RESIDENTIAL PROPERTY VALUATION EXPLAINED

It is understandable how borrowers are confused at Bank Valuations and Contracted Price and why there is commonly a 5 - 10% price differential. Residential property valuation can be a complex concept to understand. This article attempts to explain the ins and outs of the process commonly undertaken and the influences on valuations of property used by the various leneders to secure a home loan in the case that your circumstances change and you cannot afford to continue to pay your home loan repayments.

Residential property valuation is based on using sales data of properties previously sold of a similar type (lot size, house size, aspect, age, condition) in a comparable location in the previous 6 months. Valuations can vary dramatically for exactly the same property for a number of reasons:

  • Type of Buyer – Owner occupier or Investor – the lender apportions increased risk of default to an investor and provides instructions to the Valuer to use certain types of sales evidence or criteria that reduces their valuation. The Property Industry Body has been arguing with the banking regulator about this issue for many years.
  • Loan to value ratio – Whether the client has an LVR of 80% or more and requires mortgage insurance.
  • The Mortgage Insurers loan exposure to a suburb – Valuation is a subjective opinion and not an exact science. This subjectivity has been tested in court
    and a variance of up to 15% have been accepted as reasonable, although typically within 10% has been deemed acceptable in residential valuations, this provides a buffer for any negligence that may occur in determining value. There are many instances where two Valuers have completely different opinions of value on the same property. 
  • Relevance of data – When the property market is in an upswing mode, Valuers are relying on data that can be 6-12 months old and the market has increased in price since that point in time.
  • The Lender – Each lender has preferred valuers. Some of the Lenders choose more conservative Valuers to reduce their risk profile.

Valuation vs Appraisal

Real estate professionals are often asked whether there is a difference between a valuation and an appraisal. There is a difference and it is important to know when a formal valuation is required as opposed to obtaining an appraisal.

A formal valuation can only be conducted by a qualified valuer who has undertaken prescribed education and training in this field to ensure that they take into account all features and issues relating to a particular property. Valuing is a complex task and will take some time to complete. A formal valuation will take into account things such as:

  • The location of the property
  • The building structure and its condition
  • Building/structural faults
  • Features of the home
  • Caveats or encumbrances on the property
  • Local Council zoning
  • Additional features of the property (particularly relevant in rural areas)

After a valuation, the client will receive a written report detailing the value of the property and a fee will be charged for this service.

Valuations are required when a definitive value is needed.

Reasons for this include a property settlement, obtaining finance from a lending institution, establishing the value for an insolvency event, or establishing the value of a deceased estate. A Court may also order that a valuation be obtained as part of the process of resolving a dispute.

If you do require the best indication of price, engage the services of a qualified valuer so that you can be sure of the true value of your property.

Appraisals are only intended as a guide to current pricing and can be requested from real estate salespeople.

Appraisals are estimated by knowledge of the local area and recent sale prices and should only ever be used as an estimate of price. They are not definitive and have no legal standing. It is rare to charge a fee for appraisals and they are generally only requested by potential vendors to get a ‘feel' for the local market. (To check the veracity of the Agent's appraisal - ask the agent if they would be willing to GUARANTEE their Appraisal, and if NO, ask them to explain why not?)

When requesting an appraisal, it is recommended that you contact a real estate agent who is familiar with the area in which your property is located.

Market Valuation Definitions

Market Valuation:

The Valuers opinion of what the property should sell for based on a reasonable selling period (60 - 180 days) in an arm’s length transaction, without any pressure, i.e. when you sell via a real estate agent.

Mortgage Security Valuation:

The Valuer’s opinion of a value that the property should sell for in the event of a default by the client. In these instances, the bank needs to sell the property in a shorter timeframe (usually by auction in 30 days) to recover their outstanding loan, and all fees & charges incurred by a forced sale i.e. a Mortgagee in Possession Sale.

