What is an appraisal in real estate in Australia?

It probably goes without saying that, in real estate investment, it’s important to know how much your property is worth.

So far, so obvious. But the complexity behind appraisals in real estate – the professional process of assessing a property’s value – can catch investors out. Beginners often struggle, for example, with the difference between an estate agent’s market appraisal and a formal valuation. 

But appraisals impact your interest rate, your ability to refinance, your options when selling, and your tax. A proper understanding of the process is vital.

In this blog, we walk you through how a real estate appraisal works, how to get one, the time and costs involved, and the impact it can have on your investment strategy.

What is a Real Estate Appraisal?

A real estate appraisal is a professional assessment of a property’s value. It can refer to licensed valuers carrying out formal valuations, or real estate agents carrying out market appraisals. 

The main difference is that a real estate agent’s valuation isn’t legally binding, it’s just an estimate of what you could get on the open market. A licensed valuer, by contrast, has strict guidelines to follow and provides a more definitive value for things like:

• Mortgage lending
• Divorce settlements
• Capital Gains Tax (CGT) assessments
• Probate
• Compulsory land acquisition
• Litigation and other disputes

Any appraisal, formal or informal, will typically evaluate the property’s location and condition, accounting for comparable sales and improvements the existing owner has made (or that the prospective owner would need to make).

Finally, appraisals are different to property tax evaluations. The latter is a government-led process to determine the level of property tax you pay. It’s usually based on an annual mass valuation, and you have the option to challenge it through your local tax authority. 

How Does Real Estate Appraisal Work?

The typical appraisal follows this process:

1. Someone, often your lender, engages a valuer to carry out a valuation.
2. The valuer visits the property to assess size, condition, features, and compliance, plus external factors like location, infrastructure, and amenities.
3. They look at comparable recent sales to determine supply and demand and local market trends.
4. Using their chosen methodology they arrive at a valuation.
5. The valuer prepares a report, including their final estimated value and supporting evidence.
6. After ensuring their report is accurate and complies with API standards, the valuer submits it to the client.

The valuation itself depends partly on the methodology the valuer uses:

• Sales Comparison Approach: Mainly applies to residential properties and relies mainly on comparing recent sales (accounting for any subsequent market shifts).
• Income Approach: Used for investment properties, based on rental income potential.
• Cost Approach: Uses an estimate of the replacement cost for unique properties.

In addition to the location, the valuer will be looking at:

• Number of bedrooms
• General condition 
• Land area and site
• Future potential (e.g. local council zoning or evidence that similar properties have been expanded)
• Gross Living Area (GLA), i.e. the total finished, above-grade, heated, and habitable space

With apartments, there are further considerations, including owner-occupier levels, strata levies, and fees. Higher fees could make the property less attractive, potentially reducing the value, but extra amenities like pools and security could add value. More amenities, of course, could mean higher fees, so there will always be a balance. 

What is the Purpose of an Appraisal?

Apart from helping owners know what their properties and portfolios are worth, appraisals are important for refinancing (for example, assessing Loan-to-value ratios). They also play a part in determining the insurance you need.

A formal valuation is also important for tax assessments (e.g. when calculating CGT), for managing estates when somebody passes away, or dividing assets during a divorce.

What is a Real Estate Appraisal Report?

A real estate appraisal report is the formal document that a valuer delivers to their client. Unlike a real estate agent’s report, it can be legally binding and typically includes detailed information about the property and the local market. It also explains the valuation method used.

There are three main types of report:

1. Comprehensive: Includes full inspection details
2. Desktop: Uses data but doesn’t include a physical inspection
3. Restricted Use: A brief summary for a single intended reader

When reading the report, focus on the final valuation estimate, comparable recent sales, and any adjustments made. This helps you understand the conclusions and evaluate the accuracy and fairness of the report.

How to Get a Real Estate Appraisal

To get an appraisal, you need to find a licensed valuer with the right certifications and experience. The Australian Property Institute (API) has a helpful database of licensed professionals, with filters to find the right valuer for your property type.

Before your appraisal, make sure your property is clean and tidy. Have recent council rates, building plans, renovation records, and relevant property sales data to hand too. Ask your valuer what valuation method they’re using and any factors that impact the valuation. This helps you understand the final valuation and gives you helpful insights for future improvements.

How Much Does a Real Estate Appraisal Cost?

The cheapest way to get a valuation is from a real estate agent, but it carries no legal weight. For a formal appraisal, depending on the type of appraisal, your cost will vary:

Report Type

Residential

Commercial

Comprehensive Report

$300 - $700

$1,000 - $5,000+

Desktop Report

$200 - $500

$500 - $2,000

Restricted Use Report

$200 - $400

$500 - $1,500

The type, size, location, and complexity of the property all affect the fee. If the banks requests the appraisal, they typically pay the valuer but may pass the costs onto you. If it’s for private purposes (e.g. a divorce settlement), you or the business that owns the property usually need to pay.

How Long Does a Real Estate Appraisal Take?

