Valuations are an integral part of the home buying process, both for owner occupiers and investors – yet the whole process surrounding valuations is a mystery to most people. I hope to lift the lid on this process a little below.
Basically – the idea behind a valuation is implementing a safeguard for both the lender (bank) and the client – but mostly the lender. They want to know that, if you decide you can’t/won’t pay your mortgage, is it likely the lender will recover their money quickly? The safeguard/benefit from the client perspective is that it inadvertently protects clients from paying too much for their houses.
In a basic sense, the valuer attends the property (vacant land or existing home) and evaluates the location and condition of the property (among other things). They then look at other properties which are comparable which have recently sold to determine the properties likely sale price on the open market.
Categories that may be evaluated in order to establish a whether a property is comparable are: Size of land, size of house, location of the block in relation to services, number of bedrooms, bathrooms and garages, and the overall fitout of the property (stone v laminex benchtops, brick v lightweight construction, etc).
Once the valuer has compared the similar properties in the area (typically a 5km radius approximately for small/medium density residential) they provide a report to the lender containing their assessment of the property, including their opinion about the value of the property and the evidence they used to support that opinion.
Just like any other professionals, valuers are all different and have different perceptions of value. One valuer may have a different opinion to another on the value of a property. On occasion, the differences between these values can be significant amounts, even up to $50,000 in certain cases.
As a buyer, the important thing to remember is that just because one lender/valuer knocked you back, it doesn’t mean they all will. Be persistent and try again with a different lender if the first one says no. Alternatively, you can look to use the valuation as a negotiating tool with the seller.
For more advice or information talk to your preferred bank or broker.