Rob: Hello and welcome to another episode of the Property Edge podcast. My name is Rob Turnbull, and today we are looking at appraisals, more specifically, how agents can potentially increase the quality of their appraisals and the validation behind them.

And for that, we are joined by someone who knows so much in this space, one of South Australia’s leading valuers. Rachel Elliott is the head of advisory at McGee’s. Welcome, Rachel.

Rachel: Thanks Rob. Pleasure to be here with you.

Rob: Oh, it’s brilliant to have you on. And I should just note here that we have worked together. Rachel was our chief valuer for a number of years at Land Services SA, so it’s nice to be working together again.

Rachel: Thanks Rob.

Rob: Let’s just jump straight in, Rachel. Who are you and what do you do?

Rachel: Well Rob, I guess I’m a career valuer. I’ve spent about 35 years as a valuer, and I also have dedicated a fair bit of time to the industry through an involvement with the Urban Development Institute. And at the moment I sit on their executive council. I moved to McGee’s only three months ago, and I am working now in a slightly different role.

So I’m sitting in the space between traditional valuation advice and the highly creative deal-driven space of an agent. It’s an advisory space that gives me the ability to use the impartial evidence-based valuation skills that I have, but also to bring in more of a strategic balcony view of a property situation without the constraints a traditional valuation role can provide.

Rob: Well, let’s just have a quick look. What would be, from the outset, probably for me more than anyone else, the key difference between a valuation and an appraisal?

Rachel: Sales agents, by their nature, are there to sell a property, and you are selling that on behalf of your vendor, and you’re trying to get the vendor the best price. And so that is the purpose of their work. They are constantly striving to achieve the best outcomes for their vendor.

Valuers work in a much more inflexible space where we are bound by a very strict series of professional standards. We play a very expensive extreme sport when it comes to professional indemnity insurance, and our valuations are typically provided for a very specific purpose. A valuer is valuing on a day for a purpose and they are once removed from the market. They’re not talking to the vendor, they’re not talking to the purchasers. They should be talking to agents. But they’re not able to influence the outcome in any way, whereas an agent has a lot more creativity in the process, and I guess that’s the difference. A valuer can lose their own house if they get it wrong, if they’re tested, their PI insurer will be after them in no time. That’s not going to happen to an agent over an appraisal.

Rob: So a valuer’s work has to be very defensible compared to an appraisal, which should be on the money but doesn’t have that other side riding on it.

Rachel: A valuer, conceivably could be standing up in court defending their value, the value that they put on the property. So they need to have a pretty clear idea of how they came to that decision.

Rob: With most appraisals, comparable sales are always provided as a basis for the appraisal. And of course, a valuer would have a look at a bunch of comparable sales.

Rachel: The valuation methodology, the comparable transactions approach where we look at comparable properties – the choice of those sales is obviously important, and then how you analyse those sales is also important, particularly from a valuer’s perspective where you need to have empirical evidence of your value. Valuers often rely on feel, but it’s got to be data driven. So you might start with your gut, you look at the data, does that back up your gut feel? And then you decide based on that.

Rob: So that being the case, what makes a great comparable sale?

Rachel: It’s about knowing the market and knowing the purchases in that market to start with. You obviously, you’re not going to compare a four bedroom family home with a two bedroom townhouse. I mean, that’s just a no brainer. But if you keep stretching that out a bit, just because it’s in a different suburb doesn’t necessarily mean it’s not a good comparable because the distance from the property that you are valuing or appraising doesn’t make it a bad comparable. So it’s about understanding the market. But if you’ve got a property with some significant idiosyncrasies, sitting in a market with very few sales, then starting broad and then bringing the search in narrower and narrower until you feel that you have achieved the best basket of sales to compare it to that you possibly can, is the only way that I can do it.

Rob: And so if you’re doing a metro residential appraisal or valuation, what’s the minimum number of comparables that you should include in your report, or you should be considering strongly?

Rachel: It’s funny, when I first started as a valuer, we used to – it was always three, it was one lower, one higher, and one about the same. But I think the market’s more sophisticated these days and certainly the requirements of valuers are more stringent. So typically in a residential valuation report, you would try to have five approximately. More is better, but it’s not always. You have to be fairly critical of yourself when you’re doing these things. I would say five is a good number for most situations, but for those properties that are a bit different, it might be useful to have more. Bearing in mind, you’re never going to get something that’s exactly the same. In some of those markets, there may be some where you’ll get something pretty close, but in many markets, you won’t get something that’s exactly the same. So it’s enough sales so that you feel confident that you can make a really good judgment of where the market would sit for your property.

Rob: And so a comparable, when does that expire? Is it six months? Is it 12 months?

Rachel: If you’re a bank valuer, the bank typically will dictate that. And if you’re going to use a sale that is outside of their requirements, the valuer has to write some comments to explain why. The difference is if you have a property that is a bit different, you might have to stretch the time to a year, sometimes two years. I’ve used sales that are three, four years old for some properties. I say that on the proviso that the last few years the market has grown so quickly that that’s not going to be as easy to do. In those years where we’ve had two, three, four percent growth every year, it’s obviously a lot easier to use sales that are a lot older. So at the moment that’s probably not the best advice, but it can’t be discounted depending on the type of property that you’re looking at.

Rob: I have to drop this in because one thing that we do hear from both the valuation industry and the real estate industry is the $0 sales can limit your comparative options. And of course, Property Edge does provide a different data set, which is the stamped value, which is the value on which stamp duty was calculated, which can hint at what a sale price could have been.

