Receiving a low bank valuation can really put the breaks on an investment property career. This article is going to cover what goes into the valuation process, different types of valuations and how investors can minimise the threat of receiving a low valuation.
How is a valuation determined?
‘Fair market value’ is an impartial process that can accurately valuate a property, and uses a straightforward equation to reach a result. The simple definition of fair market value is the price a property would sell for, if both the buyer and seller:
1. Are under no urge to buy or sell
2. Have similar knowledge about the property
3. Are willing to buy or sell
Banks however use a different approach when finding the value of a property. This method is usually based upon how much a property will sell for within a certain time period.
When valuating a property, several aspects need to be considered to obtain a fair valuation, the most important variable is:
Evidence: Is a critical part of a valuation, nothing speaks the truth like facts. A good example of evidence would be similar properties sold in the nearby area within a specific time frame (usually 6 months or less). Using data that goes back years is not particularly useful as inflation increases each year and market conditions are always changing. Current properties on the market should be ignored and only sales of unconditional properties be considered.
Obviously, no two properties are ever the same and factors such as location, size, renovations, property condition and size of land all need to be weighed up. As a result, the appraiser (the person carrying out the valuation) shouldn’t provide a valuation as an exact figure such as $450,000, but rather a ball park figure with a about 10% margin on either side ($440,000- $460,000).
Most appraisers are experts in their local area and know more than most about the current housing markets. On average, appraisers will see several similar properties in a single day, taking down important notes that will later be used to write a concise report. Several properties can be visited in one day which means the appraiser does not dwell too long at each property.
Types of valuations
Most commonly used valuations are:
Full valuation: As the name suggests, this will involve the appraiser taking a thorough look at the property, this includes noting down room and land measurements and even taking photos inside the property.
Outside valuation: These types of valuations do not require the appraiser to go inside the property, instead they view it from the outside and take relevant notes.
Desktop valuation: Data is taken from the property blueprints such as room sizes, number of bathrooms, and land measurements alongside local area information to provide an accurate valuation. Appraisers aren’t required to view the property at all in this case.
Polices with a bank valuation
Banks have a number of different rules when valuating a property and usually won’t provide a full valuation without good reason. For example, investors who are purchasing a property for under $500,000 and are borrowing less than 80% of the value of the property, banks in this case won’t carry out a full valuation. However, if investors are trying to refinance their current loan to a new lender, banks will usually conduct a full valuation.
Based on how much money the investor is lending decides which valuation the bank will carry out. Loans of around 50% of the total value of the property will usually involve desktop valuations. Applications that include any sort of mortgage insurance (mandatory if an investor lends more than 80% of the total value of the property) will almost always involve a full valuation.
Lenders have their own team of appraisers and will not accept a valuation from anyone who has not already been preapproved by their panel. Time constrictions are in affect on most property revaluations that usually last around 12 months. Banks don’t pay too much attention to market conditions in each area as it’s not a practical use of their time or resources. Exceptions to this rule occur when renovations or major alterations have been made to a property.
Note: Lenders usually won’t accept valuations that investors have conducted on their own, regardless if it meets their criteria or not. Contact the lender before hand to find out their polices.
Reasons why you may get stung with a low valuation
Appraisers can slap investors with a low valuation for a number of reasons, these include:
- Investors being unrealistic: Investors can really get attached to their properties, so much so that they place unrealistic price tags on their property. Investors and appraisers have two different goals when it comes to valuating a property, the investor wants to get as much as possible, whereas the appraiser sits on the other side of that spectrum.
- Bad market conditions: If similar properties in the area haven’t been selling there will be less evidence to justify a higher valuation, meaning appraisers will give a more conservative number. While appraisers may agree with the investor that their property is worth more than the actual valuation, due to the lack of evidence to support these claims and the fear of being sued by lenders, appraisers must valuate based on facts and information.
- Time of sale: Properties based in larger urban cities will usually sell a lot faster than properties located in county areas or deeper inland. Lenders won’t wait several months to sell a property and will enforce the appraiser to come up with a valuation based on a much shorter sale period (5-10 weeks).
- Poor appraisers: Due to the amount of pressure appraisers are under by the banks to provide more valuations at competitive rates, this can have a knock on effect on the quality and legitimacy of some valuations. Appraisers can often find themselves having to view several properties a day because of the agreements in place with the banks, this causes work to be rushed and compromises the integrity of some valuations. Although extremely uncommon, this type of work does happen now and again.
7 Ways investors can safeguard their property against poor valuations
Nobody wants to get a poor valuation for their property, so here are a few tips investors can implement to ensure they don’t share this fate.
- Research: As with any part of real estate, researching is key. Investors should visit a few Realtors in the local area and try and find sales of similar properties to give them a rough ballpark figure. Note: Realtors generally price properties slightly above what they are worth giving investors the ‘best price on the day’ valuation. Some may even show sales of properties which may not be comparable. Our advice would be to visit the properties cited by the Realtor and see for yourself if they are in fact similar.
- Private valuations: Earlier we talked about banks not accepting valuations carried out by investors or appraisers who are not listed in their preapproved panel. Ask the lender who is in their preapproved panel of appraisers are and pick one located closest to the property. Although it may not be accepted by the lender, investors can meet the appraiser at the property and speak with them at length to gain a better understanding of things and receive a fair valuation. Chances are the lender will then use the same person to run their own valuation, and come back with an identical figure. Note: A typical valuation will set investors back around $500, be sure to tell them it will be used to obtain a mortgage.
- Estimating the value of your property: Every lender application form will have a question asking the investor how much their property is worth. Providing a slightly higher estimation (by 5-10%) does no harm, but don’t go too high as it will most likely be ignored.
- Timing: If the current housing market is on a downtrend, chances are the value of properties will be also be less than desirable. For investors who are looking to investment in more properties and wish to leverage the equity in an existing property to purchase a new one, wait until the property appreciates before getting a valuation.
- Types of valuation: Newly renovated properties that have received a makeover will gain a much more favourable valuation with a full valuation than either an outside or desktop valuation. On the other hand, properties with poor interior would be better of with an outside or desktop valuation. Note: Investors can potentially influence which type of valuation their property receives. By opting for a loan of 80% with mortgage insurance will guarantee the bank will perform a full valuation. Investors can later reduce the amount borrowed after valuation has taken place. We suggest asking the bank if they can provide a full valuation first before going down this road.
- Challenging valuations: Investors who feel the valuation conducted on their property is unjust can appeal by showing supporting evidence to back their challenge. Such evidence can include comparable sales that happened recently which may have been over looked by the appraiser, without evidence the challenge will not get very far. A second option is to ask the lender to run a second valuation of the property usually at the expense of the investors, though they may not always agree to this.
- Changing lenders: After implementing all tips suggested in this article, investors who still somehow managed to get a poor valuation can change lenders and try again.
Should investors be take valuations seriously?
It should come as no surprise that lenders will always provide conservative valuations, after all it’s in their best interests. Our expert opinion is this: if a bank decides to value a property lower than the purchase price, we most definitely want to see some sort of evidence to why the banks valuation is incorrect before we sign anything.
Australia has hundreds of thousands of properties and investors should never risk overpaying. From our own experiences, it’s very seldom that we see a bank valuation come in lower than the asking price, and when it does, we suggest proceeding with the upmost caution. Valuations that come in below the asking price can be used a crutch for investors to negotiate and purchase a property for less than the asking price.
We hope this article has been an informative guide on how valuations work, what to expect and how investors can safeguard their properties against receiving low valuations.