“A lender’s valuation may be more conservative. A lender will also look at the value of comparable recent sales, but it’s not about the maximum market price, it’s looking at a realistic price.”
Understanding property valuation and pre-approval
Pre-approval is a lender’s way of giving you an indication of how much it is willing to lend you, based on information you have shared with them, including about your financial position. However, there is a reason pre-approval is often referred to as conditional approval, it is subject to change and adjustment from your lender.
The valuation of the property you intend to purchase is one of the variables that may mean a lender adjusts what it is willing to let you borrow, relative to your pre-approved amount.
If the agreed purchase price aligns with the lender’s valuation, and your financial position meets the lender’s expectations, your home loan application will typically progress as expected and for the pre-approved amount.
However, if you agree to an inflated price, or buy in an area where a lender has determined a risk to valuations, your pre-approved amount may not be the amount you are ultimately approved to borrow. For example, a lender may assess certain suburbs as high risk if they have a large pipeline of new apartments set to reach the market, which can dilute prices for existing dwellings.
It’s good practice to speak to your lender about this and understand if they are not lending for purchase in certain suburbs. Your lender should also be able to give you an idea of their valuation practices and what is involved in the valuation process for them and for you.
What happens when price and valuation don’t match?
If the purchase is completed via a typical open market transaction, involving an agent and a public listing, and the purchase price is comparable to available recent sales, then the valuer is likely to be comfortable a buyer has bought at fair market value.
However, there are a range of factors and red flags that a lender may consider in their property valuation. For example, in an off-the-plan purchase where there is a gap between the buyer agreeing to a price and the lender’s valuation taking place, market conditions may have weakened, causing a valuation shortfall.
“There are many methods that can be used to assess a property’s value,” says Bray.
“Valuers may go out and inspect the property – they'll look at the size, the condition, they'll look at the area the property’s in and any development plans in the area. They'll also look at similar sales nearby to get a handle on what other properties have gone for.”
If a lender’s valuation is lower than a purchase price, there are a range of scenarios and remedies to consider, which differ from lender to lender. It’s important to speak to your lender, mortgage broker or home loan specialist should this situation occur to understand what the best course of action is for you.
One scenario could be that the lender will use its valuation combined with its loan-to-value ratio (LVR) - which is the proportion of a property’s value a lender will allow you to borrow - as a basis for the size of your loan. So, if the LVR is 80%, you offered $500,000 for a property but the valuer thinks it is worth $450,000, the bank will lend you 80% of $450,000, rather than 80% of $500,000.
How can buyers find the market value of a property?
Before you enter negotiations to purchase a property, being well-researched on recent sales in the area you’re looking to buy in is one powerful way to make sure the price you’re willing to offer is reflective of fair market value.
“If you're a buyer, there are so many ways you can get an indication of what the property may actually be worth,” says Bray.
“Go to Domain and realestate.com.au, these sites will give you an idea of recent sales in the area. There are also reports available, and you can speak with your mortgage broker and local real estate agents to get a better picture.”
By keeping the principles of valuation in mind, you can avoid agreeing to an inflated price, and help ensure the borrowing process brings you one step closer to securing the right property.