Bank vs Market Valuations
Learning that a Bank’s valuation of a property can (and in most cases does) differ from the market value can be confusing and confronting for buyers and investors, as the value put forward by the bank might be significantly lower than what the market dictates.
When applying for a home loan the lender will always set a value for the security held against it, which will be either the property you are purchasing, or one you already own. The lender will send a valuer to the property, and based on their report, value the property at the lower end of a scale which is provided by the valuer. Some lenders charge for bank valuations, while others offer free valuations when you apply for a home loan.
Banks and other lenders do this to minimise the risk in the event of a default, in which case the property would need to be sold. It’s for this reason that a bank valuation is the amount which the lender could reasonably recoup quickly, in the event of a loan default. As a side note, this is why some say that homeowners are best placed to sell their property themselves before defaulting on their home loan, in order to get the most value out of the transaction.
Market value, on the other hand, is the price a property fetches on the open market. If you are buying a home, this is the price you have offered to pay that has been accepted by the vendor (usually subject to finance). Even if you have a pre-approved loan, if the bank valuation on the property comes in at considerably less than the price you have negotiated you may be in trouble, as the lender may not be willing to go ahead with the loan as it no longer meets their required loan to value ratio (LVR).
If your LVR is too low, there are several ways you may be able to overcome this problem:
- Try negotiating a lower price with the vendor of the property. It may have been overpriced to begin with.
- Dispute the bank’s valuation, citing evidence gleaned from recent sale prices of similar properties in the area.
- Request another valuation by a different valuer also engaged by the lender.
- Cover the shortfall from another source, perhaps by borrowing from family or taking out a personal loan.
What is the market value of my property?
Of course, if you are selling your home you will be solely interested in your home’s market value and looking to get the highest possible price for it. You can engage the services of a property valuer but this is usually not necessary. You can always begin to gauge the value of your home fairly closely by comparing it with similar properties in your area that have recently sold. A MetroCity Agent can help you with this, at no charge to you.