An accurate appraisal is important to help vendors make well-informed decisions about selling their property or business. Here’s how to make sure you're doing it right.
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All listings need an appraisal
You must provide a written appraisal to any prospective client – residential, rural or commercial – before they sign an agency agreement. Rules 10.2 and 10.3 of the Real Estate Agents Act (Professional Conduct and Client Care) Rules 2012 (Code of Conduct) set out the requirements for appraisals.
10.2 An appraisal of land or business must:
- be provided in writing to a client by a licensee, and
- realistically reflect current market condition, and
- be supported by comparable information on sales of similar land or businesses in similar locations.
10.3 Where there is no directly comparable or semi-comparable sales data, a licensee must explain this, in writing, to their client.
Physically viewing and appraising a property
Unless there are exceptional circumstances, you can expect to have access to the property or business you are appraising so you can ensure you have fully viewed the property or business before finalising the appraised amount.
You are at risk of breaching rule 5.1 of the Code of Conduct if you do not visit a property or business before appraising it.
5.1 A licensee must exercise skill, care, competence, and diligence at all times when carrying out real estate agency work.
The following decision from a Complaints Assessment Committee (CAC) highlights the importance for you to view the property when conducting an appraisal.
This case involves a licensee who provided an appraisal for a property that was listed under a general agency agreement. It was submitted to the vendors with a statement from the licensee that said they "have not been inside but had a good look through the windows" along with comparable property data. The licensee did not take into consideration when appraising that it had been on the market for over 30 days and did not check the value against potential income that could be earned from the property.
The licensee was found guilty of unsatisfactory conduct as:
... 'the market appraisal did not realistically reflect the market conditions at the time as the licensee appeared to have considered the most favourable sales of properties that were of a similar size and ignored the less favourable comparisons'.
‘The Committee looked at the actions of the licensee as a whole. She failed to carefully inspect the property before completing her appraisal. This was lacking skill or care of both in our view (Rule 5.1).’
Appraisals should reflect the property's condition
We hear from vendors who have listed with an agency after receiving a very positive appraisal. Shortly after listing the property, the licensee begins to point out issues with the property and push for them to reduce the price.
An overinflated appraisal range may be a breach of rule 6.4 of the Code of Conduct.
6.4 A licensee must not mislead a customer or client, nor provide false information, nor withhold information that should by law or in fairness be provided to a customer or client.
Many vendors will have an idea of the value of their property or business based on what they have heard or observed, but this is not always realistic. A robust and thorough appraisal can help to manage vendor expectations.
Appraisals should be explained to the vendor
Every agency agreement is required to be accompanied by a current market appraisal (CMA). It's not enough to simply present the prospective client with a list of properties and data collected. A licensee should explain how the property compares to other recent sales, and how they have arrived at the appraised amount.
You should explain why you have included some properties for comparison and be able to explain why you have excluded others. This is captured in a CAC decision where the complainant alleged the market appraisal was misleading and inflated.
Based on the appraisal and the advice from the licensee, the complainant entered into a sole listing agreement with the agency. The CAC decision stated:
The committee accepts that the production of a CMA is not an exact science; that it is not a valuation and should not be treated as such. A CMA is usually the first step in a contract between a vendor and a licensee and, as such, plays a major role in whether a vendor decides to list his/her property with a licensee. Therefore, the committee believes care and effort should be taken with the production of the CMA.
The committee stated they saw simply a presentation of data collected with no evidence of analysis by the licensee. This left the report open to being interpreted incorrectly by the seller.
Read the full decision from the CAC
The Real Estate Agents Disciplinary Tribunal (READT) has also recently commented on the importance of appraisals when discussing licensees’ obligations when completing Form 2 and noted:
'Licensees should bear in mind that the appraised value must realistically reflect current market conditions, and that in allowing licensees to enter a provisional value rather than wait for an independent valuation, the intent of section 135 is that the provisional value is "the nearest thing" to an independent valuation. They should also bear in mind that the written appraisal they are required to provide under rule 10.2 must form the basis for the "estimated cost (actual $ amount)" of commission they must provide under rule 10.6(a).'
Read more about conflict of interest
The Tribunal also commented about the care with which appraisals should be prepared:
'A licensee preparing an appraisal will, therefore, be aware of the need for the appraisal figure to support the estimate of the commission payable, required to be given to a prospective client. The licensee will be required to comply with licensees' obligations to 'exercise' skill, care, competence and diligence at all times when carrying out real estate agency work" (rule 5.2), to "comply with fiduciary obligations to the licensee's client" (rule 6.1), to "act in good faith and deal fairly with all parties engaged in a transaction" (rule 6.2), and "not mislead a customer or client, nor provide false information, nor withhold information that should by law or in fairness be provided to a customer or client" (rule 6.4)'.
'If there is any doubt or concern that licensees' appraisals may be inflated, or manipulated in any way such that they do not reflect current market conditions, supported by comparable information, then that doubt or concern should be addressed by careful education and training and, if necessary, disciplinary proceedings'.
Read more about this decision [PDF 289KB]
If there's no comparable data
If no directly comparable or semi-comparable sales data is available, you must explain this in writing to the vendor.
You should be careful when claiming that there is no comparable data, and if there is semi-comparable data, reference should be made to that information. You may wish to reference different properties to help your vendor understand why you’ve determined they aren’t comparable.
An appraisal is not a valuation
It’s important you use the right terminology to make sure you’re not misleading consumers or committing an offence under the Valuers Act 1948.
To produce a valuation of land for members of the public a person must be a registered and certified public valuer under the Valuers Act 1948. Very few real estate licensees are also registered valuers.
You should be careful to avoid using the term ‘valuation’ incorrectly.
Learn more about property valuation in NZ on the LINZ website
You can’t solely rely on electronic appraisals
An electronic appraisal or market estimate is unlikely to satisfy your requirements to provide an appraisal under the Act.
While market estimates or algorithm-based services can be a good way to gather comparative data for a property to support your appraisal, you’ll still need to physically view the property.
If you choose to provide a market estimate, the best practice is to follow up with your potential vendor explaining you need to visit the property in person to give an accurate appraisal. You must provide a formal appraisal with supporting data before your vendor signs an agency agreement.
Appraising a property you aren’t listing
There may be situations where someone approaches you to carry out an appraisal of a property that you are not listing.
You should keep in mind that, while you can conduct an appraisal without the owner’s consent, you may not be able to conduct the full appraisal because you may not be able to enter the property without the owner’s permission.
You need to conduct commercial and business appraisals under rule 10.2 of the Code of Conduct.
Most business brokers develop specialist knowledge, usually by way of business type, location and price range. This enables the individual licensee to develop a greater knowledge of a business type and through experience acquire higher-level appraisal skills. It can be difficult to find comparable data for commercial listings. However, you should use semi-comparable data when it is available and explain this to the vendor.
When a business is listed for sale, there will often be other businesses with similar characteristics that can be used for comparison. For example, although the businesses may not be identical, they could have comparable products, overheads and turnover.
Take the time to support your appraisal with whatever comparable information is available. Clients rely on your professional expertise and need to know what evidence supports the market value you suggest for the property.
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