When buying property, it’s good to know the market value. After all, you want to know you’re paying a fair amount. But the property’s value is an important consideration for your lender too. And their valuation may be quite different.
Just how much is a property worth? Well, it depends on who’s asking.
When buying a property you’ll find there are different terms to estimate how much it’s worth, including market value, market appraisal and bank value.
And you’ll most likely find they can differ, which is be confusing. Fortunately, we’ve got the low down to help you understand the difference and how bank valuations affect your loan.
Market valuations vs market appraisals vs bank valuations, so what’s the difference?
A market valuation, which is usually undertaken by a professional and qualified valuer, gives an estimate of the expected sale price of the property on the open rales estate market. It’s based on current market trends and is valuable to both sellers and buyers during sale prices negotiations. It can also be conducted for tax purposes for owners. (ie. to calculate the taxable capital gain or capital loss)
A market appraisal (aka market estimate), on the other hand, is usually completed by a real estate agent and is often done to give homeowners an idea of how much their property could sell for in the current market.
A bank valuation has an entirely different purpose. When you’re buying a home or refinancing your loan, the bank will often need to conduct a bank valuation and it can fee like areal sting if the bank valuation comes in lower than expected. But there’s a reason for this. Bank are in the risk mitigation business, so their valuation is designed to provide an estimate of the property’s sale price as security against your loan should you default.
The valuation can be more conservative because lenders don’t take into consideration the property’s value in terms of an investment. They’re looking at the property in terms of recouping loan costs with quick sale. And, rather than being provided by a real estate agent who may have a vested interest in price, bank valuations must be conducted by an accredited valuer.
Bank valuation process
When conducting a bank valuation, typically the following factors are considered by the appraiser:
- current market conditions – just like with a market valuation, the current market climate and recent sales data for your area are examined.
- physical attributes- the location of the property, surrounding amenities, its layout, fixtures and features, size, structural condition, and council zone information are considered.
Upon completing of the valuation, a report is provided to the lender to be used in assessing your loan application. This bring us to our next point.
Pitfalls to watch out for
They say that being forewarned is forearmed, so here are some pitfalls to be aware of when it comes to bank valuations.
Say you apply for pre-approval, find a place and make an offer, but then the bank valuations is a lot less. Or you pay a deposit on a $700,000 off-the-plan property, only to have your bank come back with a $650,000 bank valuation when it’s time to move in. If the bank valuation is less than expected, it may lead to the bank loaning you less than you hoped for. You may need to come up with extra funds to close the gap or pay lenders mortgage insurance (LMI), which can cost thousands of dollars.
Alternatively, you loan application could be rejected outright, therefore it’s a good idea to save up a bit of a buffer to handle any valuation headaches that may crop up. Working with an experience broker, like us can help you to prepare for any nasty surprises and make a smoother home-buying journey.
Find out more! If you’re on the hunt for the perfect home, let us help you track down the right loan and lender for you.
We’ll be there every step of the way to help you navigate the loan process with ease and help get the keys in your hand.