A common scenario I have come across in today’s lending environment is that many funders have guidelines that discriminate against new properties.
Blogger: Sam Saggers, CEO, Positive Real Estate
State governments are trying to keep homes affordable and are encouraging the construction of new housing with stamp duty concessions and various incentives, however now with so much bureaucracy involved, we are finding some valuers prices conservative to say the least; with new house valuations coming in at the value of old houses! This concept seems daft to me - because it's encouraging new properties to be sold at the same value as old properties - which is ludicrous.
It puts purchasers at risk of being unable to being able to finance the property. It freezes the liquidity in the market as buyers quite often have to tip in any monies to fund valuation shortfalls. And the banks and lenders are taking more control of assets and the LVR's by these ludicrous policies. I believe valuations are now at a point of potentially road-blocking progression and there is now a congestion of supply and a massive shortage of properties!
Governments can deliver affordable housing in new urban sprawl corridors, where building and land is cheap, however the conundrum that investors face is often banks and their policies are not supportive of government town planning.
For instance, you would generally believe a brand new property could be compared to other brand new nearby properties that have sold and settled, and that comparable data could determine the value. Remember “compare the pair” or direct comparison valuations!
However today we are finding this is not so! Many lenders will not allow valuers to do this. The instructions much of the time will be clear from the bank to the valuer; such as, “use second hand re-sales as the comparable data”.
Today we are finding this happens nearly every time you buy a new property. As a result, we have had to implement strategies to align with the changing valuation climate for our clients. We realise for success in today's market, it’s important that our investors examine the value difference between old properties and new properties, so the gap between the two isn’t far apart.
The further apart you are, the more volatile your valuation will be.
Another piece of the puzzle is risk.
Valuations Carry Risk
It is important to note the distinction between the way lenders and the borrowers view valuations. Lenders have effectively outsourced their risk to valuers. If banks are not able to recover their costs on a bad loan, then valuers risk getting sued. When arriving at a valuation, the valuer must take into consideration the terms of their professional indemnity insurance, which is usually valid only when the lender provides finance using a conservative loan-to-valuation ratio. Bank valuations are not generally based on true market value of a property, but are rather based on the level of risk to the bank.
Complicating the situation even further. Not all valuers assess market conditions the same, nor properties.
- For more on this topic, check out the next issue (December) of Smart Property Investment magazine where Sam discusses the three different types of valuations in his column. Also keep an eye on his blog here on SPIonline next week as he delves into some real life examples of valuations, as well as provides a FREE investor checklist.