Empower Your Business with a Sales Evaluation for Mortgage

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when you buy a property you'd assume the value of the property is the price that you paid for it but that's not always the case at least it's in the eyes of the banks congratulations you played yourself when you're getting your mortgage for a property the banks will do a separate valuation to make sure the price you're paying for the property is what the property is really worth they do this because they want to know how much they'll be able to sell your property in the event that you default on your loan and they have to repossess your house and sell it to cover the cost of a mortgage and sometimes when the bank values your property it'll come back at a price that's lower than what you paid for sometimes much lower you lose good day sir if it happens to you then it can put you in a bit of a tricky situation financially especially if you bought the property at an auction or you signed a contract unconditionally with market conditions as they are today we've been seeing this issue more frequently yeah for example we had some clients that went to an auction unsuccessfully at a house in windsor on the weekend it sold for 1.220 million dollars this is way more than what they're expecting but as you can see from this valuation report the estimated house was only at eight hundred and five thousand more than four hundred thousand dollars lower than the price it eventually sold for in this case the bank would have definitely sent someone out to do an in-person valuation rather than rely on the automated one but even so if i bought this property i'd be pretty concerned about the valuation coming in low too and unfortunately since it was an auction if the valuation does come in low then the people who bought it could be in trouble in today's video we're going to teach you everything you need to know about property valuation so this doesn't happen to you specifically we're going to cover the two different types of property values and why it's important to know the differences between them how banks value property including the different types of valuations they might use why bank valuations often come in lower than the purchase price or market value the potential impact of a low valuation including exactly how much it could cost you and finally what to do if you get a valuation that comes in low and the good news is you might be able to fix it before we start this video if you find it helpful in any way do me a little favor and hit that like button or leave a comment below for the youtube algorithm just a little gesture like that can make a huge difference to the channel if you haven't already hit that subscribe button below thanks you guys it really means a lot so let's dive in so what are the two different types of property values yeah first there's market value this is almost looking at what the property is worth today or what people think it's going to be worth it's the kind of value that you might be familiar with simply put market value is the price that the property will sell for on the open market but market value doesn't always reflect the true value even the replacement of the property at least not in the eyes of the banks and lenders market value always includes a bit of an element of emotion and sometimes ego that can drive the price higher than it's actually worth and this is especially true with options i guess like you saw on that black wall street example buyers can get easily carried away with competitive environment and end up paying much more than what they budgeted for in the quest to win the property and if they fall in love with the property and don't want to miss out they're always willing to extend themselves even more and the market value can also get inflated when the market is hot like it is now buyers get fomo and end up paying too much because they don't want to miss out yeah we saw this recently with some clients that bought in petrie in brisbane there were hundreds of people that had been to the opens and there were 30 written offers made for this property our client's offer was in the top five of the 30 offers so 25 people got a text message back from the agent saying bad luck and five people got the last chance to up their offer and make their last and final to try and secure the property our clients end up securing it for and seventy thousand dollars they didn't want to miss out they'd been to a bunch of auctions they missed out on five properties in the last three months and were sick of it unfortunately the bank didn't agree with their market value of seven hundred and seventy thousand dollars the bank didn't really factor in the thirty other offers the missed properties the fatigue of being sick of the hunt and potentially being exempt on the last property and unfortunately in this case the bank ended up valuing the property at 700 000 now in our clients case they had a pretty big deposit and were able to make the difference and proceed but in a lot of other cases if your first home buy and you don't have that extra savings you can be in a lot of trouble i guess the key takeaway here is that sometimes the market value is higher than the actual valuation of the property that the bank's willing to support and it's mainly caused by the emotional aspect of the property purchase in the process and now the second type of property value is the bank value at some stage during the loan application process the bank will do an independent valuation of the home you're willing to buy they do this because they use the property as a security for the loan in other words if you default on your loan the lender has the right to sell the property to recover the outstanding monies owed you have my money right yeah it's coming so realistically the bank wants to make sure that the value of the property is high enough to cover their potential losses if they need to repossess the property and sell it on the market unlike the market value the bank value doesn't take emotion into account it's purely a numbers game there are six different types of valuations that the banks can use contract of sale this is referred to as a contract of a sale assessment this type of valuation assessment only relates to the purchase transaction and its application is restricted to certain types of properties and locations this assessment has no value input whatsoever they just adopt the purchase price on the contractor sale in that assessment generally you