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Are bank valuations different to the sale price? 🏠 FIRST HOME QUESTIONS 🤷‍♀

November 12, 2020

Hey Sam,

Congrats on the house. Very good news 😊

There are two parts to your question – value and worth. And since this is the first of several questions you sent me last night (seriously, do you ever sleep?) I’m going to focus on bank valuations now and the concept of ‘worth’ in my next answer.

Stay with me. Some of this will get technical.

John Minns, Managing Director
John Minns, Managing Director

Why do you need a valuation?

The bank values your house as part of the loan approval process. Why? Because, and there’s no kind way to put this, they want to know that if you stop making payments, they can sell the house and pay themselves back the money you borrowed.

What they don’t want is to lend you more than they can sell the house for, because then they’ll have to chase you for the difference. And if you’ve stopped paying your mortgage, you probably don’t have it to spare.

That’s why they like you to have a 20% deposit. It’s insurance against property price drops. (Has property ever dropped by 20%? Not even close. The largest drop in the past 60 years was during the 2008-09 GFC, when prices dropped by 10% in one year and then rose by 15% in the next. Still, you can’t blame them for being cautious).

If your deposit is smaller, things get a bit dicier. If you buy a place for $500,000 with a deposit of $25,000, you’re borrowing $475,000. All it takes is one global financial crisis and a price drop of 5%, to make your house only worth the same amount as your loan. Banks aren’t keen on that kind of risk.

Bottom line: banks don’t want to lend you more than 95% of the total value (not cost) of the property. If that’s lower than the amount you’ve agreed to pay, you may need to do a bit more work to get the loan over the line.

Do low valuations happen often?

Here’s the reassuring part. If you’ve done your research and offered a price based on market research—and I know you have because we spoke while you were negotiating—you’ll be fine.

Valuers look at comparable properties and recent sales, as well as the particular features of the home you’re buying, to arrive at their price. My personal experience is that the vast, vast majority of valuations come in at the price you’ve offered.

Low valuations usually only happen where the market is going through a major downturn and values are dropping. Keep in mind, that during COVID and 2020, we didn’t see this kind of downturn. And if it does happen, you’ve still got some options.

Why a valuation might come in low

The bank wants to make sure that they’re not lending you more than the property is worth. The last thing they want to happen is that you can’t pay your mortgage, and then the property doesn’t sell for enough to repay the loan.

Here’s the first bit of reassurance I have for you. It’s rare that the bank’s valuer will come in under your purchase price. I’ve been doing this job for over 30 years and what you need to know is that even when it does there are often simple reasons that may not have anything to do with fair market value..

These could include:

  • The property market has dropped A LOT since you purchased. I have never seen that happen in the 30-60 day settlement period that most homes have.
  • There are serious problems with the property that you didn’t pick up and the valuer does, like visible rising damp (again, unlikely because that would have shown up in the building report).
  • The valuer is using old data to compare prices or simply wasn’t able to access recent comparable sales. This is EASILY remedied when additional information is provided.
  • You completely lost your head and offered way above the asking price.

If you’ve researched comparable properties and negotiated the price based on the market, you’re going to be fine.

Remember, people buy property with a 5% deposit all the time. I know it feels like you’re on the edge of disaster, but a) it’s pretty unlikely that this will happen, and b) there are still some options up our sleeves if it does.

What are your options if the valuation comes in low?

1. Come up with an extra amount for the deposit.

If you’ve paid $500,000 for a property, but the valuer thinks it’s worth $480,000, they’ll only offer a loan for 95% of $480,000. That’s $456,000. That means you’ll have to find the extra. Your deposit will go up, from $25,000 to $44,000.

We know that’s not an option for you in your circumstances. Other people might be able swing that extra money either by selling something of value or getting a lump sum from family or friends.

2. Check the valuation report

Have a look at the report with your agent and see if anything stands out that might show you why there’s such a big difference. Sometimes, it’s an obvious mistake that can be corrected. For example, the valuer has done a drive-by valuation and not picked up the fact that the house has been extensively renovated since the last time it was valued. Or they’ve got the number of bedrooms wrong, or the land size.

I’ll be honest, this is not very common. But it's definitely worth a try, because it’s an easy fix if it does happen.

What is more common is that the valuer is using old data. They could be comparing it with properties that sold 6 months ago compared to properties that sold 6 weeks ago. It a hot market, like Canberra, that can make a big difference. The agent should be going back to the valuer with a list of the most recent comparable properties, but there’s no harm in you asking to make sure they’ve done that. 

3. Ask for a different valuation or go to a different lender

If there’s no obvious mistakes, but you’re still convinced that you’ve paid a fair price, you can ask for a new valuation.

Each lender uses a panel of valuers. Each valuer has a different approach and set of formulae. Sometimes, you can challenge a valuation and ask the lender to do a second one with a new valuer.

If they refuse, we’d need to look at a different lender and start from scratch.

 4. Look at a guarantor

Failing that, is there someone in your life who’d be willing to act as guarantor? The extra security will keep the bank happy so you can get the funds you need.

Once the property regains its value and is valued at your purchase price again, you can refinance and get the guarantor off your loan. I always recommend that people do this as soon as they can, because your guarantor can’t sell their own house while it’s acting as security for yours. Here’s our FAQ about using a guarantor.

So you can see that, if it comes to worst-case scenario, there are several options to explore before you throw in the towel. But honestly, Samara, it’s highly unlikely that this is going to happen because you didn’t throw all caution to the wind and offer a ridiculous amount.  

Go to bed, wait for the valuation to come in, and get in touch if you need more reassurance. This is all going to be okay.

I will chat to you soon.

TAKEAWAYS
  • Banks do independent valuations because they want to be sure that if you don't pay your mortgage and they need to sell a property, that they'll be able to sell it for at least the cost of the loan. 
  • Low valuations rarely happen because generally buyers don't make unreasonably high offers 
  • A valuation might come in low if the market has dropped significantly since the time of exchange or if the valuer is using old data 
  • There are plenty of options to take if your valuation has come in low - don't panic! 
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