A property valuation is a key step in your home or investment property purchase, as it will determine how much the lender is willing to provide you with in terms of finance. The valuation is completed by a Certified Practising Valuer (CPV), whose job is to determine the value of the property for the lender in the event that they had to sell the property. Each valuer will treat the range of aspects differently so valuations can vary, but what can be done if you receive a valuation that you feel is too low.
This week we’re exploring what factors determine the property valuation, how you can avoid or minimse the risk of receiving a poor valuation and what your options are if you do.
What is a property valuation?
Let’s start with the basics. A property valuation is the opinion of the licensed valuer based on the current market conditions and expected changes. Market conditions are typically measured with comparable sales in the area of similar properties, as well as other external factors such as economic and environmental. A range of other factors will be used to determine the property’s value, including:
- Where the property is located
- The structure and condition of the building
- Any faults and issues with the building
- Surrounding properties in the area
- Features of the property
- Zoning within the local council
- Recent comparable sales
- Any caveats or encumbrances on the property
A property valuation is typically more accurate than an appraisal, and is commonly relied on for important transactions such as purchases, sales and separation agreements in the event of a divorce. The property valuation is also different to a market valuation, as the market value is typically the highest price that a buyer would be prepared to pay that a seller would accept, which can be driven by emotion. This is why the property value determined by the licensed valuer for the bank could be lower than the property could likely be sold for on the open market.
How does the lender use the valuation?
Once your lender receives the valuation, they will review it internally and ensure that they are comfortable with the report and the figure. This valuation can influence how much the lender is willing to provide you for finance. Let’s consider an example to illustrate how this works:
Fred & Janet have just purchased their new home in Double Bay, Sydney for $3.5M and are planning to borrow 80% of the purchase price, which would equate to $2.8M. Fred and Janet apply for their loan and the bank arranges for a licensed value to determine the property’s value. Unfortunately, they advise that they feel the property is worth $3.3M, $200,000 less than Fred and Janet have agreed to purchase the property for. Fred and Janet have a number of options here, however it could mean that given the bank is only willing to provide 80% of the property’s value, they will now only lend $2.64M, $160,000 less than Fred and Janet were expecting.
As you can see, the property valuation can have a potentially significant impact on your plans, so it’s important to do your homework and take necessary precautions, which we’ll touch on shortly.
Can I challenge the valuation?
One of the most common reasons that a valuer will derive a value that is significantly lower than the purchase price is due to a lack of comparable properties or sales in the local area. It’s important to first determine from the valuation report why the property has been valued at a price lower than the purchase or contract price. There could be errors in the report, or certain items may have been missed that need to be adjusted. In the event of a desktop or kerbside valuation, whereby the valuer doesn’t even actually enter the property, they may miss important features of the property.
If you feel that the property valuation is too low, you can submit a request to have it re-assessed, however it is not very common that a licensed valuer will admit their mistake and make the correction unless it is clear that a mistake has been made. We would recommend gathering your data, checking on comparable sales, and even requesting an appraisal from a licensed real estate agent before challenging the valuation. If you are seeking an appraisal, do bear in mind that real estate agents are sales people, so you should expect that their valuation will be higher than the valuer’s.
What can I do if I get a poor valuation?
One option here is also to simply withdraw your application for finance with that particular lender, and re-apply via a different lender to ascertain whether the valuation may come in higher. Given the time and hassle of doing so, we’d only suggest considering this option if the current valuer you feel is being particularly unreasonable. There is no guarantee that the new lender will provide a higher valuation, and you may find that in fact the new lender’s valuer applies a lower valuation leaving you with little options.
The second option here is to simply cover the difference with cash or other sources of funding. If, in the example of Fred and Janet, you find that the bank is willing to lend you $160,000 less than expected, you may be in a position where you need to find another avenue for these funds. This is often the most seamless option if you have the liquidity and funds available to cover this, as it saves the need to challenge the valuation or seek another financer to cover it.
The third option is challenging the valuation, which as we’ve already outlined, is often not a successful strategy as very few valuers are willing to change their mind once their report is complete.
If you are in a situation where you’ve received a poor valuation or want to safeguard yourself from this possibility for an upcoming settlement, reach out to our team of mortgage brokers and we will assist to walk through the options and identify the most suitable path forward.
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