Home buyers are often confused when banks provide a valuation for their home that is different to the market value. For many, it is the first time they have had to deal with a bank valuation.
Understandably it can be quite an unpleasant surprise, especially if the difference is substantial. And if you were counting on having that extra equity to help with your deposit or other costs associated with buying a home, it can seem like a real setback.
So what is the difference between bank valuation and market value? This ready reckoner will take you through the key differences and how they might affect your property goals.
What are Property Valuations?
Before diving into the bank valuation and a market value comparison, it's essential to understand the general meaning of property valuations and their significance.
Typically a property valuation determines the estimated value the market deems your property is worth. It's an indicator of how much you may be able to sell it for in an arm’s length transaction, i.e., a transaction between two parties not previously known to each other.
A professional valuer conducts a property appraisal. When assessing your property, the valuer takes into consideration the property features, its location and the neighbourhood.
Likewise, the property valuer will also compare your property with similar properties in the same market. Based on these observations, the valuer will estimate the potential selling price of your house.
Why Do You Need Property Valuations?
Along with property owners looking at selling their property, a property valuation is typically used by the following parties for specific purposes:
- The Council: This enables them to charge appropriate rates.
- Australian Taxation Office (ATO): Refers to property valuation when assessing the capital gain made on the sale of an investment property.
- Bank Valuers and Mortgage Broker: To determine the property's value for lending purposes. Moreover, the bank or lender also needs to establish that the value of your home loan does not exceed the new property value.
- Real Estate Agent: For helping set a sale price during the selling process.
What is a Bank Valuation?
A bank valuation is one of the methods used to determine property values. Your lender or mortgage broker will likely want a valuation done while assessing your home loan application.
Bank valuation helps set a value for the property you intend to purchase. This enables your bank or lender to determine how much loan they may be willing to offer you. Then again, when you apply for refinance or a home loan top-up, a second valuation will be conducted.
Furthermore, bank valuations are part of risk assessment practices. To obtain a bank valuation, your lender will appoint a suitable property valuer to assess the physical property objectively. The valuer will also asses some comparable sales data to arrive at a value that can be considered a reasonable price to sell the property.
Depending on their lending criteria and the deposit you will be contributing, your lender will let you borrow up to a certain percentage of the property's value. Bank valuations may also impact the interest rates on your home loan. This is because lenders tend to offer different rates for different loan amounts and LVRs.
What Does a Bank Valuation Look at?
When conducting a valuation, your bank's property valuers will primarily only consider the following information when determining your property value:
- Property-specific: The building’s structural condition, faults, and the renovations and upgrades implemented will be considered. Furthermore, the property size, fixtures and fittings being sold with the property, the number of bedrooms, garages, and driveways will also be taken into account.
- Others: Valuers also factor in the location and neighbourhood in which the property is situated; and local council zoning, planning and restrictions. Furthermore, if your property is located in an area that frequently experiences flooding or extreme weather events, it may affect the valuation too. Furthermore, as the bank is more focused on numbers, it will consider agency commission, legal fees, taxes and the amount loaned to the owner to arrive at a valuation.
Notably, the valuation is only an estimate provided by a qualified valuer. Therefore, it should not be confused with a building inspection report.
Sometimes the valuation can be conducted from the street and compared to the latest sales data for similar properties in your neighbourhood. Alternatively, access to the inside of your property may be needed for a detailed inspection.
Are Bank Property Valuations Accurate?
Home buyers are often surprised when they discover that the bank value of their property is a conservative estimate. Notably, bank valuations on properties sometimes figure up to 10-20% lower than their market valuations.
What is the Market Value?
Market value refers to the price your property will trade for on the current market.
A market valuation on your property serves as a guide to estimating your property’s value on the real estate market, including auction and private sales. As a result, a buyer, lender or seller may seek it.
In simple terms, a market valuation can help you determine a suitable property price. This will enable you to establish an appropriate selling price in the open and competitive property market.
