Financial Game Changer #3: The Property Valuation
You may think that the market determines the price of property, but have you ever thought what would happen if the bank thought otherwise? An incorrect valuation by the bank can literally wipe tens of thousands of dollars from the value of your assets and these days it can happen all too frequently.
Myth #3 The bank valuation on your property is the final word on how much you can borrow or refinance through your lender.
Usually when we borrow money from a bank, either to refinance or to buy direct, a bank will conduct a "bank valuation" on the property to ensure that the value of the asset is in line with the price we have prepared to pay for it.
In most cases, if the property has gone to market either through auction or private treaty, then the market determined price provides a strong influence for the value of the property and the bank is willing to lend accordingly.
As an investor though, our ability to access equity in order to leverage into other assets, through refinancing or other means, is determined by the value of our properties. And how are these values determined? You guessed it – from the bank valuation.
Contrary to popular terminology, a “bank valuation” is actually conducted by an independent valuation company who contract to the bank under their “panel” of Valuers. These select Valuers are chosen at random or by postcode for each property the bank is asked to review.
What is not common knowledge is that bank valuations can be quite subjective and can vary in quality in much the same way any service varies.
This is not to say that all Valuers are shoddy, far from it. Like many industries these days though, this all-important task has been greatly influenced by the following factors:
- Companies (banks) looking to cut costs
Result = Rushed valuations performed by lower-skilled and cheaper workers such as graduates
- Rising insurance premiums
Result = Smaller margins forcing higher turnover of Valuations
- Higher risk of litigation
Result = More likely to underprice a properties value than price too high
The end result is that the value of your assets can end up being determined by an underskilled and overworked Valuer who is more motivated to underprice the property for fear of being sued.
As I said earlier though, this isn’t the case amongst all Valuers, but it is important to be aware that bank valuations are not written in stone. The end result can have a dramatic impact on your financial affairs when you’re refinancing so if you’re not happy with the result, ask the bank to perform another valuation and be present when they do so to make sure they’re being thorough. The most comprehensive “full valuation” will be performed by inspecting the property both internally and externally, analyzing comparative sales data and even going so far as to review the strata records. A “desk” or “kerbside” valuation is not sufficient.
When we buy property for our clients we always ensure we have a comprehensive “full valuation” performed on each and every property before approaching the vendor with a price. We pay full price for the Valuation (about $550) and it involves a thorough inspection of the property. That way we know that if there was any discrepancy between the purchase price and the bank valuation, we always have supporting documentation to support the properties value.
If you’re not happy with the result from the bank valuation and they’re not willing to review your requests, remember you can always change lenders. These days banks are looking for more customers and you might be surprised what options are out there.