Sales Evidence:

When it comes to new house and land being valued, we regularly see that the Valuers do not necessarily abide by their own industry body regulations. They tend to use sales evidence that reduces that opinion of value. The sales evidence utilised in the valuation report should ideally:

  • Include a minimum of three settled relevant sales.
  • Include sales within six months of the date of valuation.
  • Include sales within 15% (plus or minus) of the assessed market value.
  • Include sales of a similar type, location, age, condition, size of home.
  • For new properties that form part of a development incorporating common areas and/or shared facilities (such as strata title, community title, plan of subdivision etc) a minimum of three settled re-sales from within the subject group and/or external to the development are to be provided.
  • For vacant land and/or new house and land properties situated within a new residential estate; a minimum of three settled re-sales from within the subject subdivision and/or re-sales external to the subject subdivision are to be provided.

The difference between Market Valuation and Mortgage Security Valuation is that a Mortgage Security Valuation assumes a forced sale.

When the lender arranges a security property valuation, they do not obtain a market valuation, they instead obtain a mortgage security valuation.  

New Home & Land Contracts

When a detailed review of the valuation of a new house and land package is undertaken, these are the points that will be commonly seen in the details of the various sales evidence that the Valuer (who is randomly contracted by the lender) has relied on to form their opinion of your chosen property:

  • Second hand property anywhere from 3-40 years old compared to new.

  • Often in inferior locations.

  • Older estates with inferior street appeal – no render, no feature architecture, poor landscaping.

  • Smaller homes.

  • Markedly inferior level of fixtures and fittings – bathrooms and kitchens.

  • Not located in the same estate as the subject property being valued.

Some valuers use sales evidence which is irrelevant and does not compare apples with apples. Furthermore, they are asked to disregard market valuation and consider the forced sale valuation in the event of a default instead.

This is the reason why bank valuations in many cases can be 5-10% under the purchase price and in some cases even more. This is one of the major reasons why we see such discrepancy between valuations and contracted purchase prices.

NB: Valuers are personally liable. In addition, the Valuers in many cases are contractors and hold their own professional indemnity insurance that makes them personally liable for the advice they provide. Since 2007 several Valuers in QLD have been sued for damages by the banks over valuations that didn’t protect the banks during the GFC property downturn. When this is factored in along with the fact that valuers are personally liable for potential losses that the lender may incur due to a loan and reliance on a valuation, it’s no wonder why many Residential Valuers, earning only $150 to complete a valuation within 1 to 2 hours tend to be very conservative in their estimates.

The Loan Offer that is made by the bank must ensure that they are NOT lending you more than what the valuer believes is the quick resale value of the property. The lender will use this INDEPENDANT Valuation to determine the value of your property that will act as security against your home loan.

It means, that if you have difficulties with the loan and you’re no longer able to make the repayments, the lender may have to take possession of your property, in order for them to control the sale of the property to pay back the loan. Usually the lender will only sell your home if you’re having serious trouble with the loan or you are really behind with your mortgage repayments. If the lender has to sell your home, it may be for a lower amount than what you’d normally ask for in open market conditions. 

Valuation Differential Examples

The tables below shows the discrepancies between different Valuers at different firms valuing the same house and land package with exactly the same evidence available to them. This illustrates that there can be considerable discrepancies in valuations of the same property and the borrower has no recourse.

The values below range from at purchase price to a shortfall of $48,000 or 10.2%.

Lot 32 - Evergreen Estate, Ormeau

VALUER

DATE

AMOUNT

PACKAGE PRICE

COMMENT

LMW

22/09/17

$420,000

$468,000

SHORT FALL OF $48,000

CBRE

11/10/17

$472,980

$468,000

HIGHER BY $4,980

 

 

 

 

 

 

Lot 136 - Silkstone, Ipswich

VALUER

DATE

AMOUNT

PACKAGE PRICE

COMMENT

WPS PROPERTY GROUP

21/12/16

$366,900

$366,900

ON THE $

HERRON TODD WHITE

23/12/16

$340,000

$366,900

SHORT FALL OF $26,900

CBRE

19/01/17

$355,000

$366,900

SHORT FALL OF $11,900