What is a Valuation?

When you are looking to purchase an investment property and apply for a home loan your lender will send out an independent valuer to judge the value of the property you wish to buy.

If you require equity from your home (or your investment portfolio) as most people do to purchase an investment property a valuation will also be conducted on this property to determine its value. This will determine what funds are available to borrow on it.

A bank valuation serves as an internal regulatory and cautionary tool for lenders that reflects what reasonable amount can be recovered should it be necessary to reclaim and sell the property in a distressed state.

The Difference Between Bank Valuations vs Market Valuations

A market evaluation helps determine a property’s price on the market, while a bank valuation helps a lender determine their risks.

A bank valuation assumes you may need to sell the property to recover losses. A market valuation is an estimation of a property’s value on the real estate market. This is the valuation a lender will instruct an independent valuer to do.

This is the reason why the valuation price has to be lower than the market value. A bank valuation also protects the bank from risks. The market value is simply what the home is being sold for – at a particular time and in a specific market.

They are notoriously conservative so its beneficial to understand how it all works and what a professional valuer takes into account when putting a price on a property.

This bank valuation is a conservative estimate because the bank is concerned with lending you money they can’t get back if you’re unable to pay.

Ultimately it will determine whether the bank gives you the money to purchase your next investment property. More often than not the valuation will be a bank valuation in the current market.

To help you understand the difference a little more, we’ve broken it down for you.

Market valuations

  • Higher than a bank valuation.A market valuation assumes the seller isn’t desperate to sell as a bank and wants the best price possible.
  • Takes the property market into account.A market valuation gauges the value of a property at a particular moment in time.
  • More helpful to buyers and sellers.Unlike a bank valuation, a market valuation is designed to help you make a decision how much to buy or sell a property for by comparing to other property sales.

Bank valuations

  • Lower than market valuations.The bank is estimating the price it would get for the property if sold in the event the buyer can’t make their repayments.
  • Selling costs.The lender also has to factor in such selling costs as real estate commission, legal fees and other costs involved.
  • More useful to the bank.A bank valuation is for the bank, not for the buyer. It’s common to not even share the valuation with you, the buyer.

What is a bank valuation used for?

The bank has to ensure that your home loan does not exceed the property value. This is because the home becomes the collateral for a home loan. For the lender, if there are complications with the loan and the borrower is unable to repay the loan, the lender might have to resell the property to recoup the amount of the loan.

If you forfeit repayment of the loan, the lender will quickly sell the home in order to avoid accruing interests over a long period of time. It is unfortunate, though, that the home may have to be sold at a lower price with the evident time limitations.

The bank does not always tell the borrower what the final valuation is. Bank valuations are done in order to work out the amount of money that you can responsibly pay back. The bank will sometimes use a number less than the home’s market value and this is used for internal data to guide the lender and not necessarily to hide anything from the borrower.

At the end of the day a valuation is really just one person’s opinion of the value of the property, based on a small amount of data. What you must realise is that valuers are conducting numerous valuations in a day, usually are not familiar with the area and trying to just get their job done as quickly as possible.

If you’re interested in learning more about investing property enjoy our other blogs and if you have any Qs feel free to get in touch with Leonie directly on 0423 465 038.