Valuing 3 units on one title

[RightValue]

Well lets work on the $880k then.

The developer has walked away and the bank now holds them.

They will sell for $880k.

What about the GSt liability for the new supply of land and dwellings?

The lender is on the hook for these and they do not get the input credits.

Out of the $880k there is possibly a GST liability of $60k.

The lender will have to pay an agent to sell the 3 on one title, let us say $30k.

Believe it or not there will be a lead time here, the pool of potential purchasers for these things are not exactly thick on the ground, so let us allow 6 months from when they get it until settlement, that is another $30 in holding costs.

So the $880k quickly becomes only $760k in end value to the lender.

Which is about what the whole project will be valued at.

 

[RightValue]

Matt,

$880k is what you as a professional investor is prepared to pay for 3 on one to make a profit, it is close to Aaron's 15% profit margin.

Believe it or not I would only use a profit margin of around 10% to 12.5% plus costs for the purchasers of the 3 untis on one title.

We are valuing for the lender and we have to assume that all the other costs need to be met by the lender including sale costs, and GST, that is a big one and holding costs.

You strip these out and the value shrinks quite dramatically.

Would you still be prepared to reccomend $880k as an end value to your parents super fund when you consider all these liabilities and costs?

 

[Rolf Latham]

Believe it or not there will be a lead time here, the pool of potential purchasers for these things are not exactly thick on the ground, .

I hear that, and on average it is statistically true.

If I can get some buyers agent to find me 10 developments in a moderate ok metro area, that have strata subdivision guaranteed, are under 1.5 mill, and they are selling at 10 to 15 % discount GRV, I can get those away in a couple of weeks, with my eyes close just off current pre approved client base.

The buyers agents we work with know this to be the case give me a failed deal with the above numbers and its as good as resold.

I cant find but ONE listing that fits the above profile and there is good reason this profile isnt common,

An efficient market will put a floor under such transactions.

Remember Im not having a go at valuers here, because if you cant find comp sales, a resi val is a tough gig, and a valuer cant just say, well I cant out a number on it ( though sometimes that might be the appropriate answer ) Its just one of those times where the void between my reality and valuation will rarely meet.

ta
rolf

 

[Dazedmw]

Matt,
We are valuing for the lender and we have to assume that all the other costs need to be met by the lender including sale costs, and GST, that is a big one and holding costs.

This is a key point for me. The number of people who I talk to who just want a "fair" or "even" or even "realistic" valuation often don't realise that the valuation is for the bank, on the banks terms/standing instructions, and sometimes that "market value" is just a convenient fiction for the lenders and allows the bank to send the valuer to do their dirty work for them.

 

[RightValue]

Rolf you just agreed with my figures.

Selling at 85%-90% of GRV, which is what I work on, but then you need to deduct for all the other costs, GST, disposal costs and holding costs.

They are around another 15%.

So a rough rule of thumb may be to expect an end valuation to be at a 30% discount to GRV.

 

[RightValue]

This is a key point for me. The number of people who I talk to who just want a "fair" or "even" or even "realistic" valuation often don't realise that the valuation is for the bank, on the banks terms/standing instructions, and sometimes that "market value" is just a convenient fiction for the lenders and allows the bank to send the valuer to do their dirty work for them.

No it is not a convenient fiction, it is a fair market value for mortgage security purposes.

This needs to assume that the possible costs/expenses are accounted for.

 

[Dazedmw]

No it is not a convenient fiction, it is a fair market value for mortgage security purposes.

This needs to assume that the possible costs/expenses are accounted for.

And will market value for mortgage security purposes always match the value of the property sold through an arm's length marketing campaign? No, because the lender requires assumptions to be made that don't always match the assumptions that a regular buyer would make to purchase the property.

In this case it's not really the costs/expenses that I have an issue with (I agree with you on this valuation example) but I have seen banks refuse valuations with Profit and Risk allowances below what they consider acceptable even when supported by full sales analysis.

