Market Value VS. Bank Valuation
“Mortgage valuations can give you a rough idea of whether you are paying too much (or tool little!) for a property.” moneyfacts.co.uk
In order to protect the loan risk, it is a generally accepted prudent practice for the bank (lender) to undertake a process to assess the reasonableness of the purchase price, placed on an offer to purchase, to the the market value of the transacting property. This is done in order to determine whether there is sufficient value in the property to cover the loan amount and that the price offered is a fair reflection of market value.
Consequently, most lenders would decline a loan application on the basis of valuation, should the price offered is found to be higher than the market value opinion or the market value of the property is less than the loan amount applied for.
It is for this reason that most property practitioners, home buyers, property sellers, often expect a bank valuation to mirror the market value. right? Wrong!
The question for this article is, therefore, what’s the difference between market value and bank valuation? Is there one?
How are properties valued for a bank?
Simplistically, a property market value is an estimate of what a property is actually worth if it is to transact in an open market. Whereas a bank valuation is a process conducted to determine a mortgage value for the lender to decide whether the property market value is sufficient to advance a loan and up to what amount.
A property market valuation is undertaken by a registered valuer to determine (thus provide an opinion of) the value of a property. It is not obligatory for a bank to use a valuer to conduct the assessment process. In fact, most banks, do not use registered valuers, but rely on computer valuation models or desktop valuations to completed the value assessment process.
Therefore, the bank valuation is for the benefit of the mortgage lender. It is designed as an internal tool for the mortgage lender to ensures that the property is worth the amount of loan the lender will be advancing.
Bank valuations, are valuable, because, they can give a rough idea of whether the property is over priced or the buyer is paying too little.
How much will I pay when I want to buy the property?
The offer price on a property is an amount at which a prospective Buyer, in an offer to purchase, demonstrate the willingness to transact. Once the offer to purchase (OTP) is accepted by the Seller, this becomes the Purchase Price.
At best, the purchase price of a property is just a reflection of the bargaining skills between the buyer and seller.
This amount should ideally be reasonably close enough to the property market value to be acceptable to the bank for a mortgage loan.
"Most lenders would decline a property value, if the purchase price is found to be higher than the market value or the market value is less than the loan amount."
Will the bank accept (finance) the price I have offered?
Assuming that the applicant’s profile sufficiently meets the credit criteria the bank, the assessment of property value is the next logical hurdle to overcome to be granted a mortgage loan.
Most lenders use valuations for mortgage lending purposes based on the agreed purchase price, as reflected in the OTP. In mortgage lending valuations, valuers are asked to confirm the purchase price as a reasonable reflection of market value. For this purpose, valuers, and valuation models used, in conducting bank valuations are provided with the property purchase details.
This results in the valuers coming under pressure to write the purchase price of property as its value.
Most lenders would advance a mortgage loan on on a property, if it is confirmed that there is sufficient market value in the property to cover the mortgage loan amount and that the purchase price is a fair reflection of that market value.
Why did the bank decline my application because of the valuation?
In order to protect the interest of the bank on the risk arising out of granting a mortgage loan, in all instances, the bank will undertake a valuation to assess the market value of a transacting property against the purchase price.
Most lenders would decline a loan application on the basis of a property value, if the purchase price is found to be higher than the market value opinion or the market value is lower than the loan amount.
Is there anything I can do to a property to increase the property value from a banks perspective?
Generally the purchase price, of a property is a reflection of what a reasonable and able Buyer would be willing to offer to a reasonable and able Seller who would be wiling to accept such an amount without being placed under duress, given the level and application of their bargaining skills.
Therefore, for a purchase price to be considered acceptable from a bank’s perspective, it must be a fair and reasonable reflection of the market value of such a property.
It then goes without say that, it is unlikely for an increase in property value to arise from offering a higher purchase price.
Property market valuations, in general, takes into account the general condition of the property, environmental and other location factors. Therefore the market value of a property will be affected by the material condition, defects and other factors affecting that property, and the property valuer will take these into account in the opinion and recommend a valuation amount.
Since most banks do not undertake physical valuations the general condition of the property is ignored, and other factors are not taken into account, in determining mortgage value. Therefore, there’s very little an loan applicant can do to change the bank’s opinion of value, except if they produce a physical valuation report, such as the Standard Market Value Report.
Article Credit: Mashilo Pitjeng
Bio: Registered Property Valuer. Chairperson Policy and Advocacy SAIBPP. Chairperson Research Committee PSCC. IoDSA Registered Member. Facilitator EAAB CPD Training - Real Estate Environment and Property Valuations. Consults on real estate asset management, property risk solutions, real estate research and transformation.
Copy write: www.myhomecheck.co.zaDownload full article