So you’ve just signed your contract and got the nod from the bank for pre-approved funds to complete your purchase. Everything is looking great. Until suddenly it isn’t…
The valuer from the bank has taken a look at your property, and in their eyes, your $1.2M palace is just a measly $930K shack.
Ok, that may be a bit dramatic, but the issue of low valuations is very real and affects around 35% of home buyers today.
This article will show you exactly how to handle low valuations in the most comprehensive way possible. We’ll start off by covering some of the basic principles of property valuation, and then show you what you can do to resolve any issues with a low valuation.
Here’s what we cover in this post:
- What is a property valuation?
- Why do I need a property valuation?
- What are the different types of valuations?
- How long does it take to value a property?
- When should I get a bank valuation?
- Can I provide my own valuation to the bank?
- How to avoid a low bank valuation when buying a home
- What to do if the house valuation is less than your offer
- Case Study: How we were able to get a $110,000 increase in a client’s property valuation in 2022
What is a valuation?
A property valuation is an assessment of the value of a property. Valuations typically consider several factors, including the condition of the property, comparable sales in the local area, and the state of the property market.
Typically, a valuer will look at:
- Size of the property
- Number and type of rooms
- Fixtures and fittings
- Areas for improvement
- Building structure and condition (including faults)
- Standard of presentation and fit-out
- Ease of access, such as good vehicle access and a garage
- Planning and restrictions and local council zoning
- Recent sales in the area and other market conditions
Why do I need a property valuation?
There are two main reasons that you would need a property valuation:
Applying for a home loan
When you want to buy a new property or refinance your home loan, the banks will want to do a valuation. They do this to ensure that they aren’t lending you more money than the property is worth.
The property acts as a security against the money that the bank lends you. If you are no longer able to make your repayments and they need to repossess your home, they may need to sell your home quickly to recover their money. If they lend you too much money compared to the property’s value (known as the Loan to Value Ratio), they will not be able to cover their losses.
Buying or selling property
If you’re buying or selling a property, a valuation can help you get an idea of what the property may be worth. If you’re buying, it will help you position your offer so you’re not over- or under-bidding on the property. If you’re selling, it will help you price your property competitively compared to other similar properties for sale in your area.
What are the different types of valuations?
There are two main types of valuations for properties: bank valuations and market valuations. You might think that all valuations are the same, but they have different purposes. So they will often have a different estimation of value. Here’s how they differ:
Bank valuation vs. market valuation
A bank valuation is performed by an independent valuer on behalf of the bank. They use the figure provided by the valuer to calculate the Loan to Value Ratio (LVR). LVR is an important aspect of the banks’ assessment of your home loan. The higher the LVR, the higher the risk. If your LVR is over 80%, they will typically require you to purchase Lenders Mortgage Insurance (LMI) to protect them if you default on your loan repayments. However, there are some cases where they will waive the LMI requirement up to 90% of the property value.
Bank valuations are typically more on the conservative side of things and look at the home’s value over a longer-term because they are looking to protect their money.
Market valuations, also known as appraisals, are a little bit different. Real estate agencies will look at how much the property could sell for in the current market. They will consider any trends in your local area, whether they are short-term or long-term trends. Market valuations tend to be on the optimistic side of things as they aim for the maximum possible sale price.
The different types of bank valuations
There are several different types of bank valuations. The bank or lender will typically choose a more comprehensive valuation method if there is a higher perceived risk to the bank. Here are the different types of bank valuations:
Full valuations are the most comprehensive method. During a full valuation, the valuer will inspect the property inside and out and write up a bank report. They will include photos, property details, and the reasoning behind their assessment.
A kerbside valuation involves a physical inspection of the property, but only from the outside. They will take into account recent sales and the external condition of the property, but not any special internal features such as recent renovations.
Desktop valuations are still performed by humans, but they don’t involve any physical inspection of the property. The valuer will look at the known property details and comparable sales data to assess the property value.
Automated valuation (AVM)
An automated valuation is the least comprehensive method. Like a desktop valuation, an AVM uses the known property details and comparable sales. However, it uses a statistical computer valuation rather than a professional valuer to estimate the value.
How long does it take to value a property?
The typical turnaround time for a property valuation is three to four working days. Delays can occur if there are issues with the sellers’ agent giving the valuer access to the property or during busy times when valuers can be booked out several days in advance.
When should I get a bank valuation?
The best time to get a bank valuation is after you have agreed on a final purchase price (either by private treaty sale or auction) but before submitting your application to the bank.
Why should I do a valuation before applying for a loan?
Doing your valuation before applying for your loan has several advantages:
- It protects your credit score: Every loan application leaves an enquiry on your credit file. If you have too many enquiries in a short period of time, it can affect your credit score and make it harder for you to get your loan approved.