I don't have a problem with this because it's the lender's money and they can set any assumption that want with a valuation but don't pretend that it represents what the property would sell for it if went to auction tomorrow.

 

[Rolf Latham]

Rolf you just agreed with my figures.

Selling at 85%-90% of GRV, which is what I work on, but then you need to deduct for all the other costs, GST, disposal costs and holding costs.

They are around another 15%.

So a rough rule of thumb may be to expect an end valuation to be at a 30% discount to GRV.

there is that chasm between the market and vals, and as I said, I understand, and I wouldnt bother to challenge a val on that basis.


xcept my peops dont sell. Its a mugs game on buy and sell, alone from a CGT basis.

they lock that margin in and refinance off it walking away with usually with an asset that is cash neutral for little or no money in ...........odd I know but Real

If someone can show my a single metro listing for 3 on one title with a discount of 15 % to strata GRV id be surprised....................anyone ?

ta
rolf

 

[Dazedmw]

xcept my peops dont sell. Its a mugs game on buy and sell, alone from a CGT basis.

But the valuation is based on the assumption of a sale so examples of what people might pay to hold doesn't really apply.

 

[mattnz]

To me it is really simple, the valuation should reflect the commercial realisation value.

The bank then adjusts the interest rate offered and LVR for a development to reflect the risk associated.

They also normally work on a GRV net of GST valuation which accounts for this gst impact if they are left holding the bag anyway.

There is no reason to double count these factors, both in bank lending calculations and again in the valuation provided.

Let valuers do a genuine market valuation and let banks adjust their lending model for risk calculation.

 

[RightValue]

I think you two are missing the point.

A valuer has assumed that the sale price/market value is only about 10-15% below GRV, allowing for the professional to come in take a bit of risk and make a profit.

However we have to deduct the other expenses/liabilities inherent in such a property to arrive a a value for mortgage security purposes.

if you were the lender would you not want that final figure or would you not want the figure to reflect the net realisable amount you will be left with?

In 95% of my valuations, the figue I put on the report is what the property would achieve if sold ont he open market on that day.

However not in the case of multi untis or anything with development potential.

 

[Rolf Latham]

But the valuation is based on the assumption of a sale so examples of what people might pay to hold doesn't really apply.

true

Im not arguing that and it is pointless, because its not what people might pay, the market demands that, not a valuer, a broker or a banker - but a willing buyer and seller.

valuers have a job to do, brokers have a job to do, and to a large extent there is some friction there in many cases

There is a chasm and thats just that.

One either works with it or not. This isnt the usual white picket fence PPOR syndrome, its real empirical data. There is a floor to the market built by Buy and hold investors in the current climate.

If the industry see that great, if not, doesnt bother me any,just show me them listings with 15 % or greater discount to GRV and lets relieve the buyers and sellers of their "stress".

ta
rolf

 

[Dazedmw]

In 95% of my valuations, the figue I put on the report is what the property would achieve if sold ont he open market on that day.

However not in the case of multi untis or anything with development potential.

Yes it will usually be the same. The treatment of leased commercial property is another where variation can be found.

As for Matts point on LVRs, I used to think the same but it can be the case that credit guys at banks are using standing instructions/valuers to protect the bank from the deal guys.

 

[mattnz]

So you provide a valuation at 15% less than what I have presold all units for (willing arms length buyers) and then deducted gst and sales costs for my presold units to end up with a final valuation figure.

The bank then looks at this valuation and says, I will offer you finance for 65% of the valuation NET OF GST, and the bank needs a 5-10% contingency on the build cost, even though it is a fixed price contract.

The bank then charges me an extra 1-2% interest above standard residential.

So you have deducted a huge chunk of the real value, discounted gst and sales costs, the bank then discounts gst, offers me only 65% of that valuation, adds contingency, then lends me what is left over.

Then they charge a further risk premium.

As I said, everyone overfactors risk at every stage of the process, despite a premium interest rate and offers an extremely low LVR on the heavily discounted "value".

