Valuers must abide by the Standing Instructions, a rulebook created by banking industry regulators. If your business depends on the results of a residential bank valuation, you need to understand the rules of the game.
Playing by the rules is a valuer’s number one priority, and the Standing Instructions is the rule book valuers abide by when completing a residential bank valuation. This document specifies valuation standards, guidelines and governing principles!
The Standing Instructions was first introduced in 2012 by a committee that included representatives from the Banking and Finance Industry, valuation firms, mortgage insurers, Valex and the Australian Property Institute (API). Their goal was to provide guidance, clarity and consistency to the industry as a whole.
To ensure valuers meet the requirements of the Standing Instructions, valuation firms rely heavily on their compliance team. So, Andreas Suwono, National Risk and Compliance Manager at WBP Group, is a busy man! Since the beginning of 2021, Andreas’ team has checked nearly 47,000 valuation reports.
For Andreas, the introduction of the Standing Instructions has been a significant improvement. He remembers the good old days when “every lender had their own standard procedures and specific valuation requirements. There was no consistency across the industry. Now, we have a definitive set of rules.”
At WBP Group, queries regarding the Standing Instructions are an everyday occurrence and are often a source of angst. To ensure mortgage brokers are in the best position to help their clients, Andreas believes education is the answer.
In Scope or Out of Scope
Under the Standing Instructions, an in scope property can be valued using the ‘Property Pro’ template on a short-form or a restricted/kerbside basis. The basis of the valuation will depend on the bank’s requirements.
In simple terms, an in scope property is a ‘standard’ residential home. Examples include;
- A single house or dwelling
- A single home unit, villa or townhouse
- A vacant allotment on which construction of a single dwelling is permissible
- As If Complete or To Be Erected dwellings (construction of a single dwelling)
Ever wondered why the valuer escalated your short-form valuation request to a long-form? Banks have identified several property types they consider higher risk and have deemed them out of scope for short-form valuation. Valuers must assess these properties on a long-form basis.
Examples of higher risk ‘non-standard’ properties include;
- Development site
- Multiple dwellings on one title (2 or more houses)
- Serviced apartment
- Student accommodation
- Any property whose value exceeds $5,000,000
Residential property with development potential
A bank valuation must reflect the property’s highest and best use. The Standing Instruction defines this term as;
“The use of an asset that maximises its potential and that is physically possible, legally permissible and financially feasible.”
What does this definition mean in reality? The critical test is – given current market conditions, would a developer proposing to construct multiple dwellings on the subject property pay a premium over and above what an owner-occupier/investor would pay.
Highest and best use is a professional opinion. There is no hard and fast rule. Valuers must utilise their expertise to assess specific market conditions and sentiment at the date of valuation.
So, even if a property has no plans and permits (DA approval) in place, the highest and best use may still be residential development.
Standard bank valuation practice dictates the valuer must assume the bank is selling the property on the open market. They can’t value the property based upon your customer’s specific situation.
Ultimately, the valuer must conclude who is the most likely purchaser. If the answer is a developer, rules dictate the valuer assess the property on a long-form basis. Unfortunately, this means the valuer will disregard that your client does not intend to develop the site.
Split Contracts
Split contracts have proven to be a higher risk proposition for the banks and continue to challenge the valuation industry. Andreas spends a significant amount of his time dealing with the fallout.
Based on the requirements of the Standing Instructions, valuers apply the following test. If the answer to one or more of the following is yes, the valuer will deem the valuation a split contract.
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Legal
- If part of a multiple dwelling residential development, does permission to construct the subject property form part of a single planning permit? If the answer is yes, does the permit require the entire development to be completed before the occupation of the subject property is permissible?
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Contractual
- Does the land contract prohibit the resale of the subject property until the builder has completed the construction of the entire development? The resale must be able to occur under normal open market conditions.
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Physical
- Based on the endorsed architectural plans and engineering drawings, the landowner can’t construct the dwelling independently of all other dwellings in the development.
Andreas acknowledges that split contracts can be contentious as they require valuers to make a judgement call.
Unfortunately, valuers are often expected to make this call without having all the facts. So Andreas recommends that mortgage brokers provide the valuer with all relevant information. Ideally, this should include the planning permit, land contract, building contract, architectural drawings and engineering drawings.
Are you familiar with the Standing Instructions?
The Standing Instructions is a detailed document that covers a wide variety of residential property types. It’s also a live document that is continually being reviewed and updated.
If you’re a mortgage broker who operates in the residential space, you must have a working knowledge of this document, especially if your client comes to you with a non-standard property.
Andreas would encourage every broker to download their own copy of the Standing Instructions from the API.
CoreLogic (Valex), the largest valuation management platform in Australia, also has an extensive in-house compliance team tasked with verifying each valuation they process meets the requirements of the Standing Instructions. If they find a report that fails to do so, they’ll issue that valuer with a bounce notice.
A bounced valuation is a cardinal sin for any valuer. It means wasted time and energy to fix their mistake. And based on feedback from Valex, a bank may divert work away from any valuer they find to have incurred too many bounces.
A valuer’s job goes further than just writing a value on a piece of paper. They are also required to identify any lending risks. The Standing Instructions creates a standard framework for valuers to address these risks consistently so the bank can make a fully informed decision.
That’s why valuers need to be fanatical about following the rules.
Author Tim Stafford is Senior Valuer and Head of Research at WBP Group. For the last 18 years, he has specialised in the mortgage valuation sector.
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