When it comes to the purchase of an existing property, most people understand that bank valuations and agent appraisals vary quite significantly. However, not so many people understand the differences in bank valuations with new property, how it works and what can affect the variations. Because, in most cases they are a completely different ball game.
First, let’s discuss what a valuation is and why you need one.
If you’re purchasing a property and borrowing from a lender, you are essentially going into a partnership with a bank. You will be putting in a portion (the deposit or equity) and the bank is going to contribute the remaining 80% (or 90-95%) of the property (loan or debt) - until you pay it off. Therefore, the bank needs to know that if you default on your loan and they need to sell the property that their loan will be repaid in full. Before giving you final approval they will conduct a valuation on the property using an independent 3rd party valuer from a list of panel valuers.
There are 4 main factors affecting variations in valuations for new properties.
1. Banks
As you’ve probably come to understand lending policies change every day. Some banks are encouraging investment loans whilst others will favour owner occupier while some will push harder for commercial loans and others may be offering extra benefits to companies. These preferences change week to week with different banks and a good broker will keep on top of this. A good broker will know which banks favour investors and they will put the majority of their focus on these lenders. For example, a bank that more focused on owner occupiers might have a more stringent set of valuations conditions for investor loans to discourage this type of lending.
2. Valuers
Independent 3rd party valuation companies are exactly that, independent. What that means, is that their appraisal of the property in question is the personal opinion on the individual valuer. These opinions vary quite significantly for each valuation company and each individual valuer that works for these companies. Individual valuations for one property can be $50,000 under purchase price, while another can be on purchase price. One valuer might fight in favour of one suburb and dislike the neighbouring suburb and another valuer could have the opposite opinion. There are a lot of different valuation companies that the lenders use and they will often differ from bank to bank depending on their panel of valuers.
3. Risks
Valuation companies need to value a property based strictly on the valuation instruction provided by each individual lender. This includes identifying any factors that could affect the value of the property in the short to medium term if the lender needs to sell the property. Valuers will apply a risk rating assessment to a number of categories such as location and neighbourhood, market volatility and environmental issues as per the example table below.
Lenders will often limit the loan to 80% of the valuation if there is one risk rating of "5" or 2 risking ratings of 4 for example. Each lender is different.
4. Comparables
The most important factor relied on in a valuation is the evidence of comparable sales. Finding similar comparable sales for existing properties can be fairly straight forward but when it comes to new properties in new estates this can become difficult.
Why? Because valuers can only use comparable sales of completed houses. They cannot use land sales value and build contract amounts to arrive at a comparable sale. it will only become a comparable sale once it is resold as a completed house which may be 5-10 years time. This means that with any new estate there are no comparable sales within the estate for a period of time. This begins to pose a problem when all the houses surrounding the estate are 20 to 30 years old!
This problem compounds even further when the market is moving very fast like we have recently seen in Melbourne. Land can take 1-2 years to register after it has been sold to an investor, leaving valuers chasing their tales. The shortage of registered land means owner occupiers and investors are more willing to pay higher prices for land in the future, however the resale of completed houses are being sold now. Resulting in comparable sales lagging behind the prices being paid, for house and land packages being delivered in the future.
How to cover your bases
Talk to a good investment broker. All banks have different policies on investment lending and this changes weekly. Some banks are encouraging investment loans and others have a preference to owner occupiers. A good broker will know which banks favour investors and that will often result in better interest rates and more favourable valuations.
Think about issues that may be considered as risks to the bank. Is the property in a flood affected area, is there an oversupply or is there an extremely high vacancy rate? These simple checks can help avoid any complications.
Check comparable sales. Even though this can often be out of your control, it’s good to check what has been sold in the area to get an indication of where you’re sitting. Being more expensive than others, is not always a brick wall, so long as your property can offer significant reasons as to why it’s worth more. Do your homework.
Order multiple valuations. This is an absolute must when investing in property. Again, this is done through a good broker. This shouldn’t come at any cost to you, as the broker can often order them for free. It can be done before you been approved for any lending and it comes with no commitment. Ask your broker to order multiple valuations and that way you can pick the best one at the end of the day. The one with the best valuation and the best lending specifics.
At the end of the day, if you get a bad valuation, don’t stress!!! There are ways around it, sometimes you can even challenge the valuation. Really all you need to do is, talk to your property advisor, broker or agent and find out what your options are. After all, you have already done all the checks before you even think about committing and you know that the property is at the price it should be.
If you want to know more about valuations, then please feel free to contact us.
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