Property valuations are an important part of every property purchase; therefore it is important to understand them and the issues that may arise. Finding out what your property is worth can help you when you want to sell, or determine how much equity you can access if you want to invest or renovate.
When a buyer applies for a mortgage, their lender will refer to a certified valuer and it is their job to estimate the realistic price of the property. To assess a property’s value, the valuer will measure the following factors:
• Building structure and condition
• Size of the property
• Number and type of rooms
• Vehicle accessibility
• Perceived market conditions
The valuer then composes a comprehensive report incorporating photos, market conditions, and recent comparable sales in the surrounding area. Valuation reports cost around $300 - $800 in most Australian cities. Assessing the value of a property is not an exact science, which is why valuations can come in at unexpected values. A valuer will often air on he side of caution, as it is their job to consider the worst-case scenario. If a purchaser is unable to make their loan repayments, lenders will have to repossess the property and sell it in order to cover their losses. As such a valuer needs to makes sure lenders could quickly sell a property and recoup all costs under current market conditions.
So what does this mean for your loan? A bank will only lend you a percentage of the value indicated by the valuer, known as the Loan to Value Ratio (LVR). In the case your property is undervalued, the bank only will lend you a percentage of what the valuer says, rather than what you or other buyers agree the property is worth.
• The bank is paying a 90% LVR.
• Contract price of $300,000 so a loan of $270,000.
• If the lender values the home at only $280,000, that leaves a $20,000 shortfall
• The bank will only loan 90% of $280,000 which is $252,000 so the purchaser will need to inject an additional $18,000 to purchase this property.
In the event of a valuation shortfall there are a number of avenues one can take, a good mortgage broker should exhaust all options:
1. Dispute the valuation – You will have to provide evidence that the property is worth the agreed price, however, valuers are often reluctant to changing their opinion.
2. Ask another valuer – getting a second opinion may work in your favour.
3. Increase LVR – Some lenders may lend up to 95%, this may be enough to get a purchase over the line without putting in additional funds.
Valuations are only an opinion from an individual valuer; the true value of a property is what the market is willing to pay. Real estate is a longterm investment and valuations can create a short-term problem. If we invest in the correct market with the right growth fundamentals, short valuations are peanuts compared to the growth of that property. Work with the right people to mitigate the chance of this happening and also get the best possible result should it occur.