When you call a few property valuation companies and request a valuation on a residential property, the first question you generally get asked is: “Is this a bank valuation or a market valuation?”
What’s the difference between a market valuation and a bank valuation?
Market value is the estimated amount for which an asset or liability should exchange on the valuation date between a willing buyer and a winning seller in an arm’s length transaction. This transaction occurs following property marketing and where the parties had each acted knowledgeably, prudently and without compulsion. (Definition: Australian Property Institute – A&NZ Valuation and Property Standards).
A bank valuation is the figure that the lender is prepared to lend against for that particular asset.
Are they always the same?
Sometimes, but not always. We have seen the same property valued by exactly the same valuer (at the same company), within two weeks of each other with a substantial difference in valuation. The only difference in the process was the investor had instructed the first valuation and the bank instructed the second. Interestingly, the investor paid $400 to that company and the bank paid $190 (which was subsequently passed on to the investor).
Why are they different?
Banks prefer to be conservative to protect themselves, which is understandable. This covers them so that if they need to sell the property quickly in the event of a foreclosure, they can easily recover the selling costs and any potential downward movement of the market.
This is why we have seen different valuations on the same property when the loan-to-value (LVR) ratio is different. Bank valuations can be significantly less if the purchaser is borrowing 95 per cent against a property than if they were borrowing 70 per cent – the risk to the lender is a lot greater.
How can they do this?
Valuers have the ability to offer their subjective opinion of value and support that figure with subjective ‘comparable’ properties.
New properties versus established properties.
Where the property to be valued is within a new subdivision or development and is being purchased form the develop, re-sales or sales from other comparable developments should also be provided and considered where available as a cross reference (6.2 of the API Valuation and Property Standards).
Valuers are supposed to compare re-sales or sales, but this rarely happens. They use comparisons of the sales of existing/established properties, which does not always reflect the added value of the property being new. Apples are not being compared with apples.
Why are valuers conservative with the bank valuations?
They can potentially be held liable if a bank suffers a financial loss. There have been situations where valuation companies have been sued. An industry expert once said, “It’s the cheapest insurance policy for banks.”
Unfortunately, this doesn’t help a purchaser if they are dependent on the valuation being at the purchase price.
What if the bank valuation comes in at the asking purchase price?
Normally this is a good result, however, at the end of the day, a lender can reject a valuation and does not need to justify their decision. If a lender’s mortgage insurer is involved they too can override the valuation figure and state what amount they are comfortable in insuring.
Not satisfied with the bank valuation? What can you do about it?
Tip 1: Request a reassessment of the valuation (this rarely happens, but is not impossible) – you will need to provide evidence supporting this request, such comparable properties reflecting the higher value.
Tip 2: Cancel the finance application and try another lender.
Tip 3: If you are purchasing a property and are concerned that it is being sold at above market price as a result of the low bank valuation, instruct and pay an independent valuation company to conduct a ‘market valuation’ of the property. You are more likely to get a true valuation (which is still, of course, subjective to the individual valuer).
How to find out how much a lender will lend.
Submit a finance application with them. Some lenders may give you this figure up front.
But, be prepared:
If you are purchasing a property off-plan, understand that a bank valuation may be significantly lower than the purchase price once it is getting close to completion/settlement. If you elect to go unconditional for the purchase contract, ensure you have room to move if this happens. Obviously, circumstances can change from when you purchase to when you have to prepare to settle on the property. The longer a property is off-plan for completion, the more opportunity there is for this to happen – so take that into consideration when making your decision.