Bank valuations – guide or realistic?

//Bank valuations – guide or realistic?

Now this is a question that seems to bring some controversy. We recently came across a document from a company that sells investment properties and as part of their processes in “qualifying” a person to buy one of their properties they pose the question to the potential client, “Do you understand that most bank valuations are 5 to 7% below the contract price?”

Now maybe we’re missing something here (or put more bluntly, what a load of rubbish!), so let’s try to put this into perspective. Is it reasonable to expect that if you buy a property from this company for say $400,000 we should accept the property will most likely be between $20,000 and $28,000 below bank valuation and that if you’re not accepting of this point, you’ve not really passed the “pre-qualifying” test? So, what happens if the property is valued and it comes in say $35,000 below value? Well I guess you’ve already accepted $28,000 so what another $7,000?

If you read down the “test” you will found there is another intriguing point that says something like this, “Do you understand that a pre approval for an ‘off the plan’ purchase is only a conditional approval and that if there’s a valuation short fall on completion that you are ‘on your own’?” (or words to that effect). Now that’s true about the conditional loan point for an off the plan purchase but there’s plenty of people that went belly up a few years ago when all the docklands properties in Victoria settled for this very reason. There was more of an overselling of the properties at inflated prices than there was a drop in valuation. Of course, this led to people panicking as the settlement date got close and then they sold for ‘fire sale prices’ and then of course the Valuers have to take this into consideration.

So back to the point, should the bank’s valuation be accepted as realistic? Well, if a valuation comes in below the purchase price, it certainly should at least send alarm bells to do a whole lot more digging. Over the years, we’ve seen valuations that have been unfair and we’ve tried to challenge the Valuers at times with clear evidence and that doesn’t always work. However as we’ve always done (and will continue to do)  if a property doesn’t value up then the person buying the property should be given clear evidence as to why the Valuer was perhaps a little off and then the customer should have every right to walk away from the property without a salesperson crawling all over them.

Now, we actually haven’t had this issue at all on any properties we’ve sold since we’ve taken the sourcing of properties into our own hands (Jan 2009) and we’re prepared to tackle this issue front on, hence what we’re writing about. Most property businesses selling “investment properties” shy away from this discussion; ask them for their policy on valuation short falls!

One of our convictions is that if a valuation falls short on any property, we notify the customer, with evidence if we disagree (which usually we would because we don’t source properties where this stuff consistently happens – but we can be wrong so it would certainly ring alarm bells for us too) and understand fully if the customer chooses not to proceed, again this has not happen to us yet. We wish we could speak on behalf of others, but we can’t – the key point here though is pretty simple, don’t listen to that type of rubbish.

If you’re using another property to secure a purchase (the term here is cross securitizing your properties) where the business selling the property are pre-warning you about valuations (usually because people place ridiculous margins on top of their properties), you’d better be prepared for the fact that you may never know how the property valued up because the banks accepted the overall security and you just bought something that could have been  over priced … a simple strategy many property sales businesses use.

Always ask for the valuation confirmation from the sales company you’re dealing with, and if they say banks won’t give them the valuation (which at times is correct), ask them to place in writing to you that the valuation for the property you bought was at or above the contract price, and then store that written confirmation, just in case.