When you put in an application for a home loan, your lender will send out an independent valuer to appraise the property and get an idea of the property’s value. This is a conservative estimation of your property’s value designed to give your bank a way to limit their risk and is different from a market valuation, which provides a more accurate representation of how much you’d make by selling your property at the right time.
The difference between a bank valuation and a market value
Again, the bank valuation generally will, in most cases, be lower than the recent market value because they are different. In addition to how much money to loan the borrower, a lender uses a bank valuation to figure out how much they might get if the property were sold. The lender will only sell a home where the borrower has serious financial issues, or is really late on the monthly mortgage payments so they may not be able to sell the property at the right time or circumstances.
The property’s market value, however, is how much the homeowner would get for the home if it was sold by the owner. When selling a home, watching and monitoring the sale of other homes on the market is a crucial step. The seller then waits for the right time and the best achievable price, before selling the home.
What is a bank valuation used for?
The bank has to ensure that the home loan does not exceed the property value. The home becomes the collateral for a home loan. For the lender, if there are complications with the loan and the borrower is unable to repay the loan, the lender might have to resell the property to recoup the amount of the loan.
In the sale of the home, the lender has to factor in real estate commissions, legal fees and other associated fees.
If you forfeit repayment of the loan, the lender will quickly sell the home in order to avoid accruing interests over a long period of time. It is unfortunate, though, that the home may have to be sold at a lower price with the evident time limitations.
What buyers seek in a bank valuation
For a valuation, there are times when the bank has to access the interior of the home and sometimes, a valuation can be done on the exterior. When attempting to assess the value of a home, the bank may look at:
• The general location
• Zoning determined by the council
• The general size of the property
• The amount of rooms in the home
• Vehicle accessibility to the property
• The structure of the building
• The condition of the building
The bank does not always tell the borrower what the final valuation is. Bank valuations are done in order to work out the amount of money that you can responsibly pay back. The bank will sometimes use a number less than the home’s market value and this is used for internal data to guide the lender and not necessarily to hide anything from the borrower.
Bank valuations are more useful to the lender than to you. The market value is more important to you for informational purposes – this is to give you an idea of what other similar homes are being bought and sold for.
What if the bank valuation is too low?
If the bank valuation comes in too low, you may have trouble securing a home loan in the amount you’ve applied for. This can cause serious problems when purchasing a property. There are a few avenues of redress, however:
• Dispute the original valuation: You can dispute the valuer’s original findings by providing evidence of sales of similar homes in the area. A warning, however: many valuers are unlikely to change their original valuation.
• Request a valuation from a different valuer: You can ask that the bank use another valuer on its panel to perform a valuation. Most lenders will use more than one valuation firm, and a different valuer might provide a different result. This cost will often be carried by the borrower.
• Cover the shortfall from somewhere else: If a new valuation fails to resolve the problem, you might have to look elsewhere to secure funds to cover the shortfall, whether it’s borrowing from a family member or using equity in another property.
Example: Don’s valuation nightmare
Don heads to an auction and is the winning bidder for a two-bedroom unit, with a bid of $750,000. He pays a 20% deposit of $150,000, along with stamp duty fees. He is pre-approved for finance at 80% LVR.
Before settlement, Don’s bank sends a valuer to the home. The valuation comes back at $650,000, meaning the bank will only lend Don a maximum of $520,000, leaving Don $80,000 short.
Don requests a second valuation with similar results. He is now left to either borrow the $80,000 from his family, or try to secure the funds elsewhere.
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A bank valuation serves as an internal regulatory and cautionary tool for lenders that reflects what reasonable amount can be recovered should it be necessary to reclaim and sell the property in a distressed state. This is the reason why the valuation price has to be lower than the market value. A bank valuation also protects the bank from risks. The market value is simply what the home is being sold for - at a particular time and in a specific market.
The Acquire2Retire Expert team, will explain and guide you through this process and run all the required checks to ensure you are able to obtain finance for your investment property acquisition.
