A property can have many different valuations based upon who is giving the opinion.
More often than not the bank valuation will be more conservative and does not reflect the current market value of the property. Remember the Bank valuation is designed to protect the bank from the risk of you defaulting on the loan and the bank not recovering sufficient monies to cover their investment in you.
A bank valuation is an internal business tool that estimates what a lender can expect to recoup if they ever need to repossess the property and sell it. They also factor in agent commissions and legal costs – so it is quite a different perspective than market value calculations.
If you default on the mortgage they need to sell the property quickly, as they incur all the costs involved in the sale. So the bank valuation is just the amount they think they could reasonably recoup quickly should they need to repossess and sell the property.
If you, unfortunately, encounter financial hardship and you default on your mortgage payments, you will be best to try and sell the property yourself for "market value" before the bank steps in and sells it for whatever they can quickly get.
A bank valuation, although not an accurate reflection of the true property value; it is a major determining factor in whether you qualify for a loan or not. Some lenders will charge you for the bank valuation, some offer free valuations when you apply.
Please Note Well: CONSTRUCTION LOANS: Banks are very conservative by nature, so they like to deal with REAL Property - Property that is built and has a title issued against it. A construction loan goes against this conservative nature as it adds more risk to the equation. You want the bank to lend money to build a property that does not yet exist - How can they repossess it and sell it quickly if you default on it, or if the builder/developer goes in liquidation or some other event that prevents a favourable value of the property? In these situations, the bank wants to see more equity provided by you to them to protect their interests.
A market valuation is an estimation of a property’s value based on the current real estate market. It will most times be higher than the Bank valuation. It takes into account local fluctuations, location, buyer demographics, comparables, and desirability. All of which the Bank valuation doesn't factor in. The bank valuation is simply cold hard numbers.
A market valuation provides either a buyer or a seller with an indicative price that will be paid for the property. It is designed to help you make a decision on how much to buy or sell a property for.
The conservative bank valuation is what the bank uses to determine if it will lend you the money. Even if you have a pre-approved loan, if there is a substantial discrepancy between what you have agreed to pay for the property and what the bank values it at, you may run into some difficulties. If you cannot meet the lenders required loan to value ratio (LVR), you may not get final approval for the loan.
You can try a number of avenues – including
When buying property research is the absolute key. In the case of market value vs. bank valuation – Proper research will reduce the likelihood of agreeing to pay substantially more than the Bank valuation and in turn having issues with the final loan approval.
New Property and Finance specialises in Building New Property and helping everyday Aussies get a home loan to buy them safely.
RISK MANAGEMENT: Using the equity of your own home to buy an investment property does carry some risks. If you don't use your equity wisely, you could end up losing your home, or worst-case scenario, you could lose both your home and your investment property. It is important that you speak to a New Property and Finance consultant to ensure that you are set up correctly to invest in property safely BEFORE you buy any property.
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