What is a lender property valuation?
A property valuation is generally conducted on request by your lending institution (such as a bank) to ensure that they are lending an appropriate amount against the perceived value of your property investment. Normally ‘the valuation” is produced as a report. A property valuation includes property information – rates, size of the land and building, physical details on the construction and condition of the dwelling, details on any immediate issues that may need addressing – as well as information on comparative sales in the area. It is important to note that a bank valuation, like mortgage insurance when you have to pay this, is paid by you the buyer but the valuation is generally confidential and belongs to the bank, not you the buyer!
You normally hear people discussing house valuations when lending institutions are financing a certain property – it is an essential part of the investment loan or home loan application process.
When obtaining a mortgage or investment loan, a bank requires a valuation to ensure the security value of a property covers the loan. If anything happens and the loan is unpaid, the bank needs to be confident that it can recover any outstanding amount owing on the property if it had to re-sell it.
Lending institutions usually use their own nominated panel or preferred licensed property valuers and there are plenty of anecdotes out there as to how they come up with their values
How do valuers come up with a figure?
For a valuer to do their job, they generally need to visit the property, measure it and note details on the building structure and its condition, number of rooms and layout and their presentation and inclusions, fixtures and fittings and shred areas. They will also note the property’s vehicle access and any garages, carports or out buildings. Sometimes the valuation will include photos of the property highlighting certain features.
Once they have visited the property, they also look at planning restrictions and council zoning and its relative location. The valuer then compares all these attributes to recent comparable sales in the surrounding area before coming up with his ‘bank valuation’.
What is the difference between a Bank Valuation and a real estate agents’ appraisal?
Real estate agents will give you an appraisal on your property on request. They base their appraisals on other sales in the area and their experience in selling in the local area. Real estate agents work for the vendor (which could be you) who pays the commission on the price they achieve, not the official valuation. There is often a significant difference between a ‘market value’, what you should hope to achieve if you sold the property and what the valuer says the property is worth to the bank.
After 20 years in the industry, it would be wonderful to explain fully how banks value a property and what instructions they may give to their valuation panels. However, this remains a mystery! We have had experiences of the same valuer in the same building with virtually identical apartments being valued at substantially different values. We have hundreds of examples on new developments where one bank (or one valuer employed by a certain bank) decides that unlike all other valuers who have been to the development, the particular units are all worth many thousands less than his colleagues agree! For most of 2014-2015 the fastest growing region in Australia outside of Sydney was the northern Gold Coast. We know from experience that virtually all land valuations in the area were around 10% less than the sale price. As land values on an average 500m2 lot, gradually increased over the period, so bank land valuations continued to grow by the same amount but always around 10% less than the sale price. On a couple of occasions when valuers were questioned as to where one could purchase a similar sized lot for the value they had given, no answer was available (and from our own research we knew it was absolutely impossible to buy similar land in the area at the value the bank was giving!). In 2015 we were informed of a few purchases where a property sold at auction was deemed to be worth a lot less than was paid at Auction clearly demonstrating the difference between market value and bank valuation.
Valuers are generalised as conservative. They are tasked with assessing what price the bank could reasonably achieve for the property if the borrower fails to service the loan and it needs to take possession.
A property sale may fall over on a valuation if the property’s value doesn’t come close to the agreed sale price. A buyer, on behalf of their lender, could deem the finance clause in the contract is reason the property can’t go ‘unconditional’. They may at this point decide to exit the contract. It is important to complete your own due diligence in purchasing an investment property and be convinced, from your own research, that you are paying what you believe to be a fair and reasonable price. If you have done this and then later the bank decides not to value “to market” then you should still be reasonably comfortable with your decision.
One of the criteria a valuer will use is ‘comparable sales’ in the neighbourhood. In new developments in particular, they are not permitted to use other sales in the same development as ‘comparables’ and it is often almost impossible to find a new development in the neighbourhood that is a good comparable in terms of size, age, inclusions and location. It is common for “comparable sales” to then be in neighbouring suburbs or closer much older developments that cannot really be true or good comparisons.
It’s important to remember that the job of the property valuer is not a science and valuations can vary considerably from one individual valuer to another.
