How to Manage Valuations for Construction projects
Starting a construction project can sometimes seem like a mighty struggle. Dealing with councils, and consultants, completing costings, lining up a builder and other trades. Negotiating contracts and getting your marketing in order are all difficult tasks. Getting past this stage and almost ready to break ground only to find yourself with a funding gap due to a valuer's opinion can be a frustrating experience for developers. Getting an independent valuation report is necessary for getting funding for your project. If managed correctly can also provide a valuable independent opinion that can bring up strengths and weaknesses that you may need to be aware of. Here are a few tips for how to manage this process so you can maximise your chances of success:
Have a Basic Understanding of Valuation Methodology
More experienced developers should be well-versed in valuers' methodologies for getting to their figures. However, it is surprising how little attention most borrowers pay to how valuers come to their conclusions. Understanding this will help you better communicate with the valuer and potentially make your case for the valuations to land where they want to be. Some valuable resources for learning about valuation methodology include:
You can also get information from some of the larger valuation firms.
Engage with a valuer or valuers early in the process
Valuers are professionals who can bring knowledge and experience to their assessment in addition to being a necessary part of the finance process, but they are also human. Building a rapport with them will help shape the relationship as a mutually respectful one rather than adversarial. Having a good relationship with the valuer won't guarantee you'll get the desired result. However, it will enable a good flow of communication and give you a clear picture of where the valuation will likely fall earlier in the process so you can make plans accordingly.
Most lenders have a limited number of valuers on their panel, so you should have a high-level idea of where your project will likely be funded before engaging with the valuer. Hence, you know that the valuation can be used later for financing purposes.
Make sure you have the necessary Documents Available
For a construction valuation, there will be a checklist of requirements for them to complete their job. Having knowledge of the list of requirements upfront and being prepared will save you time, and in the development business, time is money. In particular, for construction valuations, the construction costs are crucial to the net profit of the project and, therefore, the land's Project Related Site Value (PRSV), so this can significantly impact the end financing terms. I suggest you have a standard valuer's checklist ready before speaking with the valuer and sending it through upfront upon engagement. This will help them prioritise your job and get you a quicker outcome.
Consider the Valuer's Opinion (The Valuer isn't Always Wrong)
While valuers can make mistakes like anybody, it is important to remember that they are trained professionals who generally do their job to the best of their ability. Getting angry with a valuer will rarely result in a good outcome and, in many cases, cause them to dig their heels in further. Being overly focused on achieving a valuation figure may also cause the developer to ignore important information that the valuer may uncover while completing their report. We've seen many developers blinded by their own view of the value of their project. Only to find out later down the track that the valuer was accurate in their prediction, and listening to them may have saved some heartache or at least prepared them for a much more complex sale process.
Valuations are one of the essential parts of the financing process. They can be the difference between successfully financing and starting your project or delays that eat away at your profit margins. There is no magic bullet with valuations but managing this process as well as possible is a big part of being a successful property developer.