Bank Property Market Valuations

Why do you need a valuation when applying for a loan?

Banks employ valuers to help them determine if a property is adequate security for the loan.

If a borrower is unable to make their regular loan repayments and default on their home loan, the lender needs to know the market value as they may be forced to sell the borrower’s property to recoup their losses. A bank valuation is an essential tool lenders use to mitigate their risk; it ensures they don’t suffer a financial loss.

Property Valuers must provide an opinion of value based on their professional interpretation of a set of rules, that satisfies the legal definition of market value.

The “Standard Instruction” is the rule book valuers must follow for a bank valuation. It states, “The estimated amount for which an asset or liability should exchange on the date of valuation between a willing buyer and a willing seller in arm’s length transaction after proper marketing and where the parties had each acted knowledgeably, prudently and without compulsion.”

So, what does “market value” mean in practice?

Market value is not the best-case scenario where five potential buyers get into a bidding war. One that pushes the sale price way above what a reasonable purchaser would pay. It’s also not the worst-case scenario where financial or legal difficulties result in a fire sale.

While the rules require valuers to adopt a single value, in reality, there’s a range of values between the best and worst-case scenario for which the property could sell. The valuer’s job is to determine the “best fit” within this range.

Determining “best fit” is part of providing a professional opinion. It requires the valuer to utilise their expertise to assess the specific market conditions and sentiment as at the date of the valuation. This task can be challenging, especially in today’s market, where house prices are rising weekly.

How does a valuer determine market value?

Once the valuer has completed their inspection, they will prepare a formal report for the lender. It’s at this point that the valuer will determine the property’s market value.

The most common method valuer’s use for a bank valuation is the Direct Comparison Approach. This approach aims to establish the market value of the subject property by weighing it against comparable sales evidence from the local area.

From the various sales databases valuers have access to, they are able to uncover the most relevant comparable evidence. Unfortunately, properties are rarely identical. Therefore, it’s up to the valuer to make allowances for any differences.

Some of the critical characteristics the valuer will consider when analysing the sales evidence include;

  • land size: size matters because typically, a significant portion of a property’s value will be in its underlying land value.
  • location: the valuer won’t just assess the suburb, they will also consider the street and the surrounding neighbourhood.
  • size of the house: this includes the number of bedrooms and bathrooms
  • overall condition: while the size of the house matters, quality is equally important. A renovated 3 bedroom home will attract a higher value than a 3 bedroom home in disrepair.

While these aren’t the only characteristics the valuer considers, they are fundamental to the valuation process.

Valuers are independent and impartial, and they have no vested interest in the property they are valuing. Their role is to establish the market value based solely on the available sales evidence, however, in times like this, it is quite difficult to keep up with the massive increase we have seen in house sales values.

Remember, if you need any help or advice, we are just a phone call away.

All the best, Simon.

Source: WBP Group

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