Why Did The Bank Undervalue Your Property?
In Australia, no matter what kind of real estate you buy, even if it is a piece of land, as long as you need a loan, the lender needs to make an assessment on the purchased real estate and decide how much money to lend you according to the assessment results.
This Valuation is what we call a “bank valuation”. A lot of times that Valuation is less than the contract value of the property you’re buying, meaning that there’s a big psychological gap: Why did the bank undervalue my house? Did I overpay for the house?
In order to better answer this question, the following three questions need to be analysed:
- Does the valuation reflect the market value of the property?
- What are the criteria for valuation?
- Who is the valuation report for?
Does the valuation reflect the market value of the property?
- The differences between “market price” and “valuation price”
First, there is an obvious difference in the concept of these two “prices” : market price refers to the price at which a commodity is bought and sold on the open market. In other words, the real price at which the buyer is willing to sell and the seller is willing to sell. Valuation, on the other hand, is the appraiser’s assessment or prediction of the market value of a property.
No prediction is ever absolutely accurate. Even if the appraiser is professional, it is not completely accurate to judge the property is about to sell the market price. If it’s that accurate, the appraiser must be out of this world. So market price and valuation are not to be confused conceptually. Market prices are objective, while valuations are subjective.
2. Property valuation is difficult to be objective
Valuation is a very professional and difficult job. This is especially true of property, this is because every property is unique in the market.
There is no one property is exactly the same as another, even if it is similar, there will be different variables such as geographical location, floor height, noise, etc. This also gives the appraiser more difficulties and each property valuation is without absolute reference.
Here’s the thing: Each person is influenced by his own perception and subjective will, and different valuers have different emphasis on the value of different properties. Therefore, it is interesting to know that the valuation of the same property may be different from time to time.
Therefore, when a property valuation is lower than expected or the contract price, owners should not do overly panic, for the reason that the valuation can not completely reflect the real market price objectively.
What are the criteria for valuation?
An important component of valuation reports is the comparison of recent transactions. Typically, an appraiser will look at similar sales records in the same area over the past six months to give an estimate. This information reference is very lagging in today’s market, and this is one of the major factors contributing to undervaluation.
This method tends to be very unfair for properties that come with better floor-plan, or a beautiful city-view. Due to the fact that these variables don’t show up in the appraisal report, they become the actual selling points for the property.
Here is an example – a second-hand apartment of two rooms, two bedrooms and a parking space, and an indoor area of 70 square meters, was sold at a price of $600,000. More on this, the room applies standard carpet, and the celling height is 2.5 meters, the kitchen work station stone is 15 mm thick, with split-system air conditioning. The entire project is equipped with a 10 meters long swimming pool and 30 square meters of gym.
In the same area, the buying price for a same lay-out apartment is $700,000. However, the room applies real wooden floor, the celling height is 2.7 meters, kitchen work station 30 mm stone material thickness, and equipped with a built-in sink and dishwasher and microwave oven. Further, the apartment has central air conditioning, and the project comes with a 25 meters long constant temperature swimming pool, a 120 square meters of professional gym, banquet hall, Spa, cinemas and so on.
Nevertheless, these different variables are only referred to as “superior” in the valuation report. This means that the apartment of a contract price of $700,000 is better than the one of $600,000, but what are the advantages specifically? How much more expensive is the decoration material for the apartment of $700,000? Why are the supporting facilities give more value to the property? For numbers of factors, appraisers will not be able to provide a precise price, as they are not the developers but the person who only knows about the basic knowledge of your property.
Hence the reason why valuation price cannot reflect the market price, and owners always suffer from unfair valuation.
Who is the valuation report for?
Appraisal report is the absolute reference for mortgage. Under most situations, appraisal report is prepared for the bank by the appraiser. The bank will pay the appraiser a fee, that is, the appraiser “belongs” to the employee of the bank.
As we all know, the biggest risk for banks is that borrowers can no longer afford the loans. In such a worst-case scenario, banks would be forced to sell property to repay the loans. And variables such as the original borrowing cost, unpredictable future market changes, the fees that banks pay to agents for auctions, lawyers’ fees and other fees will become the bank’s “lending risks”.
So how can banks minimise their “lending risk”? Valuation is the answer.
To put it in another way, if the worst case happens, the bank can resell the property at a higher market price to cover the full cost.
What should buyers of low cash flows do when undervaluation happens?
For these buyers, if valuations are lower than expected, they should contact mortgage brokers immediately to seek resolution.
This suggests that mortgage brokers have a better advantage than bank loan managers: Independence. Because they are independent from the banks, they are able to stand in the customer’s point of view to choose banks with the best offer. An experienced mortgage broker will be familiar with the valuation trends and policies of each bank, as well as the attitude of the bank towards “loan insurance” in different point of time. In some cases, owners are able to return to the appraiser and re-evaluate the property.