Whether you are buying or selling, you will probably need an accurate property valuation. But not all valuations are the same, because what a property is worth and what someone may be willing to pay for it are two different things.
In the 12 months to December 2021, residential property prices rose 23.7% according to ABS data. Many potential buyers were outpaced by a market that took off amid the pandemic. The competitive landscape meant many buyers perhaps felt the need to pay overs to secure a property. This gives rise to the questions; what is a property valuation, how do you get one, and why are they important?
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Lender valuation
A lender valuation is the price a bank or non-bank lender values a property. They will consider things like the land, the dwelling itself, the neighbourhood, access to amenities, demand for the area and many other factors.
What you pay for a property and what the lender valuation is may not be the same. For example, you may look at a property advertised for sale for $500,000, however when you go to a lender for a home loan, they may independently value the property at $450,000.
Why does this matter?
The reason this is so important is the bank will use this valuation to calculate the loan-to-value ratio or LVR. A loan-to-value ratio, or ‘LVR’ is the value of a property in comparison to the amount of money being borrowed through a home loan. LVR is calculated as a percentage, and is used by lenders to assess the risk of accepting a loan application. The lower the LVR, the lower the likely risk that particular loan is to a potential lender.
Keeping track of your LVR when house hunting is important as it gives you some indication of your borrowing power. A good LVR can also help you avoid certain home loan fees such as Lenders Mortgage Insurance (LMI), and also attain a more competitive interest rate. Most lenders will not charge lenders mortgage insurance on loans with an LVR of 80% or less - a 20% deposit - though some offer no-LMI loans if borrowers have a 15% deposit.
The importance of pre-approval
There’s no use shopping with champagne tastes on a beer budget, and pre-approval helps eliminate exactly that. Pre-approval arms you with knowledge of how much you can borrow for a home loan before you start looking at homes or bidding at auction. In today’s hot property market it can be risky to purchase a property without pre-approval - unless you’re a cash buyer.
Pre-approval is when you go to a lender, and essentially prove your ability to afford a home loan. A lender will look at your pay-slips, your savings and your spending habits to determine what value home loan you can realistically afford. They will then 'pre-approve' you for a home loan.
This pre-approval will show a maximum value you are able to afford, for example, after looking at your savings, spending and income history, a lender will give you pre approval for a home loan of up to $500,000.
This process allows you to understand your own borrowing capacity, which can also prevent you from purchasing a property you may struggle to afford the repayments on. However, pre-approval is also called conditional approval, and for good reason - it’s not water-tight. Before committing to a purchase you’ll still likely need unconditional approval.
How much is a lender valuation?
When you purchase a home, banks and non-bank lenders will calculate their own valuation on a property. It is this valuation that determines your LVR. If you already own a home, you can easily compare the cost of a valuation by contacting individual lenders.
Valuations usually cost anywhere from $0 to $400. The cost of a valuation can often be waived when buying a home if you plan to take out a loan with that lender.
What if the lender valuation and purchase price aren't the same?
Your lender may value the property at a lower price than what the house is selling for. This is called a valuation shortfall and it essentially means banks are not willing to lend you the money you originally applied for. This is important as it determines your LVR. This means you’ll likely need to come up with more of your own money or keep shopping for either another home or another lender.
However, the loan may still go ahead, but if your LVR is higher than 80% you’ll likely need to pay LMI. For example, if the purchase price is $600,000, you need to borrow $420,000, and the lender values the home at $500,000, the new LVR is 84%. LMI can be capitalised into the loan.
Also read: How much is your home worth?
What influences the home’s value?
Demand
The pandemic has driven up the price of property in many parts of Australia. In simple economics, supply and demand will generally always influence the value of an asset, and property is no different.
Coastal towns throughout the pandemic such as Byron Bay saw property values sky-rocket. This was due to a low supply of properties coming on the market, at the same time as many potential buyers seeking property in the area.
On the other hand, if there is a lack of buyer demand in an area or too many houses on the market, property value may remain the same, or decrease.
Location
Location is a key denominator in the value equation. A house and land, close to a capital city, with access to public transport, good schools and small businesses like cafes and restaurants, could be worth more than the same size house and land in a remote town.
If you are looking at buying, researching the suburb is a great way to understand the value of the house. If you want to get a value of a house you own, factors such as proximity to schools, parks and shops will all influence the value.
When researching the suburb or town of a property, looking for similar properties in the same area will also help you understand the value.
Property condition
The physical structure of a property is a key to its value. Potential buyers need to know if a property is in serious need of renovations or upgrades. The age, materials and size of the property will all influence its value.
The same goes for features like pools, gardens or decks. Potential buyers want to know the time and money it will cost to maintain these features, or if they need to be fixed. These factors will all be priced in to a property’s value.
Size and layout
The size and layout of your property also plays a key role in determining its value. A property with more than one bathroom, multiple bedrooms and a cohesive overall layout could be viewed as more appealing and valued higher. In saying this, many buyers will choose location over size and layout, however it does depend on other factors such as the demographic interested in the property - young professionals, families, investors and so on.
Other types of property valuations
Market Valuation
You may have heard of an online or market valuation. Usually these valuations are generated by real estate websites such as Domain or REA group. These offer an estimated value and can be used as a way to estimate a property. Be wary of using these as accurate appraisals as they are not coming from a lender.
Additionally, be wary of estimates coming from real estate agents or online tools that use algorithms to generate estimates. Real estate agents are likely valuing properties based off their own judgment and agendas, and these aren’t always going to align with how a lender values a property.
Image by Leslie Low via Unsplash
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