What's your property worth? And who's right?

Most of us have a pretty good idea of what our property (or properties) are worth in today's market place.  Your home or investment property is likely to be your most valuable asset and therefore knowing the worth of your property assets is important.

But is there a difference of opinion when it comes to the true market value of your property?  And who's right?

When it comes to market value of your property, an issue may arise when the following events occur:

• You want to sell your property
• You want to release equity against your property
• You want to refinance your home or investment loan
• You buy a new property

From experience, there is always a difference of opinion between the following parties:

1) You

2) The Bank

3) The Real Estate Agent

4) The market

So who's right and why does it matter?

If you want to borrow money against a property, then a bank valuation is set in concrete as the bank or lender will use their valuation as the basis to determine how much they're willing to lend you against their valuation.

If  you are buying or selling a property, then the actual purchase price or the actual sale price is the true market value.  Market value is determined by what a willing buyer is prepared to pay and what a willing seller is prepared to sell at.  The market is made up of a bunch of willing buyers and sellers.

An agent's appraisal is merely an opinion, and a well informed one at that, as agents are closest to the action.  Some agents may try to give you a higher value to win your listing, so dealing with the right agent is important. There are also Buyer Agents and Vendor Advocates which helps with the process of buying and selling as these guys will act in your best interest and usually always get you the best result.

In most cases, people want to borrow money against a property, and whether you are buying, selling, or even refinancing, then the bank valuation is most important as it will have the most impact on your bottom line.

A bank orders an independent valuation on your property in the following circumstances:

1) You have purchased a home or an investment property

2) You want to refinance an existing home loan or investment loan

3) You want to release equity against your existing property

When you buy a property, the bank values the property to verify the purchase price.  We seldom come across valuations that come in below purchase price however it has happened once or twice where a client paid above “market value” (based on comparable sales).  The client had to come up with the cash to make up the shortfall as well as pay Lenders Mortgage Insurance (LMI) given that the bank's exposure was now going to be much higher.

A very common instance where a bank valuation comes in lower than purchase price is with "off the plan purchases".  The issue here is that the bank will value the property based on “comparable sales” which have sold and settled within the last 3 months.  If you bought the property off the plan a long time ago (1-3 years is common), then the market may have moved and the current market value may differ to purchase price.

If you buy a property off the plan, you are at risk if the market moves against you or if comparable sales at the time of valuation are lower than the actual purchase price.  This can happen if the developer has sold you a property at a premium to include projected capital growth.  If the bank valuation is lower, you have to find the cash to make up the shortfall.  Further you may be up for LMI as the LVR is now much higher than first anticipated.

It should be noted that a pre-approval does not guarantee you that a bank valuation will come in on purchase price.

When refinancing or releasing equity against a property, the bank usually orders a valuation to confirm the current market value.  If the valuation comes in lower than expected, the issue for you is that you may end up paying LMI if the LVR is now much higher due a lower valuation.  Or worst still you may end up doing nothing, which will cost you even more in the long run by not putting your available equity to good use and purchase capital growth assets (like property).

Is there anything that you can do to achieve the desired valuation result?

The best strategy that has worked for me personally and for many of our clients is to present the property as best you can (for existing properties you own), as well as to research comparable properties which sold in your area in the last 3 months and present these to the valuer for consideration.

What if your property is valued by the bank below what you think is fair market value?

Again if you can demonstrate at least 3 comparable sales for properties which have been sold recently in your area, then the valuer has to take these into account.  A valuer puts a dollar figure on your property based on his market research and market intelligence.  At the end of the day the valuation number is subjective and this can either work for you or against you.

Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.