have to have a pretty big deposit for the bank just to accept the contract to sale they run it through their system the computer literally says yes we're happy to accept the contract to sell what you pay and they go ahead more and more often at the moment it's pretty rare for the banks to accept a contract to sell assessment the next is an avm avm is short for automated valuation modeling an avm is a computer generated estimate on the value of the property they look at the attributes like the number of bedrooms the land size along with comparable sales in the area these come with a confidence score which is an estimate of the level of accuracy on the estimate at the moment abms can be pretty hit and miss especially if the property's never sold before it doesn't really have an anchoring point it doesn't factor in if there's been renovations even sales that have happened in the last one two three months sometimes there's a bit of a lag and a bit of a delay there and avms aren't factoring in the current market value desktop estimates these are sometimes referred to as electronic valuations desktop estimates are produced by a licensed valuer the value will reference the property attributes comparable sales and photographic evidence of the property in order to arrive at their estimated value they don't do a physical inspection basically a desktop estimates like an avm with the person individually curating the sales and picking them out rather than the computer doing it curbside assessments these are also known as drive buys a license valuer will externally inspect the property and use your assessment along with the comparable sales to estimate the value of the property this estimate is given as a value rather than a single figure short form valuation this is probably the most common type of valuation assessment it relies on a licensed valuer carrying out an internal and external inspection of the property the valuer will consider the condition of the property overall market conditions and recent sales evidence to determine the value of a property the value figure is expressed as a single figure and is presented on an industry endorsed template if you're getting financed through a non-bank or a smaller bank the short form valuation is the most common a lot of those smaller banks don't actually do an avm or an electronic valuation it goes straight to the short form valuation so be aware that potentially they need to arrange an inspection there too so there's a three four five day lag time from when they start the valuation process to finish it long form valuation this is the most detailed type of valuation assessment that the bank can use this type of valuation is only used on complex unique or high value properties so if you're buying your first home it's unlikely going to come across a long form valuation but as with the short form the property is physically inspected by a licensed valuer compared to a short form valuation the long form was way more thorough and extensive the type of valuation your bank is going to use really depends on the lender how much deposit you have the value of the property even the location of the property all valuations except for the contractor sale and avm estimates are performed by an independent third party in other words they're not directly employed by the bank they do this to try and avoid any conflict of interest as i mentioned earlier bank valuations can often be lower than market valuations so why is that it comes down to the underlying goals of people doing the valuations market valuations are usually done by real estate agents either on the buying side or the selling side their motivation is to get the highest price possible for the seller and to give the buyer a reasonable indication on how much they should spend on the property market valuations are typically assuming that the seller isn't in a rush to sell the property in other words that they're willing to wait longer that means they're going to get a higher price so overall market valuations will tend towards a higher figure bank valuations on the other hand have a different goal in mind a bank valuation is all about limiting the risk for the lender in other words they want to make sure they can sell the property quickly and recoup any losses if they have to repossess and sell the house and for that reason it makes bank valuations a little bit more conservative there are also a few other things that make a bank valuation tend to be a little bit lower than market valuations they're often more objective they don't take emotion and they buy sentiment into account they assess the property as at the moment and in the condition it's currently in in other words they don't look at the potential of the property in the future they also assess the property its current state so if the house you're looking at is in a bit of disrepair or the quality that there's holes in the walls you know the presentation doesn't look great the bank's value will factor this into their valuation so what's the potential impact of a low valuation if the bank valuation comes in lower than the purchase price it will affect the loan to value ratio the loan to value ratio is calculated as a percentage of the loan amount compared to the value of the property for example if you bought a property for 1.22 million dollars and you had a deposit of 244 000 you'd have a loan amount of 976 000 this translates to a loan to value ratio of 80 percent so the loan amount to the value of the property is 80 so the lenders use lvr to assess the risk of the property essentially the higher the lvr the higher the risk if your lvr is above 80 so you have less than 20 deposit then you're going to need to pay lenders mortgage insurance or lmi in order to get your loan approved and if your lvr goes above 95 then well you might not be able to buy the property at all so let's say the bank used an avm to value the property at 28 blackmail street that would give a valuation of 805 000. assuming you had the same deposit nathan mentioned before the same loan amount would put your lvr at 121 in other words there's no way you get your loan approved without coming up with an extra 520 000 to bring your lvr down to a max of 95 if that was possible unfortunately most people don't have a cool half million sitting around so there's a good chance that you wouldn't be able to go ahead with that purchase and if you had bought this property auction which someone did then you would not only lose the chance to buy the property you