Between booking the appraisal, carrying it out, and preparing a report, you’re typically looking at a 1-2 week process. The inspection and report are sometimes done within a few days, but if it’s a complex property, there are delays in getting access to the property, or your bank has extra criteria, that can slow things down.

There are ways to speed up the appraisal (i.e. by paying more) but the best method is to plan ahead, accounting for your financial deadlines.

How Long is a Real Estate Appraisal Good For?

Real estate appraisals are typically valid for 3-6 months, and possibly longer for tax valuations. That said, lenders usually require an appraisal no older than 90 days, depending on market stability (a rapidly changing market demands more up-to-date appraisals).

Apart from market changes, you’ll need a new appraisal if the previous one has expired or if you’ve made significant changes (e.g. renovations). If you schedule an appraisal close to your expiry date and keep careful records, you can maximise its usefulness.

Are Appraisal Fees Tax Deductible on Rental Property?

In most cases, the cost of a property appraisal is deductible so long as the property is being used for income-producing investment purposes (e.g. renting) not personal use. If the property is for mixed use, the costs are deductible in the same proportion. For example, if you rent the property out for six months per year and live in it for the rest, half the costs are deductible.

Whether the costs are deductible in the year incurred or amortised depends on the purpose of the valuation:

• For rental income or expenses, the cost is generally deductible in the year incurred. ​
• For loan approval, such as refinancing, it’s considered a borrowing expense, so you deduct it over five years or the loan term, whichever is shorter. ​
• If determining the cost base for CGT, the expense is treated as a cost of managing tax affairs and is deductible in the year incurred. ​

A lot of investors don’t take time to understand these differences and make mistakes such as claiming deductions on a personal use property or failing to amortise. Others miss out on deductions to which they should be entitled. To stay on top of things, keep all your receipts, rental income records, ownership details, and apportionment calculations.

Common Pitfalls and Mistakes in Australian Property Appraisals

Apart from miscalculating tax deductions, the most common mistakes investors make are:

• Not having strategies to avoid undervaluation or overvaluation.
• Failing to account for improvements and renovations.
• Relying on outdated sales instead of recent sales of comparable properties.
• Assuming all properties will increase in value regardless of external factors.
• Failing to prepare your property to maximise value.
• Overlooking red flags like structural damage or poor rental demand.

The Futurerent Alternative

A real estate appraisal is complex. From booking a licensed professional to getting your formal report and understanding its contents, there is a lot to do, but if you do your research and fully understand the tax implications, it’s possible to navigate your appraisal safely. 

Still, you can be forgiven for thinking all that work and research, not to mention high costs, is off putting. Refinancing is expensive enough as it is, but when you start to include appraisals and other hidden fees, you might feel it’s not worth it.

Futurerent offers an alternative to traditional financing that means you don’t need an appraisal at all. Instead of adding to your debt, Futurerent gives you an advance of up to $100,000 on your rent, repaid over a fixed period with a simpler property assessment process based on what you can expect in rental income. That means no appraisals and no appraisal fees.

Contact the team today to find out more.

FAQs

1. What is appraisal in real estate?

A real estate appraisal is a professional assessment of a property’s market value, conducted by a certified valuer. It is used for mortgages, refinancing, taxation, legal settlements, and sales transactions. The appraisal considers factors like property condition, recent comparable sales, location, and market trends to determine an objective valuation.

2. How much does a real estate appraisal cost?

The cost of a real estate appraisal in Australia varies depending on the property type and appraisal method. A standard residential appraisal typically costs $300 to $600, while commercial appraisals can range from $1,000 to $5,000+ due to their complexity. Expedited services or valuations for legal disputes may incur additional fees.

3. How long is a real estate appraisal good for?

A real estate appraisal is generally considered valid for 3 to 6 months, depending on market conditions. Lenders often require appraisals to be no older than 90 days, while tax-related valuations may be accepted for longer periods. In fast-moving markets, a valuation can become outdated within weeks if prices fluctuate significantly.

4. How does real estate appraisal work?

A real estate appraisal involves a certified valuer inspecting the property, researching recent comparable sales, and applying valuation methods such as the Sales Comparison, Cost, or Income Approach. The final report includes an estimated market value, a breakdown of the property’s condition, and any influencing factors such as zoning or market trends.

5. How long does a real estate appraisal take?

The real estate appraisal process typically takes a few days to two weeks, depending on property complexity and valuer availability. A standard residential appraisal may take 3-5 business days, while commercial or complex properties may require 1-2 weeks for a full assessment and report preparation.

6. What is GLA in real estate appraisal?

GLA (Gross Living Area) in a real estate appraisal refers to the total finished, above-ground, habitable space measured in square metres or square feet. It excludes basements, garages, and unfinished areas but includes heated and fully enclosed living spaces, such as bedrooms, kitchens, and living rooms.

7. Are appraisal fees tax deductible on rental property?

Yes, appraisal fees for rental properties are tax deductible in Australia when they are related to income-producing purposes, such as financing, depreciation reports, or property management. However, if the appraisal is for loan approval, it may need to be amortised over five years rather than claimed as an immediate deduction.