Key points you have to know for property valuation
By Elsa Hsieh, 6 May 2020
By Elsa Hsieh, 6 May 2020
No matter what kind of property you buy in Australia, even if it is just a parcel of land, as long as you apply for a mortgage, the lender needs to value your property, and the result of the valuation will directly affect the loan amount.
Take an example:
For a property with a contract price of $600,000, if the loan ratio is 80%, your home loan will be $ 480,000. If the bank’s valuation is $580,000, and the bank still follows the 80% LVR (loan to value ratio), then you can only borrow $464,000, and additional deposit of $16,000 is required.
Similarly, if the contract price is $600,000, the bank valuation is $620,000, your home loan will be $496,000 according to 80% LVR, your required deposit will be reduced by $16,000.
Why? Does the bank valuation reflect the market value? What are the standard criterias for a valuation report? What is bank valuation used for? Does this have an impact on investors?
The following content is only for residential property; commercial property has different valuation standards.
Bank valuations versus market valuations
Higher than a bank valuation: A market valuation assumes the seller wants the best price possible and isn’t as desperate to sell as a bank. This is generally true, as a seller is motivated to try and get the best price on their home, even if it means waiting longer.
Takes the property market into account: A market valuation gauges the value of a property at a particular moment in time. It’s more sensitive to the fluctuations of the property market.
More useful to buyers and sellers: Unlike a bank valuation, a market valuation is designed to help you make a decision how much to buy or sell a property for by comparing to other, similar property sales.
Lower than market valuations: The bank is estimating the price it would get for the property if sold in the event the buyer can’t make repayments. Unlike a private seller the bank is motivated by the urgency of selling a property to recoup their potential losses.
Selling costs: The lender also has to factor in such selling costs as real estate commission, legal fees and other costs.
More useful to the bank: A bank valuation isn’t really for a buyer at all. It’s for the lender. They may not even choose to share the valuation with you.
Valuation can be a very subjective job as there are no properties exactly the same. We have asked the valuer what factors will drive the value of property valuation. She said geographical location, the quality of the property and sales history of the past 6 months, etc. (click the video below to learn more) are all references for property valuation.
As we all know, the biggest risk for banks is that borrowers can no longer afford loans. When this worst-case scenario occurs, the bank has to sell the property to pay back the loan. At this time, the valuation report is a reference for banks to sell the property! In terms of borrowing costs, future market changes, real estate agency fees, attorney fees, and auctions handling fees will become banks’ “borrowing risk”.
So how can banks minimise “borrowing risk”?
The answer is valuation. In other words, if the market is bad and the house value is underestimated, the bank can resell the property at a higher price to cover all the costs.
In General, the valuation report includes sales history in the past few months. You can see the age of the property, wall materials, house size including the number of rooms, toilets, garage, indoor area and yard area, etc., the landscape, the quality of indoor and outdoor decoration will also be considered. These details are only used in the valuation report with the words “superior or inferior”! The specific price is not accurately indicated by valuers as they are not quantity surveyors. That is why the valuation is a bit subjective.
From a valuation report, an important component is the comparison of recent sales which has been mentioned above. Usually, the valuer will refer to the sales prices of similar house types in the same area for the past six months to estimate property’s value. This information will be behind today’s market. In some regions, the average price may rise by 5% in six months. If the value refers to the sales price six months ago, it is easy to understand why the property value is underestimated.
When the bank ’s valuation is lower than the contract price, don’t panic! Because the valuation does not completely reflect the real market price, and you can do a few different valuations. While it is still necessary to put more cash aside just in case. Once the bank’s valuation is lower than 10%-15% of the contract price, we need to reconsider whether the price of your purchased property is reasonable or not. If the contract includes rent guarantee, cash rebate, furniture package etc, the valuer will deduct these values to reduce lender’s risk.
Some people hold a wait-and-see towards the recent market. While we have to congratulate Midas clients that bank valuations are all back on dollar for recent settlements.
We wish this article could help. A handpick selection of high-quality properties is very important for the long term relationship with our clients. It’s very fortunate that the properties we recommended to our clients all have contract value and property value also did grow in past years. Midas team provides professional, personalised and long-term client care service to help them achieve their goal. Customer satisfaction is the greatest recognition and motivation for us.