So you’ve just signed your contract and got the nod from the bank for preapproved funds to complete your purchase. Everything is looking great. Until suddenly it isn’t. The valuation has come in short and your $1.2M palace is now a measly $930K shanty. Ok, that may be a bit dramatic, but the issue of low valuations is very real and is affecting around 35% of home buyers today.
This article is going to show you exactly how to handle low valuations in the most comprehensive and vanilla way possible.
- 1. What is a valuation?
- 2. Why do we need valuations?
- 3. Who needs ’em?
- 4. Why do valuations come in low?
- 5. How to overcome a subpar valuations
1. What is a valuation?
A valuation is an opinion on a property based on current and future changes in the market. Identifying these market conditions are done by comparing recent sales (ideally within six months) of comparable neighbouring properties (i.e. those properties with the same number of bedrooms, bathrooms, car spaces, and land size), as well as other external factors (e.g. environmental and economical).
2. Why do we need valuations?
Before the bank willingly hands over hundred’s of thousand’s of dollars to a virtual stranger they like to make somewhat certain its not a completely reckless move. To do this, they take the property as security for the purchase. In plain speak, if you can’t pay your loan the bank will take your home. Harsh I know, but that’s life. So its tit-for-tat, the bank has to be sure your property is worth more than the loan you requested. An independent valuation is a way to do this.
3. Who needs ’em?
The short answer: everyone with a contract down. Valuations do not discriminate!
4. Why do valuations come in low?
Like every opinion, they differ person to person. It’s quite common to have three different people value the same property, at the same time in the same market and yet have three separate valuations. No one valuer is right or wrong, technically speaking they’re all correct.
Low valuations can come about for a multitude of reasons, including, but not limited to;
- ⛔️ Oversupply
- ⛔️ Market conditions
- ⛔️ Hazards (e.g. high-tension power lines, prone bushfire zone)
- ⛔️ The liability of a property (is the property deemed habitable)
- ⛔️ Physical Issues (e.g. incomplete renovations)
- ⛔️ Uniqueness / Resalability
- ⛔️ Limited comparable resales history
- ⛔️ Rebates/Incentives
- ⛔️ Overcapitalisation (spending too much on a property)
- ⛔️ Private treaty / non-arm’s length agreement
- ⛔️ Multiple properties on one title (known as an in-line valuation)
5. How to overcome a subpar valuations
You have three choices when it comes to a low valuation…
1. THE RED PILL
You can go to your lender and prove you have additional funds to cover the shortfall amount and allow them to lend you the rest.
2. THE BLUE PILL
You can request some additional valuations with other banks and compare to see if any come in higher. Or contest the valuation with the current valuer. To do this, you’ll need to give (usually through the Valex ValStatus website) the valuer three recent sales generally within six months of comparable quality to the valued property which support your expected market value of the property. Please note, it is rare for the valuer to change the value once their report is complete. 👎
Read More: How to Challenge a Bank Valuation
3. THE BLACK PILL
You can use equity from another property to support the loan. This could be from another property you own if you’re like Oprah and have a few lying around. Or, you could ask a family member to go guarantor on the loan.
What to do next…
If you’re currently looking to buy a home and worried about all the moving parts associated, our team at Hunter Galloway are here to make the journey as smooth as a good Jazz song.
If you want to get started, please get in touch here and we can book a time that suits you – either a phone call information session or a face to face meeting (which doesn’t cost anything for you).