As a self-managed super fund (SMSF) property investor in Australia, understanding the importance of property valuations goes beyond just a figure. Whether you’re considering purchasing a property to add to your SMSF investment portfolio, or refinancing an existing property owned by your SMSF, it’s crucial to understand the difference between appraisals and valuations.
We take a look at the difference between property valuations and appraisals in Australia, and explore which may be the right option when assessing an SMSF property’s current market worth.
The difference between valuation and appraisal
Whether it’s residential property held personally, or a property that’s owned under a self-managed superannuation fund, the difference in appraisal and valuation is the same.
A property appraisal is an estimate of your property’s current market price to gauge the likely selling price. An experienced real estate agent is often able to determine the estimated value of your property by comparing it to recently sold similar properties, considering factors like location, competition, trends, structure, and condition. To get an accurate real estate appraisal, it’s generally a good idea to contact local real estate agents that have extensive knowledge of the neighbourhood.
Throughout the appraisal process, the real estate agent assesses various aspects, including the property size and fixtures. Property appraisals help you understand your property’s potential market value at a specific time, which may be valuable insights for both buyers and sellers.
Note: it is common for real estate agencies to offer free property appraisals when you engage them for the purpose of selling your property, however, this may not necessarily determine the final property value, and is typically an indicative figure only.
On the other hand, a valuation is typically performed by a qualified property valuer. Thorough property valuations incorporates a wide range of variables to obtain a more definitive figure than an appraisal. A valuation takes into account factors like land value, property improvements, town planning considerations, as well as an analysis of the property’s layout, including living areas, bedrooms, outdoor spaces, and parking facilities.
Importantly, a property valuation should come from an independent and unbiased point of view. This is because property valuations are most commonly used to help determine the property’s suitability as security for a loan.
When are property valuations required?
Typically, valuations are required when a definitive value of the property is required. Common examples are:
- For property settlement.
- Deceased estate settlements.
- For a property purchase (particularly when there’s mortgage lending involved).
- Legal disputes, including divorce, disputes over property ownership or property partition.
- Property tax assessments.
- For insurance purposes.
- To analyse the property for investment suitability.
When will I need a property valuation of an SMSF property?
There are several instances where an SMSF investment property will require a valuation:
When the fund initially acquires the property
When the SMSF purchases a property, it needs to be valued at the time of acquisition. This valuation helps determine the property’s market value, which is necessary for compliance purposes and to ensure the SMSF doesn’t breach any superannuation laws or regulations.
For the annual financial statement
SMSFs are required to prepare annual financial statements as part of their reporting obligations to the ATO. The property held by the SMSF should be valued as at the end of the financial year for accurate reporting. The valuation should reflect the current market value of the property.
In specie contributions of property
The property must be valued at the time of contribution when an SMSF member makes an in-kind contribution of a property. This valuation helps determine the contribution amount for compliance and tax purposes.
Reviewing the investment strategy
SMSFs are required to have an investment strategy in place. When reviewing the investment strategy, it is advisable to consider the property’s current market value. This ensures that the SMSF’s investment decisions align with its strategy and objectives.
If the SMSF has borrowed funds under a limited recourse borrowing arrangement (LRBA) to acquire the property, the lender may require periodic valuations to assess the property’s value as collateral. The frequency of these valuations would depend on the lender’s policies and the terms of the loan agreement.
When applying for a loan from a financier, they typically commission a valuation and rely on its findings to decide whether to lend you the requested amount. However, the written report prepared by the property valuer provides a lender with more than just a valuation figure. Certain elements within the report can significantly impact the outcome of your loan application.
SMSF lending for an investment property
Importantly, if your SMSF is looking to purchase a property, regardless of whether you’re purchasing the property outright, accepting the property as an in-kind contribution or using an LRBA to facilitate the purchase, then it is highly likely that you’ll require a property valuation completed as part of the purchase process.
To access experts in limited recourse borrowing arrangements, contact the team at SMSF Loan Experts.