TelferYoung Limited
Valuers -
1 July 2006
Do They Do Enough Analysis?
Some may say that property professionals analyse transactions to death but when the standards of the New Zealand Institute of Valuers and the Property Institute of New Zealand have defined market value as - the estimated amount for which a property should exchange on the date of valuation between a willing buyer and a willing seller in an arm's length transaction after property marketing wherein the parties have each acted knowledgably, prudently and without compulsion - one wonders whether they do enough analysis?
Traditionally the value of a property within the terms of that definition is determined by reference to comparable sales. The analysis of sales has focussed upon the physical characteristics of the property. Namely, the size, accommodation, construction, services, fittings, quality of appointment, condition of the buildings and the size, shape, aspect and location of the land, together with numerous other minor points. All the analysis focuses upon sales that have been transacted in the past and adjustments are then made for the time lapse between the sale and the valuation, if considered appropriate, and the physical variations.
However, each of the sales is an expression not only of the physical characteristics of the property but also the supply and demand at that time. A willing buyer and willing seller if acting knowledgably and prudently will have made some effort to acquaint themselves with the number of buyers that are in the market at a particular time and the number of properties that are on the market. A potential buyer might even attempt to determine the number of other buyers who are interested in a particular property at that time. With some exception, limited effort is made by the valuer to determine whether the buyer or seller had acted knowledgably or prudently but more importantly little effort or detailed analysis is made to determine the supply and demand at the time of sale. Between the time of sale and the date of valuation the supply and demand could have changed markedly for any number of reasons.
All property professionals know the affect of a competitive auction situation on unique properties and have seen properties sell at what is generally referred to as premium price levels. Prior to the auction little analysis, other than anecdotally, is made of what will be the potential demand on the property although often agents facilitating the auction try and estimate the number of buyers that may be interested and what the demand may be. Certainly the supply will be quite apparent.
With the advent of technology some assistance is now available to valuers, in particular, in this respect. The Real Estate Institute have a web site - ww.realenz.co.nz - which allows anyone to access the site and determine the number of properties that are for sale in any locality thus enabling some analysis of the supply size. It will not be definitive but will certainly provide a reasonable indication of the number of properties on the market in a particular locality. A measure of this should provide a trend indicating the amount of supply. Some anecdotal evidence may be obtained by enquiry with real estate agents as to the number of buyers but little science is attached to recording the numbers and their relativity to each other at various times.
The Real Estate Institute produce monthly a list of properties that have sold in all areas. Some valuers have access to that data, while most valuers have other sources that provide the same or more detailed information. Within their data the Real Estate Institute data also provides details on the length of time the property has been on the market.
We believe it would require little effort but some goodwill for the same data to include the number of buyers in the market within various price ranges, the number of properties on the market also within those price ranges and within the respective localities, and it would then build up a database of information that would form the basket of evidence when determining market values. Naturally it would not be an exacting piece of evidence for the process but it would certainly provide an accurate trend on which way the market was moving particularly when all sales are historic and the market value of a property is moving from that point into the future.
If property professionals undertook appropriate analysis of individual sales with the wealth of factual data available, then added an analysis of the number of properties on the market and buyers in the market at the time of the sale and valuation, together with further analysis of the time taken to sell from the Real Estate Institute data, a wider statistical based view of the market would be obtained. This would be in strong competition to the anecdotal evidence often given and would also assist in making adjustments for time when they are necessary.
The analysis of the number of buyers or buyer enquiry is always going to be difficult simply because of the competitive element between Real Estate Agencies but if there was goodwill there is no reason it could not be achieved.
A valuer's report detailing sales evidence and data indicating the strength or otherwise of the market in general, would be a well researched document providing a sound base for its conclusions.
Adrian Brady
This monthly paper reflects the views of the writer and may not represent the views of all TelferYoung staff.