With property prices falling in 2008 and recovering in 2009, bank valuations have been hard to predict. So what can you do to avoid frustration and disappointment? Stuart Wemyss investigates.
What is value and how is it determined? ‘Fair market value’ is defined as a value at which a property can change hands between a willing and knowledgeable buyer and a willing and knowledgeable seller who are under no compulsion to buy or sell. This means there’s no time limit to buy or sell a property.
However, the definition of ‘value’ that banks use may differ from ‘fair market value’. Some banks would prefer a measure of value that reflects the price that would be achieved within a certain period of time, say two months. More on this later…
When undertaking a valuation, valuers will look for evidence that indicates a value. That is, the valuer will complete a search using various databases for completed sales of comparable properties in the surrounding location to the subject property.
The property market can change quickly, so the comparable sales would need to have been completed recently, say within the past six months (12 months at most).
Older sales may no longer provide good evidence of current value so it really depends on what’s happening in the market.
Valuers will be quick to adjust their opinion in a downward moving market. However, valuers will want to ensure any recovery will be sustained before being more optimistic with their valuation estimate.
Valuers won’t be influenced by properties that are “on the market” or “quoted” private sales. They can only take into account completed sales (i.e. unconditional sales).
When determining if a property is comparable to the subject property, the valuer will consider things like location, size of land, size and condition of the property, any special features, and so forth.
Two properties are rarely identical, so there’s a fair bit of subjectivity in property valuations. In fact, valuations should more correctly be expressed as a range (for example, value of $300,000 to $330,000) rather than as one figure to reflect the level of uncertainly or subjectivity that exists.
However, the bank needs to work off one figure so property valuers are in the unfortunate position of having to arrive at one figure. My guess is that figure is likely to fall within the lower half of the valuation range – hence many people label bank valuations as “conservative” – which they can be.
Often, valuers work in defined geographical areas of responsibilities. Therefore, they should have a good working knowledge of the local market and the real estate agents who operate in that market.
A valuer will normally spend the whole day driving from property to property, taking notes and photos of each subject property. At the end of the day the valuer will return to the office to complete their comparable sales research and to write up their reports. A valuer may have to complete many valuations in one day, so they normally don’t spend a lot of time at each property.
There are three common types of valuations:
- Full – a full valuation involves the valuer undertaking a full inspection of the property, including an internal inspection. This will also normally involve the valuer taking measurements of the land and the internal living area. The valuer may also take internal photos.
- Kerbside – a kerbside valuation involves the valuer driving past the subject property but doesn’t require the valuer to undertake an internal inspection.
- Desktop – a desktop valuation involves a valuer collecting comparable sales data based on a description of the subject property (eg. size of land, bedrooms, etc.). This valuation doesn’t require any physical inspection or sighting of the subject property.
BANK VALUATION POLICIES
Over the past 18 months, valuation policies have changed considerably.
Before the global financial crisis, many lenders were trying to reduce the amount of full valuations they were ordering and order more desktop or kerbside valuations instead (to reduce costs). However, the banks’ concerns about the possibility of depressed property prices (which occurred in the United Kingdom and United States of America) has increased their reliance on full valuations.
Some lenders also started ordering valuations on all properties held by the lender, regardless of whether or not they were the subject of the loan application.
Many lenders have also tightened up internal controls around the ordering of valuations. For example, one major lender has outsourced the management of valuation ordering to a third party. This means bank staff can’t find out which valuation firm the bank will use in certain areas. It also means the bank can’t speak to the valuer before the valuation is completed, perhaps to provide sales evidence and the like. The purpose of these changes is to stop bank staff or mortgage brokers unduly “influencing” a valuer.
The type of valuation (i.e. full, kerbside or desktop) that a bank will order depends on the application. For example, if you’re borrowing a low proportion of the property’s value and you’re an existing customer of the bank then it will probably order a kerbside or desktop valuation. If you’re borrowing more than 80 per cent of the property’s value then it’s highly likely the bank will order a full valuation.
Most lenders would prefer not to revalue properties more often than once every 12 months. However, if there’s a specific reason why the value of a property has altered, for example if you’ve completed some renovations, then most banks will be open to revaluing the property.
There are lots of reasons why a valuation might come in lower than expected, including:
- You have an unrealistic expectation of what your property is worth. Our objectivity can be impaired when we assess the value of our own properties.
- There might be very few comparable sales for the valuer to rely on. In these circumstances, the valuer is likely to err on the side of conservatism.
- The average time taken to sell a property could be too long. In some country areas, it can take three to six months to sell a property. A lender won’t want to wait six months to sell a property, so it will want a valuer to provide a valuation which reflects a quicker sales period.
- A poor valuation. Maybe it’s been a “rush job” or maybe the valuer is inexperienced but poor quality valuations do occur – luckily they aren’t that common.