A Misconception
The other day, I received a call from a private individual looking to get a valuation completed early in the separation process and without the expert assistance of any lawyers. He asked the usual questions about how we determine property value and seemed satisfied with my explanation. But then he asked something I hadn’t been asked before:
“Aren’t valuations for family law usually higher than the real market value?”
That caught me off guard.
After years in the industry, I’ve heard plenty of commentary about valuations being under market value, especially when it comes to bank valuations. But this idea that family law valuations are inflated was a first, and I think it’s worth setting the record straight to dispel any myths regarding the basis of valuation.
The Legal Basis for Valuation
Valuers don’t simply “guess” a number, and we certainly don’t adjust it depending on whether it’s a bank, a separating couple, or the ATO asking.
All valuations, regardless of their purpose are rooted in the definition of market value established by the Spencer v Commonwealth (1907) case.
The estimated amount for which an asset or liability should exchange on the valuation date between a willing buyer and a willing seller in an arm’s length transaction, another proper marketing and where the parties had each acted knowledgeably, prudently and without compulsion.
This definition remains the cornerstone of valuation practice in Australia and is applied consistently across lending, taxation, and family law scenarios.
So, What is Market Value?
When valuing residential property, the primary method of valuation is the direct comparison or market approach. This valuation approach provides an indication of value by comparing the subject asset with identical or similar assets in the same or comparable areas, where price information is available.
But it’s not as simple as pulling a few numbers from property sites. It’s the valuer’s responsibility to:
- Establish the most comparable sales available
- Investigate the circumstances around each comparative sale (was it a forced sale, a private-off market deal, was it marketed property?)
- Ensure that each sale used in comparison reflects market value.
Not all sales are exchanged at market value. Some sales are outliers, too high or too low and relying on them without context can impact the accuracy the valuation.
In my presentations, I highlight this using sales examples of obvious out-of-line sales to show how research and context matter.
Understanding Time on Market Factors
A key part of this research involves understanding time on market. If a property sold very quickly, it may have been rushed or discounted. We also speak with local real estate agents involved in key sales to understand if anything unusual influenced the final price.
These are all steps we take to ensure that the assessed value is fair, evidence-based, and reflective of the true market
Forces Sale Scenarios
Recently, I had a client request a valuation for family law purposes under a forced sale scenario. This was an unusual request and in most markets there’s limited available sales evidence of properties that sold under similar forced circumstances. Without enough data, we couldn’t produce a reliable value for the property under those conditions. It’s a reminder that market value is based on fair and willing negotiations, not distressed or rushed transactions.
So, in summary whether a valuation is prepared for lending, asset review, or family law purposes, where accuracy is especially critical the end figure should be the same, as it’s based on the same set of carefully researched, applicable comparable sales.
The tricky bit is how those sales are applied. Real estate is a wonderful but individually different beast with a very many variables considered in the comparison process. It is important for readers of valuation reports to understand that the valuation of residential real estate is as much an art as it is a science. Even with access to the same data, different valuers can reasonably arrive at different conclusions based on how they weigh each attribute of the sales and the subject property.
A Personal Side Note on Trusts and Property
As a side note, I visited my accountant recently to explore options around selling my primary place of residence, which like many properties has seen considerable growth over a short space of time. What I didn’t anticipate was learning that because it’s held in a Discretionary Trust (a legacy decision from my days as a shareholder in Taylor Byrne Valuers), it’s subject to capital gains tax, even though it's my principal place of residence.
Let’s just say that was a bad day.