Why Is There A Difference Between Bank Property Valuations vs Market Valuations
You are with proceeding with the purchase of your new property and your lender or bank is just about to value the property so they can finalise your mortgage approval. Is the figure they come up with a true measure of market value? The answer is typically not.
Why are Bank property valuations more conservative than the market value of your property?
In the world of “What is my house worth?” you have a moving target. Borrowers need to have a clear idea of market value as opposed to the bank’s property valuation of a potential home. Your bank’s property valuations will not usually mirror market value – it is usually considerably more conservative.
What does this mean?
When a bank forecloses on a property, they will be concerned about recovering the money owed to them on the property with it been sold in a timely manner. The bank will also need to recoup costs like legal fees, interest and real estate commissions. They are motivated by the urgency to repay the debt in full asap. The property valuations they place on your home are conservative in case you cannot fulfil your end of the deal. It is done for the bank to asses the risk of a property, not the purchaser. Bank valuations influence what banks will end up lending to you with the loan to value ratio (LVR).
Banks often change their lending criteria. During the global financial crisis for example. Internal bank policies changed and borrowers need to be aware of that.
If your bank tends to value your property below market value – there is one business that will value your property above market value – insurance companies. If your property is destroyed due to say a fire, earthquake etc., insurers need to devise a figure that reasonably reflects what they would have to pay out to replace your property. They need to come up with a figure that takes into account inflation, rising construction costs or changes in our CPI. The higher value is their safety net.
How do you calculate the market value of a property?
The estimated market value of your home is an estimate of that property’s potential market price based on external data of similar property – it is the value of your home at a particular time in a particular market. It is the price at which a house will sell within a reasonable amount of time. This value helps you determine your potential home’s price on the market. With market value, the seller can usually wait for the best price – not like a bank who needs to mobe quickly.
In today’s market, your potential home is worth what the current market deems its worth. Its value depends on its location, its age, its condition, its size, the surrounding neighbourhood and what other properties in the neighbourhood are selling at. Direct comparison with recent comparable sales is your main component in assessing the value of a home. Although market value is a guide, it is a more accurate representation of the property’s current value.
This is where a mortgage broker can help you with property valuations that are lower than you expected, they can assist you with possibly ordering additional valuations from other banks & lenders (fees may apply for the valuation costs). Local real estate agents can also give you a market analysis of the area you are interested in.