Understanding bank valuations and market value

When buying a property or refinancing an existing loan, your lender will often request a bank valuation so they can make sure they are lending responsibly;  they need to make sure that they’re not lending over and above the recoverable value of the property. But property owners often make the mistake of assuming a bank valuation is the same as a market valuation – and can be shocked when a figure they weren’t expecting comes back from their lender. To help clear up this confusion, let’s break down the differences.

A bank valuation is an internal control tool, which reflects what a bank can reasonably expect to recover its losses if they need to take possession and sell the property in circumstances where the borrowers can no longer afford to repay their debt. This is why a bank valuation is often lower than a market valuation. This type of valuation can be requested by either the lender or a mortgage broker.

A market valuation on the other hand, acts as a guide estimating a property’s value on the real estate market – i.e. what someone may purchase the property for at an auction/private sale, etc.  This is usually higher than a bank valuation. This type of valuation on the property may be requested by a buyer, seller or lender.

How valuations are conducted

Now we know the difference between these two types of valuations, let’s unwrap the different ways they can be conducted.

If your home is or will be mortgaged, your lender will almost certainly need to value it. A full short-form valuation is comprehensive inspection of the premises, including measurements of internal and external areas. When you apply for a home loan your lender/broker will send out an independent valuer selected from a panel to inspect and determine the value of the property you wish to buy.

For a full short-form valuation, the appointed valuer will inspect the entire premises – inside and out.  The external part of the valuation involves an assessment of the land – its size, shape and potential zoning for development.  The internal part of the valuation then considers things that make up the inside of the property, i.e. the number of bedrooms, bathrooms, age of the building, its fixtures, plan, etc.

By contrast, a curbside or drive-by valuation, does not involve an inspection of the property. As the name suggests, it occurs outside the property – on the road or by the curb.

The final method is a desktop or electronic valuation. This method involves digital research, turning to the internet to research comparable sales data within a certain radius of the property.

What does a valuation cost?

Property valuations from independent valuers and banks can cost you between $100 and $600. Banks and lenders usually charge you between $100 and $200, as a part of your home loan fees/professional package fee, but independent valuers usually charge upwards of $400.

How to overcome a low valuation

Not all bank valuations will return at the expected price – but this isn’t necessarily something to worry about. Bank valuations are traditionally conservative assessments, sometimes 10 – 20% less than the current selling prices of comparable homes.

If you are concerned that your valuation is not a fair reflection of the value of your property, you can file a dispute with the valuer by using evidence of comparable sale of properties around that area.

You can also request another valuation to be undertaken by a different assessor that is engaged by the same or a different lender.

While the best case scenario is that you can bump up your valuation to something more palatable, there may be times that the issue lies with the vendor – perhaps the property was overpriced to begin with. For situations such as these, it might be worth negotiating a better price to bring your costs down in line with your valuation.

If you’re purchasing property, it makes sense to have an expert adviser on your side to navigate the tricky valuations landscape. At The Hopkins Group we pride ourselves on working to get the best results for our clients. Our mortgages and finance team has experience with a range of lenders and is familiar with a number of different valuers – so you can trust that we keep your options open. Chat to the team about your mortgage and finance needs today.

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General advice warning: The information contained herein is of a general nature only and does not constitute personal advice. You should not act on any recommendation without considering your personal needs, circumstances and objectives. We recommend you obtain professional financial advice specific to your circumstances.