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When price and value don’t stack up

Traditionally property has always been one of the more secure of all investment options.

Less volatile than stocks or mutual funds, and attracting more tax benefits than precious metals or vintage automobiles, property conventionally offers higher returns, more capital gain and greater stability than other ventures aimed at wealth building.

But over recent times Australia’s turbulent property market combined with an increased supply of strata residences, high-profile issues around construction quality and concerns about potential remediation costs has led some investors to question whether parking their money in shares, investment bonds or even plant based meats could provide a healthier return.

As recently as 2017 less than 16% of newly constructed units in NSW were valued below contract price after they were completed. Yet based on August 2019 settlements, six in ten of off the plan (OTP) apartments in Sydney and 52.9% in Melbourne have been settling with a valuation below their contract price.

Typically, a valuer will look at things including the size of the property, the number and type of rooms, the fixtures and fittings, the location of the property, the standard of presentation and fit-out and the ease of access, such as good vehicle access and a garage. He or she will also consider planning and restrictions, local council zoning, market conditions and recent sales in the area before deciding on your property’s value.

But just because your strata property may have received a valuation below your agreed purchase price, seasoned property investment professionals insist there are a number of different options you can take to help rectify the situation.

The first is to request a reassessment of the valuation. While this is not common, it is not unheard of for banks to change their minds about the amount they are willing to lend based upon a review of an initial valuation. It’s important to remember that to achieve a favourable outcome you will need to provide evidence supporting your request, such as comparable properties that reflect the higher value.

Another option is to cancel your finance application and try another lender who may come up with a more favourable valuation. Should this not appeal, try contacting a mortgage broker and ask them to do the leg work for you.

The third option is to instruct and pay an independent valuation company to conduct a market valuation of the property. While this will cost you initially, you are more likely to get a figure that is reflective of the true valuation of the property. Privately ordered valuations are not used by banks when making lending decisions, but can provide a guide as to the estimated market value.

Ryan McLean, from full service buyer’s agency On Property, says it’s important those who find themselves in this situation acknowledge their situation and not ignore it or fail to act in the hope it will improve over time.

“The most successful property investors that I see are property investors who are actively involved in growing and maintaining their portfolio. So let’s not stick our head in the sand, let’s admit we made a mistake and let’s look for a solution to that mistake,” he says.

McLean says there are also numerous ways to rectify the situation for those who have already borrowed to purchase property but now realise their strata investment is worth less than what they paid for it.

Assessing the market is a worthwhile activity, he says.

“If the market’s tanking, maybe you want to get out now or if the market’s stabilising, maybe you want to hold on. Project yourself five or 10 years ahead and see what’s going to be happening and make your decision based on that. Something to think about is will you get money back and could that money be invested elsewhere in a better situation that’s going to deliver more returns and move you towards your goal faster?”

McLean says in the event you decide not to on sell your property, you should try to get yourself into a cash flow neutral or cash flow positive situation where the property’s not costing you anything to hold onto.

To do this it is worthwhile becoming what he calls an “active investor” by trying to reduce your expenses such as switching from a principal-and-interest loan to an interest-only loan or shopping around for cheaper insurances until the market improves.

Disclaimer: The information contained above is general in nature and does not take into account your personal situation. You should consider whether the information is appropriate to your needs, and where appropriate, seek professional advice from a financial adviser.
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