Property investors are often surprised when they realise the market value of their investment property is not the same as the value placed on it by the bank. So what's going on? And how can you get a higher valuation?
Blogger: Sam Saggers, CEO, Positive Real Estate
While your bank does value the property before lending you capital, they do it with their own interests in mind.
Remember: when dealing with financial institutions, while they help you buy assets they’re purchasing an interest in the same asset and they do so with their own self-preservation in mind.
To cover this, they will value the property lower than the market. This is why it can be so difficult to obtain finance when you’re buying at the bottom of the market. Market sentiment is low, despite all of the positive indications of growth on the way, so banks will be very conservative in lending in such a market.
Lenders assess risk based on factors such as the population of the postcode you’re buying in, market conditions and growth expectations. The higher the risk (in their estimation) the less money they will lend.
Banks might set a limit on the exposure they’ll accept in a certain neighbourhood or location. Also, banks have even been known to limit the amount they lend to housing purchases in total.
Other guidelines lenders use involve LVR and property type:
Type of property
House 80% lend + Lenders Mortgage Insurance (LMI) = 90% LVR
Unit 80% lend + LMI = 90% LVR
Commercial = 70% LVR
Residential Vacant Land 80% lend + LMI = 90% LVR
Rural Vacant Land = 70% LVR
Serviced Apartments = 70% LVR
Seniors Lots = 60% LVR
Hotel Rooms - (Lending unlikely)
Student Accommodation - (Lending unlikely)
Must be larger than 45 square metres.
Smaller complexes (less than 32 units) typically have more lending options
If a bank feels they have reached market saturation in a certain location they may stop lending in that area.
Lenders' Mortgage Insurers don’t always agree with banks in lending decisions, meaning there’s no guarantee you’ll be able to get LMI just because your bank agrees to lend in a certain postcode.
Banks put the onus on valuers to arrive at a proper valuation. This means that if you default on your mortgage and the lender is unable to recover their costs because of the property’s value, the valuer who did the original valuation could end up being sued to recover costs. As you can see, this is a good incentive to aim low when doing a bank valuation.
How to increase your chances of a good valuation
1. Research comparable sales
When assessing the viability of a comparable property, look at the land sizes first as it’s likely to be a big driver of value. Next, compare dwelling size, floor area, bed/bath, age, etc.
Look for the most recent and the most comparable sale first, rather than pick out sales that are the highest. The valuer will certainly do just the same.
2. Speak with local real estate agents
Knowledgeable agents can be a big help in market research and will often be willing to provide you with a list of comparable sales for free.
3. Make the home presentable
If you’re refinancing a home you own, make it as appealing to the eye as possible.
If the valuation has already been done and it’s lower than desired, you could challenge it by providing new sales that support your estimates. However, if the difference is 10 per cent or less, chances are you won’t convince the valuer to budge.
Otherwise, the fastest and simplest way to obtain a higher valuation is to try another lender.