Also, since the selling price typically includes negotiation between buyers and sellers, there's more space for emotion and subjectivity compared to a bank valuation. For example, a potential buyer may fancy a house to the extent of stepping beyond the budget to buy it. For this reason, market valuations are generally higher than bank valuations.
Market valuation factors in data obtained from similar property sales in the area and surrounding areas at a specific time to establish a reasonable value. Both home buyers and sellers can leverage the market valuation as the base to further negotiate a mutually acceptable price.
How Do Real Estate Agents Do a Market Valuation?
Notably, only a legally qualified valuer can provide genuine market valuations. On the other hand, a real estate agent offers a market appraisal, which is an informal valuation and usually free of charge.
Your real estate agent will typically prepare a market appraisal by comparing recent sales of similar properties comparable to yours. An agent's appraisal is not legally enforceable. Instead, it’s the agent's closest estimate regarding your property value.
A real estate agent usually prepares a market appraisal by comparing recently sold properties that are comparable to yours. This appraisal is not legally enforceable and is their best estimate of what your property is worth. The realtor will take into account the following:
- Property-Specific Criteria: Features, including the land size, building condition, number of bedrooms, bathrooms, car spaces, outdoor areas and buildings, will be factored in. The valuation will also consider the number and quality of fixtures and fittings that will be sold with the property. For example, if your house has been recently refurbished and the land is significantly larger with more oversized bedrooms, your property would be priced at the higher end of the spectrum.
- Other Criteria: This includes the actual sale price of comparable properties in the area in the past 3-6 months, the attractiveness of the location and the level of planning and restrictions. For instance, in places like Melbourne, the prices in some much sought-after areas like Brighton are higher than the median price. So these places automatically have a higher market valuation.
Likewise, some buyers dislike this aspect if the local council of a particular place has many planning restrictions. Therefore, real estate agents typically consider all these factors when marketing the property.
Finally, when doing an appraisal, suppose your agent may find your situation unique, i.e., no comparable sales made in recent months in the area, or your property is incredibly outstanding, making it difficult to predict its potential value. In that case, they will combine their experience with the closest comparable property to determine the anticipated value of your property.
When appraising your property, and prior to listing, your agent will generally consider all of the above factors and probably a few others before offering a price estimation. Many homeowners hire a professional, independent valuer to determine their property value.
What is the Difference Between a Bank Valuation and Market Value?
In this segment, we'll compare various aspects of bank valuation vs market value to understand the critical differences between the two.
The bank value is used chiefly by your home loan provider for lender valuation purposes. Lenders do not have any emotional attachment to the house and try to be as objective as possible when getting a valuation.
A market valuation is used mainly by the seller and prospective home buyer when selling and buying property. Therefore, the owner will try to be as optimistic as possible during the market valuation.
If a bank has to sell your property, it would likely be like a distress sale to mitigate an existing risk. For this reason, your banker will want to sell your property as quickly as possible to recover their money. Unfortunately, this means they usually won't have time for cosmetic improvements to increase your property value. Therefore the main goal during a valuation is to assess the resale value of your home.
Buyers and sellers consider market valuations to set an average price that both can negotiate. Most sellers look for the highest price and wait until they find a suitable price. On the other hand, bankers only want to ensure that they attain a specific amount.
Bank valuations are usually conservative as they are concerned about the numbers. In contrast, most sellers look for the highest price and wait until they find a suitable price.
Moreover, qualitative rather than quantitative factors highly influence the property prices market. So market valuations tend to be higher than lender valuations. For instance, there may be more bidders for a property during summer. This influences buyers' emotions to bid competitively as there is more significant competition for the same property.
Why Do Banks Use their Own Valuations?
For starters, banks or lenders must ensure that your home loan amount is not more than the property value. For example, if you qualified for an 80% loan-to-value ratio (LVR) home loan on a $600,000 property, the bank will lend you $480,000.
Secondly, banks and lenders do their own valuations to know the value they can recover should the home buyer become a defaulter. In this case, the bank may have to take possession of that property and sell it as soon as possible at a minimum cost.
