Bank Value vs Market Value

By June 13, 2018 No Comments

All investors look broadly for their investment property.  For some it is opportunity driven and for some, it is price point driven.  The past few years has seen a concentration of investors look at the capital city markets across Australia, resulting in questions about the valuation process.   As the purchaser, it is important to understand that the valuation process is complex and has become increasingly challenging for all parties as Australia’s property markets continue to move in both directions, sometimes within the same city.  When purchasing a property all parties will want to know the ‘value’ of the property.  Understanding how a valuation is determined, what the term ‘value’ means to each party and how these ‘opinions’ can affect your purchase is important.

There are several key things you need to know about valuations.

  • Bank valuation and market valuation – Why is there a difference?
  • Is valuation an exact science?
  • New dwellings vs established dwellings
  • Can a valuation be challenged?

Bank valuation and market valuation – Why is there a difference?

Market Value as described by the API – A&NZ Valuation and Property Standards, is:

‘the estimated amount for which an asset or liability should exchange on the valuation date between a willing buyer and a willing seller in an arm’s length transaction, after proper marketing and where the parties had each acted knowledgeably, prudently and without compulsion.’

The market value is advising the buyer what the property should fetch on the open market.

Bank value is an arbitrary figure the lender is prepared to lend against the asset.

Knowing that finance providers need to account for far more economic factors and risks when compared to the individual, a bank valuation should simply be:   the market values less all holding, selling and lost opportunity costs.

The bank value therefore, will be a number representing the funds remaining after the lender recovers all costs associated with the sale of the asset such as legal costs, marketing and commission.   The balance available then needs to cover the loan facility.  Accordingly, if the LVR on the loan is higher say at 95% we would see a lower value given than if the LVR was at 70%, simply because the bank valuation must factor in a higher risk to the lender.

Given the variance in reasoning behind the two valuations, it would therefore be reasonable to expect that the Bank Value will not equal the Market value.

Is valuation an exact science?

Valuers have the ability to be subjective with the comparable properties they choose.  This allows them to satisfy the owner of the report whilst appearing professionally subjective.

Finance lenders tend to be more conservative, again because they are taking the majority of the risk.

Valuer’s will operate to non-standard guidelines as the lenders loan book risk levels vary under market competitive forces.  It is important to understand that many valuation firms currently gain the lion’s share of their income from the lenders and can’t afford to be removed from the panel of approved firms. Additionally, valuers can be held liable if a lender suffers financial loss, so it is understandable that they would err on the conservative side when engaged by the lender as opposed to being engaged by an owner.

New dwellings vs established dwellings

New dwellings just like new cars carry a premium.  Although dwellings can have the same attributes, I would be most upset if my new investment was valued equal to the last sale of an older property.  When a valuer can only compare new dwellings with old dwellings, a short fall in value is to be expected.  Where once the sales post completion within the new development were considered evidence of market value, this is no longer the case and only re-sales can be considered.  This is particularly troublesome when product within a locale can vary by quality, size and aspect, dragging higher quality product down.

Valuers may conduct up to 15 valuations per day, sometimes spending less than 5 minutes viewing the actual property.  As their opinion is always subjective, you may have been unfortunate enough to get a valuer on a rainy day, in a bad mood or simply in a hurry to get somewhere else.  Although it would seem unfair on the buyer, and it is, I can count on one hand the few occasions I have seen a valuer change their opinion.

Can a valuation be challenged?

  • If you believe there has been a genuine mistake, such as the valuer missed a bedroom or a bathroom in their inspection, then request a re-assessment from the lender on those grounds.
  • You can request and pay for an independent valuation, again, as you are the party paying for it, it should be more favourable. It may not be accepted by the lender, but you can provide yourself with much assurance that you aren’t paying well above market value.
  • By far the easiest options is to switch lenders, request a new valuation and hope for a more favourable result.

To discuss valuations or any of your property investment questions, use the contact details below, we are always happy to help.

Steve Purcell is located at our head office and is the licensee of Launch Properties. He holds a PSBA License, is a licensed Auctioneer and holds a Master’s Degree in Business.  Steve brings an extraordinary depth of hands on experience to the role, including twenty years in commercial and residential construction, followed by ten years in residential Real Estate sales and property development. This unique blend enables Steve to provide advice on selected developers, to ensure they are providing functional, quality assets with high quality finishes to mitigate potential sector risks to our clients. Become a client of Steve’s and get access to RP Data suburb reports, market valuations and advocacy options.

To speak with a property expert, call our team on (02) 9009 2428 or email: