there is a forced sale. Valuations are a more detailed inspection of the property than an appraisal, and will usually take into account features such as:

• Description of the property, including number of bedrooms and land
• Risk ratings for things like environmental risks and market risks.
• Condition of property
• Comparable sales
• Any issues uncovered in the inspection of the property or other searches conducted

The actual valuation given to the property will be based on recent sales in the past six months of similar properties in the same suburb. The market value is determined by looking at these and comparing the differences to the actual property. Since it is based on past sales, it is historically based and this is a conservative approach that the banks need.

Appraisal

An appraisal is an informal valuation usually completed by a real estate agent. It tends to be forward looking in predicting where the property market is headed and what could be achieved in the near future.

An appraisal is not a legally binding document, and is often done as a first step to aligning expectations and putting the property on the market. It can be used as a guide if you are planning to sell your house, as it indicates the price you may achieve when you sell.

Wanting to get a combination of the two without having to pay for a formal valuation? Use a real estate agent who is familiar with the area and has access to past property sales to compare your house to. Ask them to put as many comparable sales in the report as possible so you can make a judgement about what is a realistic value.

As the real estate agent is hoping to gain you as a customer, they may be optimistic about the value that is achieved. Therefore, it is a good idea to have a few appraisals done by different real estate agents to get a sense of what the property is really worth.

Unlike valuations, appraisals usually do not have a fee involved. However, to avoid a surprise, check with the real estate agent beforehand to see if they charge a fee.

The opinions expressed in this article are the opinions of the author(s) and not necessarily those of homeloans.com.au. The above is general commentary only and is not advice tailored to any individual's financial situation. We recommend seeking advice from a finance professional before implementing changes relating to your finances.