The Lender needs to value my property – why, what does this mean?
Article by Patrick Lynch, Head of Operations
There has been plenty of recent talk – when isn’t there – about the property market, particularly about the rebound in values in Melbourne and Sydney since the election, changes to interest rates and serviceability assessments, etc. As a finance broker, most of what Long Property does revolves around property, whether Clients are purchasing a home or investment, or refinancing an existing loan.
We thought it might be useful to let you know how Lenders assess property and property values, and how to optimise the outcome.
Why does the Lender need a valuation?
Good news – sometimes they don’t. Bad news – most times they do, especially if the Client is borrowing against a high percentage of the property’s value or going to a Lender whose policy always requires a valuation. The valuation is for lending purposes and can determine whether the Lender is willing to provide you with a loan, and how much debt might be appropriate.
Property is one of the “5 ‘C’s of Credit” – collateral (the others are character, capacity, capital and conditions). If the property is unsuitable or insufficient as collateral/ security, the Lender can require changes to your lending strategy and structure or could decline your application outright.
What is a valuation?
A valuation is an assessment conducted by a qualified valuer on behalf of a Lender of how much a property is worth. Valuers analyse certain aspects of the property and gather information including recent comparable sales data to determine a ‘value’. Valuations generally come as either:
- Full Valuation
- Desktop/ Drive-by/ Modelled Valuation
With a full valuation, the Lender will instruct a valuer to inspect the property and produce a report detailing the characteristics (e.g. bedrooms, bathrooms, car spaces, location, size of the land/ building, condition, etc.) and recent comparative sales (local market), producing a value. In a brief (c 15 minutes) inspection, the valuer will note the property details, take photographs and measurements, and maybe ask the Owner (if their home) or Tenant/ Property Manager (investment) some questions.
Valuations where construction is involved are slightly different. For land and build, the valuation (for lending approval) will mostly come in at the aggregate of land value and build cost (i.e. no uplift), whereas the post-completion value might show a higher amount.
With a desktop-type valuation, the valuer might only drive past the property or rely on information from databases. These tend to be less accurate but can be relevant if the expected outcome is likely to be within certain parameters for the proposed lending (e.g. low Loan to Value ratio).
Some Lenders bear the cost of a valuation, but there are others that require this to be paid in full or part by the Client. The cost tends to be c $330 for regular properties but will be higher if the property is considered non-standard by the Lender or their valuer (e.g. luxury by value, location, type, etc.). For commercial properties, the valuation can cost $5,000+.
Market appraisals/ Property profile reports vs. Valuations
A property valuation differs from a market appraisal you might get from a real estate agent, e.g. if you were looking to sell your property or just wanted to get a general idea of value. Property profile reports are available from online property portals. Be wary – they are largely inaccurate, based on historic information about the property, and use algorithms rather than a proper inspection.
Property valuations are carried out by qualified valuers, who have a legal responsibility to the Lenders to whom reports are provided. If a valuation can subsequently be proven inaccurate when a Lender might need to sell the property to repay a loan in default, valuers can be subject to legal action.
It is likely a market appraisal will be higher than a valuation. Sometimes, the real estate agent might have an unconscious bias when providing an appraisal in trying to get your sale listing. Other times, the valuer may subconsciously be conservative or use historic data when the market has moved.
Assessment of a valuation report
Before a valuation is ordered, it is important to have a good estimate of the value. Too high, and the valuer is likely to ignore your suggestion. Too low, and the valuer might trend to this level (it may even set the ceiling). This estimate, plus details of the property and a contact for arranging the inspection, is sent to the Lender so that the valuation can be initiated.
Once the inspection is complete, the valuer seeks comparable properties to form the basis of their assessment. Valuers place the greatest emphasis on comparable properties in the same location that have sold and settled within the past 3 months. This is important – anything that sold in a different area, sold a long time prior to the valuation date, or being advertised for sale is excluded. The comparable properties might comprise a slightly superior and inferior property and a close match. Ultimately, a valuation can be quite subjective – the practice is more an art than a science.
The valuer then prepares a report for review by the Lender. This report is for the attention of the Lender and generally not available to the property owner, even if they paid for the valuation. For a regular property, the report will be with the Lender within 48 hours.
The report has several parts, not only the valuation amount. It will also have commentary on and photos of the property, details of the comparable properties and (if a house, rather than a unit) the valuer’s estimate of replacement building insurance required. It can also often have a rental estimate, i.e. how much the property could earn on the rental market (even if it isn’t currently an investment property). Finally, there will be ratings from 1 (low risk) to 5 (high risk) on factors such as:
- Location and Neighbourhood
- Land (including planning, title, etc.)
- Environmental issues
- Improvements
- Recent Market Direction
- Market Volatility
- Local Economy Impact
- Market Segment Conditions
Any rating that exceeds ‘3’ can often be a concern to the Lender. For example, we’ve recently seen issues with Improvements (e.g. where the valuer has noted some potential necessary repairs) and Market Segment Conditions (where comparable properties don’t support the purchase price).
What to do if unhappy with the outcome (value)?
With a purchase, most valuations match the Contract of Sale – but not always. Even if the outcome doesn’t appear acceptable, what is important is whether the value enables your lending strategy and structure to proceed. Example:
- Your loan is $600,000 against a property you believe is worth $1m (loan to value is 60%).
- If the valuation comes in at $900,000, your loan to value is c 67%.
- The $100,000 lower valuation is immaterial if you can still to achieve your desired outcome.
Where the valuation makes a material impact to your borrowing strategy, there are options. The most common is to ask the valuer to reconsider their report, providing details of alternative comparable properties that might have been missed – these can be from your own research, asking a local real estate agent or arranging a valuation with another Lender (another option, if your strategy allows). This last one is risky – there might be a cost and you could end up with the same valuer, as the firms used by most Lenders are similar! Challenges are mostly unsuccessful or have minimal impact.
How do I maximise my valuation?
If the likelihood of an improved value after the inspection has been completed and report produced is low, it is important to do everything to ensure the optimal outcome beforehand. Make sure the property is in the best condition, clean and tidy – an internet search can provide details of how real estate agents give that ‘feel good factor’ when showing or selling a property.
If the property isn’t your home, but instead an investment property, let your managing agent know early that they might be contacted by a Lender’s valuer to arrange an inspection. This will allow them to guide the tenant and make suitable arrangements for inspection.
Conclusion
Valuations are often necessary for lending but aren’t the full story. They allow the Lender to confirm that the property is suitable as security and what level of debt might be appropriate. There is limited inconvenience to inspection, and it can often prove illuminating. In the end, the focus shouldn’t be solely on the number (value) – it should be whether you can achieve the desired lending outcome.
Long Property blog content provides general information only and has been prepared without taking into account your objectives, financial situation or needs. We recommend that you consider whether it is appropriate for your circumstances and your full financial situation will need to be reviewed prior to acceptance of any offer or product. Nothing on the Long Property website constitutes legal, tax or financial advice and you should always seek professional advice in relation to your individual circumstances.
