Whether you’re selling or buying a home, a property valuation is essential. Not only does it let you set a fair price relative to the market when selling, but as a buyer, it also gives you an indication of competitive pricing.
But when you’re buying, your lender may also wish to have the property valued, which is when differences between valuations occur. But how does a bank valuation differ from a market valuation and why are they required?
What’s a bank valuation?
When you take out a loan to buy a property, your lender needs to determine their level of risk. To assess this, they conduct a bank valuation and an independent valuer will be employed to assess your home value. The valuer doesn’t base home value on a fair market price and instead values the property based on what the lender could recoup if they had to repossess, and then sell, your property in a distressed market.
Bank valuations are usually lower than you’d reasonably expect to receive if you put your home on the market yourself because lenders want to protect themselves from a financial loss should you default on your loan. By valuing your home at a lower price, they’re able to calculate debt recovery, including any additional expenses, such as legal fees and real estate commissions, with a quick sale in mind. Then, if they value your property at less than market value and it still covers the costs should you default, then typically this will get you a step closer to loan approval.
How does a valuer work out a bank valuation?
A formal valuation is carried out by a qualified valuer who is trained to focus on the features of a property such as:
- Location and the aspect of the property.
- The condition and structure of the building.
- Any building faults.
- Home features and improvements.
- Property caveats or encumbrances.
- Local government zoning.
While your lender may order the formal valuation, often it’s you who will pay the fee associated. Formal appraisals cost between $100 to $500 per property and your lender usually keeps any information collected about your property.
When do I need a bank valuation?
Bank valuations are carried out to ensure you don’t borrow more than your property is worth. This lending strategy safeguards that your home, which is your loan security, is adequate to cover the lender’s risk.
How is the valuation carried out?
A valuer will first arrange a time to visit your property. Once there, they’ll measure your home and make notes on the building structure, condition and any faults. They’ll also note the property layout, number of rooms and bathrooms, as well as the fit out and any changes made to the property that add value.
Home improvements tend to include extensions, landscaping, solar systems, water tanks, shedding and swimming pools. Often the valuer will take photos of your property and take note of its relative location. Then, the valuer will research planning restrictions and council zoning, before looking at comparable sales in your area. After the valuer has conducted this research, they’ll produce the magic figure.
How does a market valuation compare to a bank valuation?
In comparison to a bank valuation, a market valuation is the value of your property based on the current market value. Also known as the ‘highest estimated buyer price’, this valuation is an appraisal and has no legal standing.
Market valuations are typically carried out by a real estate agent when a homeowner wants to sell a property. These valuations are based on sales in the area, as well as local knowledge, and are usually free of charge.
What are the major differences between a market and bank valuation?
|Used by property buyers and sellers: Usually, a market valuation is used to determine the value of a property for sale. It may also help a buyer identify whether or not a property has a competitive market price. Overall, the market value of a property gives both buyers and sellers an indication of the perceived value of real estate.||Used by banks: Bank valuations determine a lender’s level of risk and also ensure that a property value is high enough to secure a loan. Then, if the borrower defaults on loan repayments, the lender is assured they can recoup their financial contribution to the purchase.|
|Market-based: Using recent sales data of similar properties, the market valuation takes a snapshot of the market at a specific time and then uses this as a basis to value a property. The buyer and seller can then use this information to negotiate a purchase price.||Resale based: A lender looks purely at the resale value of a property, in case they need to sell it quickly. So, the bank valuation isn’t for the buyer, it’s merely for the lender. Thus, most lenders won’t even share the information that they’ve collected about the property.|
|Higher than a bank valuation: With a seller often having longer to achieve a property’s perceived value, market valuation is typically higher than a bank valuation. Plus, the market valuation is seller-motivated, with the seller often waiting to achieve the amount they desire.||Lower than a market valuation: A lender valuation typically factors in selling costs such as legal fees and real estate commissions, based on a ‘quick sale’.|
Do you want more information about bank valuations and market valuations for your property? eChoice’s expert brokers can help you understand the market and then simplify the process of applying for a mortgage. We have access to hundreds of products, so we’ll find you a competitive rate.
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This information is a guide only and is an estimate only based on the past 12 months of aggregated online mortgage enquiries from eChoice and partner programs.
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