THE STORY OF BANK VALUATIONS
It’s probably common knowledge that when you go to get a bank loan for a new home, the bank will need to get a professional opinion on the value of the home – a bank valuation. But what’s probably not common knowledge is the inside story of how it all works and why it sometimes doesn’t work! So this is the story of bank valuations. Or at least some of the story – it would take a long book to really spell out all the gory detail.
So the sky is blue and the grass is green and you’ve had written approval to borrow the money for your new home, and then … the bank manager tells you there’s a problem – the valuation has come out under the cost to build. What?! A thunderbolt from the blue. But there’s nothing that can be done about it, she tells you.
So why has this happened?
Firstly, let’s paint a real quick picture of why the bank needs a valuation. In the real world, sometimes things can go pear shaped. Let’s say Fred borrows $500,000 to build a new home but then loses his job and can’t pay his monthly mortgage repayments. After a while, the bank is losing money and the big boss says they have to recover their losses so they tell Fred to get out and then put the home on the market to sell it. But the bank aren’t interested in making money on the sale, they just want to cut their losses and run, so they sell it at what’s known as fire-sale rates – which is often well below market is paying, because they want to make sure they can sell it no matter what the market is doing. And this fire-sale rate is linked to the original bank valuation that was done.
In other words, the bank wants to know what they can sell the home for in a hurry if the customer can’t pay and they need to get out of the deal in a hurry. And this is why they get a professional bank valuation.
Property valuers is a profession, and one which we respect – we’re not here to denigrate or cast a slight on these skilled professionals – which involves quite a process in valuing a property. They’ll take a number of things into consideration, including what the market’s like at the moment; historical sales; cost to build; what the market could be like in the future, and various other factors such as the demographics of the location you’re building in.
So in the case of a new home build, they get the plans and scope of works and use industry rates such as Cordell or Rawlinsons and literally cost up what they think the home is worth. Note: they tend to ignore the builders costings. One thing to understand is that a valuer is being legally relied on to provide a written valuation that can be used by the bank (or other organisations) to make large decisions, and if things go wrong, the bank can come back on the valuer and sue them. So the valuers really do their own homework and take many things into consideration to make sure their valuation is as watertight as possible.
But for you, the customer, this can result in three problems:
- Property valuers always err on the side of caution, resulting in lower valuations than you would expect.
- The valuations are for the bank to use in a fire-sale situation, resulting in lower valuations than you would expect!
- The valuer hasn’t been involved in the nitty gritty details of working out the design and specs of the home over many weeks or months and with no fault to him, he overlooks some hidden costs of the intricacies of your home on your land with your tastes, resulting yet again in lower valuations than you would expect!!
So, you’re in a spot where you thought the home was worth $500,000 and the bank valuation comes in at $450,000. What to do?
A low bank valuation causes 2 problems.
- Banks generally only lend a percentage of the cost to build, so when a valuation comes in short, you have to make up the difference by going begging from family and friends or digging deeper into your own pockets. I.e. say they were going to lend you 70% of the $500,000 which is $350,000. If the valuation comes in at $450,000, then you might think you’re still covered because you were only borrowing $350,000. But 70% of the lower amount of $450,000 is $315,000 – you’re actually $35,000 short.
- It scares the Dickens out of you and makes you think you’re paying too much or your house design etc is all wrong.
Here’s our comments – step 1 is to understand that the valuation is only an opinion. A professional opinion, yes, but still only an opinion. If you believe that the valuation isn’t accurate, then talk to your bank manager about it. We’ve seen it plenty of times where the bank arranges for a different valuer to revalue it. The way banks and brokers sometimes request a second opinion is testimony to the simple fact that valuations are not absolute or objective – they’re the subjective opinion of a human being and can vary for reasons we’ve already discussed earlier.
Another thing is for the bank to go back to the valuer and ask for reconsideration based on comments from you about what they might have overlooked – special things in the design or site costs that the plans and scope of works may not accurately convey. We’ve seen valuers come back with a higher value but unfortunately it’s rare. The new evidence or information has to be very convincing and material to make them revisit their work.
The other thing is to just smile and realise that the valuations are expected to be low for the reasons we’ve already pointed out, and find a way to get the extra cash and move on with life. No real estate agent has ever used a professional property valuer to set a price on what a house is worth, and if builders used property valuers to calculate the cost to build, there would be no builders around because they’d all have gone broke long ago.
Of course, the scenario we used earlier is fairly extreme, often it might only be a small amount such as $5000 of $10,000 which is a manageable figure. And if the variation really is a huge amount out, use the opportunity to drill down into it with your builder to see where the costs actually are and if anything can be done about it.
At the end of the day, no one’s out there to purposely make your life hard, it’s just that the property valuer is doing his job and making sure that it doesn’t come back and bite him and the bank manager is doing the same thing. It’s just a matter of being aware of how it all happens so you can make it work better for you.
And as always, ask for help!
Disclaimer. This blog is our opinion only. The information provided in our blogs is accurate and true to the best of our knowledge, but there may be omissions, errors or mistakes. The information presented in our blogs is for informational purposes only and we are not professionals, so the content we provide shouldn’t be taken as legal advice. We strongly recommend consulting with a professional before taking any sort of action. We reserve the right to change how we manage our blog and we may change the focus or content at any time.