What Is Unimproved Capital Value or UCV?
What is UCV and why is it so important when we assess property?
Performing thorough Due Diligence on a property is something ALL buyers need to do before they commit, but it’s often this Step is skipped, particularly for First Home Buyers who probably don’t know what to even do, or look for when it comes to property Due Diligence.
Firstly, what even is Due Diligence?
Let me explain in simple terms.
Due Diligence is the process of investigating or “looking into” certain aspects of a property, before you buy it.
It is a process by which a Buyer performs searches, checks the accuracy of information provided by the selling agent, and in general, investigates the property at hand, following which an opinion can be formed as to whether the property is suitable to Buy.
Essentially, you are putting a property under the microscope, and “picking it to bits”, BEFORE you make a buying decision. You are playing the role of investigator and finding out as much information about this property so your decision to buy can be an informed one.
There are around 13 steps in my Due Diligence process that I discuss and explain in my soon-to-be-released First Home Buyers E-Kit.
For now, let’s look at one of the most critical pieces of information you should look into when buying a house - it’s UCV, or Unimproved Capital Value.
What is a property’s Unimproved Capital Value or UCV?
The Unimproved Capital Value, or UCV as I like to abbreviate it, is the figure that is assigned to the value of JUST the land ALONE, without the dwelling (house) on it.
You can find the UCV figure on the rates notice for the property, and it is typically the valuation amount used to determine the council rates.
But when it comes to property Due Diligence, and interpreting this figure further, here’s what I like to consider…
Firstly, I like to look for properties where the UCV is relatively HIGH in comparison with the OVERALL estimated value or worth of the whole property combined (house and the land together).
For example, if the UCV is $400,000 and the estimated property value (the house and land combined) is around $550,000, this means, in theory, you are buying the house itself (or the dwelling) for just $150,000.
Going one step further, a good property purchase is one where you are buying BELOW what we call INTRINSIC VALUE (or replacement cost) for the property.
This means that the amount you pay for the property is LESS than what it would cost to replace or rebuild the dwelling on the land.
Let me explain this to you, using a simple example.
Using the previous working scenario above, you purchase a property for $550,000 with the UCV (land value) at $400,000.
To replace the house or to build new, the cost of the new dwelling could be between $300,000 and $350,000, so you have effectively purchased the property for below replacement cost.
The reason I like to see the UCV high in comparison to the overall purchase price of the property, is that the land component APPRECIATES, whilst the house component DEPRECIATES.
Effectively, a higher portion of your investment (the land component) is appreciating, whilst the lower component (the house or dwelling) is depreciating.
This is where you see the magic of capital growth in action, and if you’ve bought in an area where the UCV of the property is proportionately higher than the overall purchase price of the property, you’ll likely see an outperformance in capital growth for this particular property, whereas if you were to buy a property where the UCV was proportionately LOWER, the capital growth will likely be less.
Can you see why the UCV is so important when we’re putting a property under the spotlight?
You could argue it is a good signpost when it comes to assessing the potential for capital growth.
There are, of course, other factors that come into play when it comes to capital growth, which I explain further in my First Home Buyers E-Kit.
You can pre-register to receive your Kit by clicking this LINK.