Why do you need a bank valuation?
Suppose the borrower is unable to make their regular loan repayments and they default on their home loan. In this instance, the lender needs to know the market value, as they may be forced to sell the borrower’s property to recoup their losses. A bank valuation is an essential tool lenders use to mitigate their risk. It ensures they don’t suffer a financial loss.
I’m sure there have been times when you’ve disagreed with a valuer’s professional opinion. However, it’s important to remember that the valuer has no vested interest in determining a property’s market value. A valuer’s primary responsibility is to provide the lender with a valuation that satisfies the legal definition of market value.
So, what does this IVS definition of market value mean in practice?
Market value is not the best-case scenario where five potential buyers get into a bidding war. One that pushes the sale price way above what a reasonable purchaser would pay. It’s also not the worst-case scenario where financial or legal difficulties result in a fire sale.
While the rules require valuers to adopt a single value, in reality, there’s a range of values between the best and worst-case scenario for which the property could sell. The valuer’s job is to determine the “best fit” within this range.
Determining “best fit” is part of providing a professional opinion. It requires the valuer to utilise their expertise to assess the specific market conditions and sentiment as at the date of the valuation. This task can be challenging, especially in today’s market, where house prices are rising weekly.
The valuation process
Once the lender has ordered a bank valuation, the valuer will contact the homeowner to arrange a time to inspect their property. The inspection will take approximately 10 – 20 minutes, and they will need to access all areas, including the house, the backyard, bungalow, sheds, etc.
During the inspection, the valuer should;
- confirm the layout of the house, including the number of bedrooms and bathrooms
- assess the quality of fit-out and overall condition of the house
- make a note of any essential repairs that are required
- take measurements of the house to determine its size
- capture internal and external photos of the house
Before a valuer can complete a bank valuation, most lenders require the valuer to be registered with the Australia Property Institute (API). To obtain this registration, the valuer must first complete a recognised university degree, two years of practical experience, and a professional interview with a panel of senior API valuers.
How does a valuer determine market value?
Once the valuer has completed their inspection, they will prepare a formal report for the lender. It’s at this point that the valuer will determine the property’s market value.
The most common method valuer’s use for a bank valuation is the Direct Comparison Approach. This approach aims to establish the market value of the subject property by weighing it against comparable sales evidence from the local area.
From the various sales databases valuers have access to, they are able to uncover the most relevant comparable evidence. Unfortunately, properties are rarely identical. Therefore, it’s up to the valuer to make allowances for any differences.
Some of the critical characteristics the valuer will consider when analysing the sales evidence include;
- land size: size matters because typically, a significant portion of a property’s value will be in its underlying land value.
- location: the valuer won’t just assess the suburb, they will also consider the street and the surrounding neighbourhood.
- size of the house: this includes the number of bedrooms and bathrooms
- overall condition: while the size of the house matters, quality is equally important. A renovated 3 bedroom home will attract a higher value than a 3 bedroom home in disrepair.
While these aren’t the only characteristics the valuer considers, they are fundamental to the valuation process.
Is there a difference between a market appraisal and a bank valuation?
The answer is yes. There are some crucial differences between a market appraisal and a bank valuation.
First, a market appraisal is an advertising tool agents use to help generate more business. It’s not an impartial assessment of a property’s market value. While I’m sure most agents attempt to provide objective advice, there is an incentive to present their clients with a high value.
Valuers are independent and impartial, and they have no vested interest in the property they are valuing. Their role is to establish the market value based solely on the available sales evidence. There is no reason to provide the lender with a conservative value.
Second, a market appraisal is not a formal document. There are no legal consequences if the appraisal is incorrect. On the other hand, a valuer accepts total liability. Under the API charter, they have a professional responsibility to provide frank advice and commentary on matters they believe may impact a properties market value. Ultimately, a valuer must be able to defend their valuation report in a court of law.
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.