Bank valuation is an essential part of the home loan application process because it dictates the amount of money the bank would agree to lend. Bank valuations are often confused with the property’s market value – so what’s the difference, and why is it important to know?
Both are legitimate measures of property appraisal, but lenders tend to disregard market value in favor of bank valuations because the latter usually yields more favourable results for them. Bank valuations return conservative appraisals that minimise financial risks for the lender.
The bank valuation usually estimates a lower property value than its current market price — sometimes even registering up to $200,000 difference.
It’s a wonder how the difference could be so huge even when both appraisals apply to the same property, but different factors were considered in the assessment.
For market values, professionals focus on the supply, demand and emotions that drive up a property’s value. That is, the more buyers there are that flock to an area and commence a bidding war to effectively drive up prices, the higher a property’s market value would be.
On the other hand, bank valuations focus on the property in question, assess its value, then lowers the amount a little more as an added security measure – for when a borrower defaults on their loan.
How long do bank valuations take?
Bank valuations are usually accomplished between one day to one week, depending on the type of valuation required for the loan and the valuator or lender. There are three types of valuations usually applied. These are:
Desktop valuation
Desktop valuations are literally done on the valuator’s desk and can be accomplished within a day.
The professional valuator relies on property descriptions and the sale prices of similar properties that were recently sold similar properties. No actual visit to the area where the property is located occurs.
These yield results faster and cost less—between $100 and $200—than the other types of valuation because there isn’t much effort on the valuator’s part.
Kerbside valuation
Kerbside valuations take the valuator away from their desk to the curb of the property because they will have to assess it based on what they see from outside. That means valuators will not enter the property in question.
It would not factor in the interior structural conditions that may further increase or actually decrease the property’s value, but it could yield more precise results compared to desktop valuations.
Since there is slightly more effort involved in a kerbside valuation, the result would naturally take longer to come out—usually about two to four days. However, the time frame would still depend on how fast the professional valuators work.
Full valuation
Full valuations require the most effort from valuators because the property must be assessed inside-out, which is usually the case when a borrower is applying for a huge loan for an expensive property.
Since the valuator is supposed to inspect every nook and cranny of a property, they can be held liable for their assessment. This is why valuators present pertinent evidence to back their assessment.
With all the efforts involved, full valuations take the longest to complete—usually five to seven days—and cost at least $500 for an average sized home.
Another reason that affects processing time
Some may experience valuations that take longer than the processing times indicated above, but it doesn’t always mean the delay is the valuators fault.
In many cases, the lender processes everything after pre-approval and holds off on ordering a valuation until the last minute. For instance, a bank that promises loan applications to be processed in only five business days may order a valuation on the 4th day.
If the professional valuators have a lot on their plate, the most recent order would have to wait in queue before it is accomplished.
Factors that affect bank valuations
Several factors affect the results of a bank valuation — some of the most important considerations are explained below.
- Location
One of the biggest factors that affect a property’s value is its location. Is it in the middle of the city’s business district or in the suburbs? Perhaps the real estate conditions in the area has been in a slump and does not justify the requested loan amount.
Other location-based factors include:- Local zoning and restrictions
- Geological faults and other environmental risks
- Planned developments
- Sale price of similar properties in the same area in the past half year
- Structural condition
It’s a given that valuators would take the property’s physical structure into consideration, but this also includes plumbing, electrical and any other potential issues that could decrease the property’s value. - Building size and number of rooms
- Ease of access, including vehicle access and garage or vehicle parking area
Disputing a bank valuation
Banks select an assessment that exposes them to as little risk as possible, which is why some valuations result in lower-than-expected amounts. Of course, borrowers are given the freedom to dispute the valuation, but the result rarely changes.
Disputing a bank valuation is difficult since banks win at least 97 per cent of the time. The near 3 per cent of successful disputed valuations, show circumstances when disputes can change the results, such as:
- Assessment error
Assessment error happens when the valuator mistakenly includes or fails to include important factors that affect the property’s value.
For instance, the valuator may have considered the sale prices of similar properties in the same area and gave the property in question a low assessment because a few were sold off $200,000 cheaper, not realising that those were distressed homes.
Since the borrower is making a regular purchase, the valuator should not have compared the value of their potential property with the sale price of distressed homes. - Valuator’s personal opinion
Professional valuators are required to keep their personal opinions about the structure, location, or any other factor out of any assessment and focus on the numbers.
For instance, a valuator can rate a property as high-risk because of some damaged section of the house when, in fact, the “damaged section” was only a decorative addition to the house and does not affect the structure in any way.
If the instances above affected the valuator’s assessment, the borrower may dispute the result.
However, it may not change the result because most lenders still choose the lower valuation even if a new, higher one is presented.
What is an independent residential property valuation?
Some borrowers may consider paying for independent residential property valuation prior to applying for a loan so that they could have a more precise assessment that supports their loan amount.
This may prove helpful for borrowers, but lenders usually have their own panel of professional valuators. The results lenders receive from independent valuators can be disregarded and not be used.
For those who are planning to purchase a property by getting a loan from a bank, the smart option is to avail of the bank’s valuation first before applying for the loan (even if you have to pay for it yourself). This should ensure that your credit score wouldn’t be affected if your loan application gets rejected.
Seek expert advice
As always, the information above should not be taken as financial advice: it is best to discuss your options with a professional to take your personal and financial circumstances into consideration.
Explore Nest Egg for more information.
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