Valuation vs. appraisal
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.
A valuation is a formal report that is done by an accredited valuer who is registered and has completed the necessary training. Mortgage lenders use this to ensure the property is a suitable security for a loan and that the market value is enough to cover the mortgage if there is a forced sale. Therefore, it is a more detailed inspection of the property and will usually take into account features such as:
- Description of the property including number of bedrooms and land size
- Risk ratings for things like environmental risks as well as 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.
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. This is not a legally binding document and is often done as a first step to aligning expectations and putting the property on the market. An appraisal can be used as a guide if you are planning to sell your house and is an indication of what 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 that you can make a judgement about what is a realist value.
As the real estate agent is hoping to gain you as a customer, they may be optimistic about the value that is being 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 do charge a fee.