- It will improve your chances of your loan being approved: if the bank’s valuer gives you a low valuation, it could mean that your loan would be rejected. If we do an upfront valuation, we try your application with a different bank or lender.
- Your loan application will be approved faster: An upfront valuation can speed up the approval process since we won’t need to wait for the bank to arrange a valuation.
Why should I wait until I have a final purchase price?
The purchase price of your home gives the valuer an anchoring point. They can compare your purchase price against their assessment of the home’s value, and more often than not, they will value the home at the same price as you paid for it.
If you order the valuation before you have agreed on a final purchase price, the valuer may be more conservative in their estimation. This could cause you issues if your purchase price is higher than the valuer’s estimate.
What can I do to estimate the value before agreeing on a final purchase price?
There are a few options for estimating the value of a property that don’t involve using a bank valuer. You can use a buyers’ agent to assist you with purchasing the property. Alternatively, you can use comparable sales and some other tools to value the property’s market value yourself.
For more on how to do this, check out this video:
Can I provide my own valuation to the bank?
The short answer is no. Most banks require that the valuation is ordered through them to prevent fraud or other issues. They will typically use an independent valuer (someone not employed directly by the bank) to provide an unbiased estimate of how much the property is worth.
How to avoid a low bank valuation when buying a home
The best way to deal with a low bank valuation is to avoid getting one to begin with. This may be a bit late if you’ve already received a low valuation, but if you’re not at that stage yet, then here’s what you can do to avoid it.
Do your own value estimation before agreeing on a purchase price.
Researching the market value of your property is a critical part of the home buying process. If you don’t know what the property is worth, you’re basically pulling a number out of thin air. And that’s a recipe for disaster – if you’ve paid well above the fair market value for your home, there’s not much you can do to challenge the valuation.
We can assist you by providing an RP Data report which gives an automated estimate of the value of your property. Combined with your research looking at recent sales on Domain and realestate.com.au, this should give you a fairly accurate picture of what the property is worth.
Be careful when buying an off-the-plan apartment.
If you’re buying an off-the-plan apartment, it’s a good idea to remember that the lender can only value the finished property. Completion may be well over a year after signing the contract and placing a deposit.
There is a risk that property values in the area may change over the construction period. The bank valuation may be lower than your purchase price if they do.
There is also a risk that the dimensions of the finished apartment may vary from the plans. This situation may result in a bank valuation that’s less than the purchase price.
Unregistered land can also be risky.
A similar situation may occur in new estates when developers offer unregistered land for sale. The developer may need several years to build the infrastructure necessary to register the land.
In this case, the lender will need to reassess your application before settlement. Over the time since you paid your deposit, values in the area may have changed, resulting in a valuation lower than your purchase price.
What to do if the house valuation is less than your offer
If you have received a bank valuation that is less than the offer you have submitted (or bid at auction), the first thing to do is: don’t panic.
This is known as a valuation shortfall, and it’s not uncommon. There is no hard and fast rule on bank valuations. A valuation is the opinion of a single individual at a certain point in time. It’s quite common to have three different people value the same property at the same time, in the same market, and have three different valuations.
You could receive a valuation shortfall if:
- The valuer is relying on outdated comparable sales data.
- The market is rising quickly, and the valuer has failed to factor this in
- The lender used a less comprehensive valuation method, which doesn’t consider the property’s full value.
You have several options to resolve this issue. If you’re applying directly with a bank, you can attempt to do this yourself. Still, we recommend using the services of a mortgage broker to assist.
Here at Hunter Galloway, we have assisted hundreds of people with valuation issues. We can usually get a good outcome thanks to our relationships with different lenders.
Generally speaking, here are your options to resolve a valuation shortfall (and this is how we do it here at Hunter Galloway):
1. Find out the reason for the low valuation
The most common reason for a low valuation is that the valuer did not find enough supporting evidence for comparable sales of similar properties. The less supporting evidence they have, the more conservative they tend to be with their estimates.
2. Challenge the valuation
Valuers can make mistakes, and sometimes you can challenge the property valuer directly. This approach is often unsuccessful because, as with everyone, valuers do not like to be told that they are wrong. It’s estimated that only 3% of clients are able to challenge a valuation successfully.
If you choose to contest the valuation, you’ll need to give at least three recent sales in the local area of homes with comparable quality to the valued property. These sales should generally be within the past six months to ensure their validity, but the more recent, the better.
3. Get valuations from other banks
Different banks will use different valuers for their valuation process. So if you can’t get your original bank or lender to increase their valuation, you can request a valuation from another bank. We can order up to another two valuations from other lenders to see if their valuation is more in line with your purchase price.
4. Negotiate with the seller
If you have submitted an offer under private treaty with a finance clause, you may be able to negotiate with the seller for a lower price.
