Property valuation is supposed to be a science, using facts, mostly comparable sales in this case, to ascertain the value of a property which is offered as a security for a loan to a lender. How much a specific security is worth is going to define how much the said lender is willing to lend against it.
Each lender in Australia has a valuers panel, which is made of all the valuation firms around the country which meet this lender’s requirements. When a loan application is received, or in some cases even before the it is lodged, most lender will request a valuation from a randomly chosen valuer on their panel and use that report as their reference regarding the value of that security.
Aside from putting a value on a property, a valuation report will also rank it for risk for 8 categories with a score of 1 meaning very low risk and a score of 5 meaning high risk. It will also give an appraisal of what rent the property would return if it was used as an investment property.
What could possibly go wrong?
It was over 8 years ago but I still remember the 1st time I saw it: two apartments, with the exact same floor plan and finish, on the same floor valued on the same day for the same bank by two different valuers on that bank’s panel. One of the valuation came back on purchase price at $405,000 while the second one was returned at $350,000… Since then, I have seen this again and again, right up to yesterday when an apartment which was purchased for $495,000 was valued on contract price by a valuer, after an initial valuation last week was received for $420,000.
I have a property valued at $750,000 for a refinance sold within 3 months of that valuation for $870,000 and the list goes on.
If only bank valuations were not so crucial…
A low valuation can have incredibly harmful consequences on a buyer, from increasing the cost of buying (i.e. triggering mortgage insurance, requiring a second mortgage) to losing a deposit for buyers who can not settle altogether.
To make matters worse, lender will always work on the lowest valuation they have on file, so what has been seen can not be unseen! Once a valuation is in and if it is not suitable, a borrower is forced to go to another lender and hope another firm is chosen to value the property. For some it is okay but for some others, their circumstances may limit the amount of lenders they can use, sometime down to only one.
Risk – Even when a valuation comes back on contract price, the valuer may have decided to rank it 5 for risk on one of the 8 categories mentioned above and that would be enough to make the security unusable for some lenders or reduced the amount others are willing to lend against it.
Rent – This one is crucial for clients with tight servicing. We recently had one half a duplex valued for an SMSF loan and received an amazingly non sensical valuations a) Even though the other half of the duplex was sold for $435,000 a few months earlier, the valuer decided that this half was only worth $415,000 by using other comparable sales (i.e. how could they possibly be more relevant?) and b) even though the property had been tenanted to the current tenants for >12 months (and they had just resigned a 12 months lease) for $430 per week, the valuer thought that the rental value of the property was $400 per week!
In this instance, the SMSF was cashed up so the low value was no concern but the income situation was very tight and the reduced rent meant that the loan amount had to be reduced, forcing the trustees to contribute some of their savings into the SMSF: simply insane!
Comments – As if there was not enough scope for valuers to ruin people’s lives with their clearly subjective opinions, they are also providing the lenders with some thoughts which may fall outside of the other criteria mentioned before. There’s an endless list of things that can comment on which may jeopardize a finance application. For example, I’ve seen valuer alerting the lender that a specific property was a serviced apartment when it was not. Unfortunately, serviced apartments were not acceptable securities for this lender…
So what can be done about poor valuations?
Theoretically, a valuation can be argued if mistaken but in practice it consistently turns out to be a draining, long process with little chances of success. To be fair, we have successfully challenged valuers on a number of occasions but that’s a very difficult path to embark on.
Raise additional funds through other means: if a low valuation reduces the amount that can be borrowed, depending on the borrower(s)’ circumstances there could be other means to raise the funds needed for settlement. It could be through a personal loan, a peer to peer loan, a guarantee from parents or equity in another property.
Chose your valuer: it’s just that simple! A few select lenders, including for SMSF loans, will let you chose a lender from their panel to complete the valuation. Oh joy! All that is left to do is order upfront valuations until a suitable valuer can be found and then request that firm to be used by one such lender.
That’s assuming that a suitable valuer can be found which is not a given, since the very method they use to value property is extremely limited. Unfortunately, on some occasions the best that can be done is damage control.
* The information contained in this blog is general information only. No part of this blog is to be construed as a solicitation to buy or sell any security or financial product. The author, in preparing this blog, did not take into account the investment objectives, financial situation and particular needs of any particular person. Before acting on any information or advice in this document, you should consider the appropriateness of it (and any relevant product) having regard to your circumstances. You should also seek independent financial advice prior to acquiring a financial product.