For example, if the lender has agreed to an 80% LVR on a $500,000 purchase price, the borrower is hoping to have access to $400,000 from the bank. But if the valuation, ordered by the bank, comes back at $475,000, then the bank will only lend 80% of that lower figure, or $380,000. The buyer must make up the difference, either by contributing more cash (extra $20K) or by using more available equity from an existing property or the bank may agree to a higher LVR and charge the borrow Loan Mortgage Insurance (LMI)
There are a number of valid reasons why a valuation may vary from the contract price.
Valuations are a measure of the bank’s appetite for risk, which varies over time. There is a difference between a bank valuation (done to protect the bank’s balance sheet) and a market valuation. Bank valuations are inherently conservative and vary widely. It is wise to be prepared for some variation in the valuation from the contract price, anywhere between 5-7% is quite routine.
Valuations are very much an ‘inexact science’ at the best of times, they are heavily dependent on individual expertise and opinion.
The Valuer’s source of information for the valuation report, is recent sales data based on actual recent sale prices in that area (from a sales data base), talking to local real estate agents and general local area research. A Valuer’s report contains an element of personal opinion when deciding on the valuation figure, based on their research. The Valuer carries personal indemnity insurance for the purpose of safeguarding the results of their assumptions.
The Valuer is liable to be sued by the lender if and when:
- A foreclosure and forced sale occurs and a lower than the valuation report price is achieved in that sale.
- The bank cannot retrieve sufficient funds from the forced sale to clear the loan and associated costs of retrieving those funds.
The lender is relying on that report when advancing the funds to the borrower.
Hence the Valuers tend to be conservative in their assumptions.
The banks reasoning for the type of instruction to the Valuer, is to hedge the lender’s risk.
Lenders are in the business of selling money, whilst minimizing risk.
Focus on risk minimization has been intensified since the Global Credit Crisis.
Valuations are typically done on a comparative analysis – looking at similar properties that have sold within a specified radius with the last few months. They can also be done as ‘drive bys’ or a ‘desk valuation’, normally only when the requested LVR is fairly low.
The problem with the comparative method is that resales in the area, including much older homes in older parts of the suburb are used to make comparisons.
There is a premium to be paid for new property; owners are guaranteed consistency in quality and standard of housing and streetscapes, and they won’t end up next door to an ‘eyesore’!
Understanding the difference between lenders valuations and their purpose and market appraisal valuations should help alleviate any anxiety caused as a result of a valuation of the property being purchased coming in lower than the Vendors asking price. It does not necessarily reflect the true value of the purchase value. This is also the reason why banks will not release a copy of the valuation report to the client as it is purely for the banks own risk minimization purpose.