also lose a lot of your hard earned money contracts and sales signed at auction are unconditional as soon as you sign the contract you're legally bound to buy the property at the purchase price if you fail to do so you'd lose your entire deposit which is usually five to ten percent and you'd open yourself up to a potential lawsuit from the vendors for the lost sale they can sue for any losses incurred from the loss of the sale this includes the real estate agent fees listing fees and importantly any differences between the original contract price and the final sale price if they did have to resell it so if the property is sold for anything less than 1.22 million next time they sell it then you're liable for the difference so in this example you could lose 120 000 from the 10 deposit you put down on auction day plus any differences between your contract price and the final sale price so if the property re-sold for 805 000 then you'd be liable for an extra 415 thousand dollars in damages combined you could lose over 530 000 buying a house through private treaty meaning you put an offer instead of going to auction is a bit more of a different story you should be safe from most of the damages as long as you sign the contract to sell subject to finance in this case the lender is going to do a bank valuation before your loan is unconditionally approved so if the valuation is low it's not a big deal if you can't move forward the purchase at most you'd lose some of the holding deposit in queensland for example if you've got a contract subject to finance if you terminate under the finance clause you can get that deposit fully refunded it'd still be a thing to lose three thousand dollars but it's a sting that's a lot less than being on the hook for half a million dollars so what happens if you get a low valuation are you completely screwed or is there something you can do about it the good news is that you do have a few options if you have a low bank valuation firstly you can dispute the original valuation you can provide the value with evidence of comparable sales in the area that you think would justify a higher price they may be willing to adjust their valuation if you provide the right comparable sales within the last three months it's worth a try but most valuers are unlikely to change your original valuation if this doesn't work you can request the valuation from a different valuer you can do this by two ways you can ask linda to use another value on their panel to form a valuation in most cases it's not going to be possible because if a bank holds two valuations if they've got a lower one they're going to go with the lower one so it's not going to really prove any benefit otherwise you can try a different bank ask them to do a valuation your property and hope it doesn't get the same value up property valuations are pretty subjective in other words it's going to depend on the opinion of the person who's doing the valuation so while there is a framework there's no hard and fast rules to get to that end property value it's what the valuer thinks the property's worth compared to this one that's all down the street for 700 000 this one for 800 000 and how they compare we've seen this with our clients in one case the client of ours requested a valuation from three different valuers and the estimates vary by over hundred and fifty thousand dollars this option has definitely saved plenty of people from getting into a sticky situation if this doesn't work and you've made your offer subject to finance you may be able to use these valuations to negotiate a lower purchase price from the seller if you bought an auction then you're out of luck on this one you've already committed to the buying property at the purchase price that you agreed at auction finally if all else fails you might need to look at options to cover the shortfall you have to do this by increasing your deposit maybe you talk to a family member for a gift or alternatively in the example before you might need to look at paying lender's mortgage insurance and increase the loan above 90 you might still be able to get your loan approved as long as you satisfy the lender's lvr requirements so something that will hopefully understand more the difference between market valuations and bank valuations and all the different types of reports that we get putting all together here are the key takeaways firstly market valuations and bank valuations are not the same what the real estate agent thinks the property is worth and what the bank thinks it is is not going to be the same secondly low bank valuations can prevent you from getting your home loan application approved if you're buying auction you want to make sure that you're very confident about the value of the property or cover any potential shortfalls if the valuation comes in too low otherwise you may end up learning a very expensive lesson if you're buying by private treaty always always always make sure you've got a finance clause in your contractor sale and if your valuation is too low all is not lost you may be able to get a better valuation by asking a different bank to reassess the property and get a higher evaluation as a result the example i used earlier might seem a little crazy like could a bank value property 400 000 less than the purchase price but unfortunately the answer is yes like it's definitely happening while this case the bank would not have used the avm they would have sent a value out there for the physical inspection we've seen situations where a property bought for 1.4 million was only valued at 1.1 million the shortfall in valuation for cheaper properties isn't usually that big you'll unlikely get a 200 000 shortfall for a property that sold for 500 000. but those valuations can still come in under purchase price and you need to be prepared for that make sure you do your research look at realestate.com for recent sales and get a really good feel on what sold not six months ago not 12 months ago but in the last month or two in that local area on similar properties that have the same amount of bedrooms that have the same block size if the unit has the same floor space and get an understanding on what you're paying is pretty close to the market value so what's preventing you from qualifying for a home loan here at hunter galloway we get home loans approved so if you're living in australia and looking for a mortgage broker we can help visit us online at huntergalloway.com.edu or call us on 1300 088 065 and we'll see you next time you