For example, recently, one of our clients bought a one-bedroom unit in Brisbane, and they paid $350,000, which seemed like a good deal for one bedroom. We went and got three separate valuations— one came in at $315,000, one came in at $320,000, and the third one came in at $320,000. So that’s over $30,000 less than it was under contract.
Fortunately, the property was still subject to finance, so the buyer could go back to the selling agent and ask them to reduce the purchase price to $320,000.
This option is highly dependent on the market conditions. If the seller has other offers on the table at a price higher than the bank valuation, then they will not accept a price reduction.
If that happens, you can either walk away (if you have a finance clause) or accept that you will need to put in a higher deposit or borrow more money to complete the property purchase.
If you’ve bought at auction, you’ll need to find the money to complete the shortfall or risk losing your deposit.
5. What happens if you can’t resolve the valuation shortfall?
So what do you do if you can’t find a lender who is willing to value your property at its purchase price?
You have a few options, depending on the LVR of the loan based on the bank’s valuation of the property.
If the new LVR is still below 80%, you can proceed with the loan.
If you have a sizeable deposit for the property (more than 20%) and the new, lower value doesn’t take you over that 80% level, then there aren’t any issues with getting your loan approved.
Let’s look at an example:
In this scenario, you have put in an offer for $500,000. You have a deposit of $150,000 and you would like a loan of $350,000, giving you an LVR of 70%. The bank valuation comes in at $450,000, giving you a new LVR of 78%. As this doesn’t take your loan above 80%, you will have no issues with getting your loan approved.
If the new LVR is between 80% and 95% – you can proceed but you may need to pay additional fees
If you have a 20% deposit for the property and the new, lower value takes your LVR over 80%, then you may need to pay Lenders’ Mortgage Insurance if you can’t source extra funds to make up the shortfall. You should still be able to proceed with the loan application, but you will be up for additional costs to get the loan approved.
Let’s look at another example:
In this scenario, you have put in an offer for $500,000. You have a deposit of $100,000 and you would like a loan of $400,000, giving you an LVR of 80%. The bank valuation comes in at $450,000, giving you a new LVR of 89%. If you are unable to make up the additional shortfall, then you would need to pay LMI to proceed with your loan application.
If the new LVR is over 95% – you will need to find a way to cover the shortfall with extra cash
If the valuation shortfall takes your LVR over 95%, then you will need to find additional funds to cover the valuation shortfall. 95% is the maximum LVR that banks will accept (and not all of them go that high), so if you can’t make up the shortfall then your loan will be declined.
Here’s an example:
In this scenario, you have put in an offer for $500,000. You have a deposit of $50,000 and you would like a loan of $450,000, giving you an LVR of 90%. The bank valuation comes in at $450,000, giving you a new LVR of 100%. If you are unable to make up the additional shortfall, then your loan would be declined as there are no lenders who will loan you 100% of the property value. The only exception is if you’re getting a .
6. Options for making up the valuation shortfall
If you need to put a higher deposit to purchase the property, then you have a couple of options to do so:
Prove that you have additional funds
Let’s start with the most obvious option first. If you have access to additional funds, such as shares that you’re willing to sell, then you can go to your lender and prove that you have additional funds to cover the shortfall amount.
You may also be able to ask your parents or other relatives to gift you the money – the bank of mum and dad has been a great assistant to many of our clients over the years.
Use equity from another property
If you own an investment property, you may be able to refinance the loan on that property (or redraw funds from the mortgage to cover your shortfall.
If your parents or other family members own property, you could ask them to become a guarantor on the loan, which would allow you to borrow up to 105% of the property value.
Case Study: How we were able to get a $110,000 increase in a client’s property valuation in 2022
In January this year, Thomas and Kate reached out to us for some assistance with their home loan. They had just put in an offer for a lovely 3-bedroom home in a suburb in North Brisbane for $900,000.
The bank valuation came in significantly lower than their purchase price, at $790,000. With a deposit of $140,000, this would have taken their LVR to 96%. They didn’t have any additional funds, so without a better valuation they would have had to walk away from the contract.
We sourced valuation from two other lenders, providing additional supporting evidence of recent comparable sales. As you can see below, getting another valuer to take a look at the property resulted in a $110,000 increase in the value of the property.
|January 2022||Bank Valuer 1||$790,000||–|
|January 2022||Bank Valuer 2||$800,000||$10,000|
|January 2022||Bank Valuer 3||$900,000||$110,000|
This was the same property, at the same time, but different valuers.
This is not unusual, although this was a higher increase than we see in most cases. And it just goes to show the value of sourcing alternative valuations if the original property valuer isn’t coming to the table.
If you’re in a similar predicament, we may be able to help. Get in contact with our brokers today to see if we can assist with arranging another valuation for you, or call us on 1300 088 065 to discuss your options.