What Happens if Bank Valuation is Lower than Purchase Price?
When the bank values are lower than the purchase price, it is known as a valuation shortfall. Though not frequent, the implications may vary depending on the lender if the bank's valuation is lower than the home purchase price.
If the valuation is set way below the purchase price, the bank may decide to reject your loan application and will not offer you a loan at all.
In contrast, if the valuation is set marginally lower than the purchase price, the bank may offer you a loan based on that price. As a result, you may need a larger deposit to make up the deficit between the valuation and your purchase price.
Here's what can you can do in such as situation:
- Challenge the Bank Valuation: You could challenge the valuation if the valuer has not been using the latest comparable sales data or has failed to consider high-value recent sales. Providing evidence of your claims may help you get a revised valuation report. However, you may need to pay for the second report. Bank valuation costs vary from $200 to $600. Also, you could get another valuation through a more experienced valuation firm, which could resolve the issue.
- Approach Another Lender: You could apply with a different lender who may be willing to you offer you a loan matching your financial situation and personal objectives. Noteworthily, depending on how your solicitor has framed the offer, you may be able to withdraw or revise the offer using the finance clause. An offer made at auction means the sale is unconditional. So if you withdraw from the sale, you pay your deposit and more.
- Increase Your Borrowing: If the valuation is lower than the home value, you could try to borrow more money from your current lender. Some lenders offer up to up to 95% of the property value, which means you'll only have to pay a 5% deposit. Nonetheless, if you contribute less than a 20% deposit, you'll likely have to pay lenders mortgage insurance or LMI. This may increase the overall cost of your loan by a few thousand. Moreover, you should know that since LMI is often combined into your mortgage, you'll also be charged interest on that amount.
- Access the Equity in Another Property: If you own significant equity in another property and leverage some of it to fund another home purchase, your bank may allow you to borrow more. Likewise, if you're a first home buyer, you could ask a family member to act as a guarantor for a loan by offering equity in their property as security.
- Seek Expert Advice: It's also advisable to consult with your broker. A good mortgage broker may know specialist financial products or lenders that help you navigate this scenario.
How Joust Can Help You
Bank and market valuations may differ, impacting how much you can borrow.
At Joust, our Instant Match online tool helps residential and property investors access suitable lenders who can offer them finance products matching their specific requirements. As a result, our customers save time and benefit from competitive rates and terms.
If you're looking for a home loan, our team of experts can provide you with the help and advice you need to make an informed decision.
How Long Does a Bank Valuation Take?
The time taken for a bank valuation depends on how soon the vendor offers access to the property and if a full valuation is needed. It typically takes 1-2 days for straightforward kerbside or desktop valuation. However, a full valuation could take up to 7 working days.
Why Do Banks Undervalue Property?
If a bank has to sell your property, it would almost certainly be in the nature of a distress sale to address an existing risk. Banks undervalue property because if they’re forced to sell your property to recover their money, they want to be sure that they’ll recover the debt amount and additional expenses like real estate commissions and legal fees.
When is the Best Time to get a Bank Valuation?
It is advisable to get a bank valuation done if the property prices in your area have been rising and seem to be getting stronger each week. This is because your valuer will likely have an optimistic outlook on your property value in such circumstances.
Also, getting an updated valuation soon after house renovations and improvements is a good idea. It will allow your valuer to assess your asset in new condition and be suitable for presentation.
How Can You Increase the Value of Your Property?
To increase the value of your property, ensure that it's tidy and well-maintained at all times. Put away the clutter and keep your gardens and lawns well-presented.
Make a list of the attractive features of your home, such as new flooring, solar panels, top-quality home appliances and fittings, and new carpets. Highlighting these less prominent features will help nab a better valuation.
In addition, giving your agent a heads up on community development initiatives in the pipeline, for example, a new indoor games facility or a playground, could potentially increase the value of your property.
Note: The information in this article is general in nature and should not be considered personal or financial advice. You should always seek professional advice or assistance before making any financial decisions.