If all a valuer does is provide the actual commercial realisation, the bank has plenty of risk calculations already built into their formulas they lend on. The bank is lending at most 60% of the GRV, so the developer already has tonnes of equity at risk before the bank could have any losses. The valuation doesn't need to be adjusted at all to protect the bank's interests, they are well covered.

In today's environment you can't get a bank loan, without presales to cover all of your debt, or for very small developments like this, be able to demonstrate serviceability on completion.

 

[RightValue]

To me it is really simple, the valuation should reflect the commercial realisation value.

The bank then adjusts the interest rate offered and LVR for a development to reflect the risk associated.

They also normally work on a GRV net of GST valuation which accounts for this gst impact if they are left holding the bag anyway.

There is no reason to double count these factors, both in bank lending calculations and again in the valuation provided.

Let valuers do a genuine market valuation and let banks adjust their lending model for risk calculation.

Matt,

they are welcome to do that.

They can ask for a valuation as if on separate titles and the sum of the valuations (in this exapmle) will come out at $1.07m.

But they do not ask for that when they ask for a 3 on one valuation.

They can work it out, as those figures are (at least in out reports) included in the report, but for a valuer to ignore those liabilities leaves them wide open to a whoile world of pain if things go wrong.

 

[RightValue]

So you provide a valuation at 15% less than what I have presold all units for (willing arms length buyers) and then deducted gst and sales costs for my presold units to end up with a final valuation figure.

Matt,

I am not doing a valuation of three units as if on individual title.

I am doing it as if they are on one title. If someone buys three on one title they should expect a profit and risk return as you pointed out earlier, that is the gross realisable value.

From that the potential expenses and liabilities are deducted.

You are looking at it too much from the perspective of the borrower rather than the lender for whom the valuation is conducted.

Valuers do not know the LVR, it does not affect the valuation figure.

The fact of the matter is as with every valuation instruction I get I know nothing about the lending decision, the risk management or the LVR.

All I am asked to do is this.



Here is an address, put a figure on it... That is,. if we owned it (in the case of a TBE assuming completion of the building contract), what would we get for it if we sold it today.

In the case of 3 on one in this example you should get $880k, but beware you are on the hook for these costs and expenses so here is what you should get and that is the figure they ask for.

 

[RightValue]

As an aside,

As for the "bank" working things out.

Let me let you in on a little secret.

The "bank" does not do these calculations, bank employees do it.

Yesterday I turned up to an appointment to do a valuation.

I was in the wrong place.

of the address the "bank" had given following was wrong:

The unit number
The street number
The name of the street.

The only part of the address that the bank had right was the Suburb.

Todays example.

They a asking me to value 2 on 1.

The street is wrong,

The suburb is wrong.

The building contract contains the same mistakes. (so the bank is lending against a building contract for a propeerty that basically does not exist)

The building permit has the right street but the wrong suburb.

No employee from the bank checked.

The day before I get a query on a valuation I did last week stating that the valuer did not mention the carpark in the valuation, and there was a carpark when we lent against this property last time.

I check the report, the carpark is mentioned twice and there is a photo of it.

And you think bank senior management wants these people making calculations on residual values of three units on one title?

 

[Rolf Latham]

And you think bank senior management wants these people making calculations on residual values of three units on one title?

nuff said

thread closed : )

ta
rolf

 

[mattnz]

Thanks for your time and effort explaining from a valuers perspective Right Value.

I honestly do appreciate it.

The variations that I have had between valuers has been astonishing. i.e. Did a development last year where the inline valuation from one valuer was $1.4M pre-build and on completion went to get some equity out while waiting for the strata title to come through and the valuation came back at $1.085M from another valuer with the same bank.

Such experiences leave me highly skeptical and ensures that I shop around for the correct valuer who is aligned with my thinking, then choose a bank that uses them on their panel. Its rather unfortunate, but when you don't create the rules, you have to work around them to get a sensible outcome.

 

[mattnz]

I actually work at the head office of one of these banks, so that certainly doesn't surprises me.