The issue of bank valuation vs market value can be confusing for many home buyers when they find that the bank valuation on a property does not reflect the market value, and in some cases, comes well below it.
How do bank valuations work?
When you apply for a home loan or to refinance your existing loan with another lender, the lender will set a value for the property you are buying or, in the case of refinancing, your current home, in order to assess how much they will lend you. The lender will send a property valuer to the property and, based on their report, value the property at the lower end of the scale provided by the valuer.
Banks and other lenders need to cover themselves in the event that you default on your mortgage repayments and the property needs to be sold. A bank valuation, therefore, is purely the amount the bank could reasonably recoup quickly should it need to repossess and sell the property. This is why, should you ever have the misfortune to fall into financial hardship and default on your mortgage payments, you are best to try and sell the property yourself for full market value before the bank is able to repossess it.
What to do if a bank valuation is too low?
Market value, on the other hand, is the price a property fetches on the open market. If you are buying a home, this is the price you have offered to pay for it that has been accepted by the vendor (usually subject to finance). Even if you have a preapproved loan, if the bank valuation on the property comes in at considerably less than the price you have negotiated you may be in trouble, as the lender may not be willing to go ahead with the loan as it no longer meets it's required loan to value ratio (LVR).
There are several ways you may be able to overcome this problem:
- You can try negotiating a lower price with the vendor of the property. It may have been overpriced to begin with.
- You can dispute the bank's valuation, citing evidence gleaned from recent sale prices of similar properties in the area.
- You can request another valuation by a different valuer also engaged by the lender.
- You can cover the shortfall from another source, perhaps by borrowing from family or taking out a personal loan.
Some lenders charge for bank valuations, others offer free valuations when you apply for a home loan.
What is the market value of my home?
Of course, if you are selling your home you will be solely interested in your home's market value and looking to get the highest possible price for it. You can engage the services of a property valuer but this is usually not necessary.
You can gauge the value of your home fairly closely by comparing it with similar properties in your area that have recently sold. Your best ally, however, is your nearest Century 21 real estate agent, who will have access to all the latest property data and will produce a written appraisal for you, outlining the range of price expectation you should achieve and recommending the asking price you should set for advertising your property for sale.
If you then work with your Century 21 agent to present the property in tip top shape for the marketing photos and open for inspections, you will be in a great position to achieve the best possible market value for your home – so you see, bank valuation vs market value is not nearly so confusing once you understand the essential differences!