What is a RICS valuation really worth?
Hey guys,
I have been investing for over a decade now so I can speak with a some amount of authority about the RICS valuation. I normally spend between £2000 and £4000 per month on RICS valuations and I can tell you unreservedly that they are always wrong!
Wrong.
100% of the time.
Wrong.
That’s right. It never really gives me an exact valuation of the property.
Now before you ask how can this be?, or conclude that we’re being mislead by RICS and sign the petition to burn every valuer at the stake, it might help to consider the following three points:
1. A person conducts the valuation Yep — a 100% human being that has good days and bad days. They have areas they know really well and others not so well. They like some areas and despise others.
They are not robots using some algorithmic equation to calculate the value of a property. They are people using training, knowledge and experience which of course are subjective criteria. Send three valuers into a property you will most likely end up with three different valuations. Now this in itself is not a problem unless you choose to believe the valuer’s decision to be perfect.
2. The intention of a RICS valuation is to give an ESTIMATE based on an arm’s-length transaction, sold on the open market with a normal marketing program over a 3 month period. It is not meant to give you an exact value at an exact time on an exact date. If it was, the valuers professional indemnity insurance premiums would be so much higher and the cost of a humble valuation would sky rocket.
Let me explain in a little greater detail:
- An estimate allows for a range of values. In most cases, this will normally be around 5% (plus or minus) but it’s totally normal and can be as high as 10% in either direction. Think of it this way, on a £200k house that can be as much as £40k difference, up or down.
- An arm’s-length transaction means that the buyer and seller do not know each other. They are normally bought together through an agent (such as Your Property Club).
- The open market these days would mean an agent who will use a variety of internet, phone, newspapers and other forms of marketing to attract a buyer.
- A three month period, meaning that we don’t expect it to sell overnight and nor do we expect it to take years.
Now the above definition of a RICS valuation is a lay mans definition not a precise technical definition so please don’t hold me to the letter. But in principle it is correct. There are many different types of valuation methods (the most common in residential property is the comparative valuation method) and I don’t claim to be a valuer but I have always found this definition to be worthwhile to me.
So if you understand that the intention of a valuer in doing a valuation is to provide a comparative estimate then you can understand that it is simply another tool in your kit bag and not the kit bag itself. Therefore it cannot be perfect but it can be a guide.
3. Finally, what are you really using the valuation for? As part of our due diligence on properties, we regularly have things down valued, and when I tell clients this they are disappointed. But you see, all too often after a developer has had their expectations build up by estate agents, our lower RICS valuation gives us the extra ammunition that we require to bring the price down to a realistic market level. We can then go back and start negotiating afresh.
Now here’s the most important bit about a valuation when you are planning on building a portfolio and it’s not the valuation figure. More often than not by the time that you instruct a valuation you know what the thing is worth or at least you will, if you have done any measure of due diligence.
So what’s the key to building a portfolio?
The key is the rental figure that the valuer gives. The value doesn’t matter because unless the rents stack up properly you’ll be putting a huge deposit into the property and burning up your valuable capital. Now I am not saying that the valuation figure isn’t important, but just as important in building a portfolio is the rental figure.
Ok — one final point about RICS valuations: it’s of absolutely no use whatsoever blaming the valuer if you think the property is being valued over the market price. Likewise, don’t blame them for down valuing a property. They will always have a reason but most of all you need to understand that the only person responsible is you. Yes, you — so do your due diligence properly, and use the valuation as it’s meant to be used — as a tool and as an estimate of value.
Live with passion,
Brett Wood