Essentially, the banks always make sure they can get their money back – they’re in the business of money; lending it, making it and recouping it. But they’d only sell your property in extreme circumstances of financial distress.
Understanding the value of a property and the amount you wish to borrow, in order to make the purchase, enables the bank/lender to calculate your loan to value ratio (LVR). This is important to you because if you keep the LVR under 80% then you can avoid paying lenders mortgage insurance.
Now, don’t let the process of valuations discourage you from investing, especially if you get a lower valuation amount than you’d hoped for or you’re worried about losing everything. With the right property investment expert on your side mapping out a realistic strategy you can find the right loan type and property price to fit your strategy that supports your cashflow.
At Investor Property we believe the more you know, the better equipped you are to make confident decisions for your future. When it comes to property valuations, understanding how they work will prepare you for planning your next investment.
How a property is valued
Residential property valuation identifies the specifications of your property and compares them to sales data of similar properties sold in the previous 6 months in a comparable location. The final amount is based on the valuer’s opinion of how your property stacks up to others.
The particular details that valuers are looking at when determining a property’s value are:
Why prices can vary for the same property
There are different types of valuations that can give different prices on the same property, and the reason they are different is based on the motivation of a future property sale.
You can already see how the price of one property can be assessed differently and have potentially vastly different final figures. Yet there are more factors that can produce different results, sometimes as much as 15% variance. We personally have seen a difference of $50,000 or 10% in property valuation in new suburbs!
- Opinion – Valuations are a subjective opinion, not an exact science and the valuers can be conservative in their valuation reporting, being liable for the advice they provide and any losses the bank/lender may incur due to a loan and reliance on a valuation. A 10% variance has been deemed acceptable in the industry!
- Type of Buyer – Owner occupier or Investor – the lender apportions increased risk of default to an investor and provides instructions to the Valuer to use certain types of sales evidence or criteria that reduces their valuation. The Property Industry Body has been arguing with the banking regulator about this issue for many years.
- Old data – Because valuers use historical data that’s 6-12 months old, they may not account for property upswings and more current higher prices aren’t included in the value comparison.
- The Lender – Most banks and lenders have preferred valuers that they enlist to provide property valuations. Some lenders looking to reduce their risk profile will engage with valuers known to be more conservative.
- Sales Evidence: When it comes to new house and land being valued it can be difficult for a valuer when there are no comparable sales. In these instances, we see valuers using what we’d consider to be irrelevant data comparing brand new house and land packages in a new estate with great amenity, to an older property in a less appealing location with fewer positive attributes. This can also be the case when a new product is introduced to the market, such as innovative dual key living opportunities. If there’s nothing like it that exists or has sold, it’s hard for a valuer to confidently determine the value for the banks.
For investors, working with valuers can be frustrating. With all the above factors at play, plus lenders’ instructions to disregard market valuation and focus on a forced sale to understand the mortgage security, the whole process of valuing can feel ridiculous. However, better the devil you know, so do your research, get a realistic expectation in mind for your current and proposed property purchase, and provide as much information as you can about your new purchase if it is something difficult to compare.
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