In your experience, what’s the upside of having that sort of data set compared to not having it in performing a valuation or appraisal?

Rachel: I use Property Edge day in, day out, the stamped value sales, they’re an absolute godsend. The days of hiding behind a $0 are over. We always have to be very careful when we are valuing that we are using market transactions, it’s critical. But quite often you’ll see a property that has been marketed, openly marketed, may even have been auctioned, but when it settles, it’s coming through with a $0. So in some markets, particularly in the higher value suburbs, 20 to 30% of the sales are sitting behind a $0. It’s also happening a lot in commercial markets. But data is key to everything we do. So we need to make sure that we have the best data. Even if in the end we’re relying on our gut feel, it’s got to be evidence-based.

Rob: And let’s talk about desktop research versus actually wandering around the house because I mean, I’ve had an experience recently where an agent had come to, not my property, my sister-in-law’s property with their appraisal having never actually walked in the door. And so the appraisal hadn’t taken into account any of their renovations that she’d done inside, which weren’t apparent from any of the photos from the outside or from Google Maps or whatever sources they used.

And the person who then wandered around the property then came back with a completely different appraisal that better, or she felt better valued her property. Are they really important for appraisals or is it better for just valuations?

Rachel: If we are looking at desktop as opposed to just the desktop bit, there is an awful lot more information available these days for an agent or a valuer to make that initial assessment on a desktop basis. It’s all there. It’s all at our fingertips. And you can do a fair bit of that initial work with a desktop assessment.

And in some cases when it comes to valuers, banks will accept desktop assessments. Typically, there’s a risk qualifier there and valuers have lots of disclaimers in those reports. You’ll find banks will probably accept them for low loan to value ratios, but nothing beats an inspection.

Rob, basically, as your sister-in-law found out, you get there and you find that it’s beautifully renovated. You can’t see that from the street. It’s got an extension that you can’t see from the street. It’s not until you actually get to a property that you can really feel and see, and hear and smell and get the vibe. That’s not to say that a desktop doesn’t have a place. But to go to a property having already formed your view of what it’s worth, without seeing it, I feel that that is dangerous for valuers and agents alike.

I find that if you go to a house to value a house, and I’ve valued a lot of houses, quite often they’ll ask you there and then what’s it worth? And I never answer that question. I find that you need to sort of sit and digest all of the information that you’ve got from your desktop research, from your inspection, looking at the sales and bringing it together and providing a really considered view of what the property would be worth to the market.

Rob: Now one of the aspects that I know does get used a lot are AVMs or automated valuations. Now, once again, they are based on the data that go into them, and that’s the quality of the output you get. What are your views on AVMs and as a starting point for appraisals?

Rachel: AVMs have got a lot better over the last few years. But an AVM is only as good as the data that’s available. And I guess similar to someone walking into a house and not knowing that it was renovated, AVMs don’t always know that kind of information either. I had an example shown to me some years ago by the very brilliant George at Point Data, where he showed me three different AVMs. There were two townhouses next to each other, absolutely identical. And each of the AVMs predicted a different price for each townhouse. One of them was relatively accurate and I might say that was George’s, but ultimately the other two, there was hundreds of thousands of dollars worth of difference between the two different sides of these perfectly identical mirror image townhouses, which basically speaks to the fact that it depends on what data the AVM is using.

I think the moral of that story is that whenever you do use an AVM, you have to decide how much you’re going to rely on it and how much scepticism you’re going to place on the model output and that maybe it’s a really good starting place, but at the end of the day, you still need to do your own research, your own due diligence, look at the property, and relate that back to your own market knowledge and your knowledge of other sales and the people that are in the market.

Rob: Well, let’s finish now on some red flags that undermine credibility in appraisals or valuations. What are a handful that would help a real estate agent when they’re doing their next appraisal, anything they should just keep in mind that they might not already be doing.

Rachel: Well, I think you identified one thing. Don’t throw out numbers that you haven’t had a really good think about. Having access to good quality data that you can then have really good quality conversations with your vendors. I love talking to agents who really understand their market, who the operators are, who’s active, what types of buyers are active, who understand what properties are selling for, what’s driving those sale prices? Is it quality? Is it land? Is it something about the location? Is it something about some infrastructure that’s about to be built?

Is it something to do with some new developments that are planned in the area that they know all about and they understand the impact that that might have on the sale, on the buyer. Does the market see this as a house or do they see it as a development site? Sometimes you see properties advertised for sale where as a valuer I look at the listing and think, I think the agent actually missed the point on this one. This property is not being marketed to achieve its full potential.

Rob: And the thing that’s struck me and I’m going to walk away with is you’ve described valuation as data-driven gut feel, which I love. And I guess appraisals are very similar, right? You’ve got the gut feel, but you need there to be some data behind that too, so that you can defend it and you can push it towards your vendor.

Rachel: I sit with a spreadsheet, I will pull the market apart, I’ll pull the property apart, I’ll pull the sales apart and then I’ll put it all back together and I don’t necessarily expect that every agent is going to go to that depth.

Rob: Absolutely. Well, thank you so much for your insights today. I do really appreciate you coming on the Property Edge Podcast.

Rachel: Thanks, Rob. Great to be here and I’ve enjoyed having a chat.

Rob: Well, I think everyone’s going to walk away with some new insights into operating their next appraisal. Thank you for listening or watching. If you are looking for any other information about the Property Edge Podcast or the Property Edge platform, head over to propertyedge.app.

Note: This transcript has been edited for clarity.