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How Banks Perform Property Valuation

property valuationIt is a bank’s job to lend money but it is also their job to hold the sanctity of the prime lending institution. Banks fulfil both these requirements to the tee- they never shy away from forwarding home loans but at the same time conduct their own home valuations to judge the strength of the collateral. This brings us to a crux question? What standards of property valuation do banks use or in other words how do banks value properties?

As a first, banks use licensed valuers – and such professionals are only satisfied by hard evidence.

Licensed valuers undertake grave responsibilities

After all, theirs is a legal responsibility and they can be held in the court of law for any inappropriate valuations (one reason why I am inclined to think that the bank valuers should be paid more- well! Just a passing thought).

So how does a valuer go about his job?

First and most significant aspect is home inspection. Everything else (except the comparable sales data which we will discuss later) plays second fiddle to this all-important task.

Home inspection may include, but is certainly not restricted to, fixtures and fittings used, number and type of rooms, location of the property, building structure and its age, aesthetic standard of the property, and planning restrictions and council approvals.

Comparable sales figure

Next is the –worth its weight in gold- aspect of comparable sales. Comparable sales amounts to finding out the sale prices of “much alike” homes sold in the neighbourhood (in fairly recent past).

Buyers and sellers are both interested in comparable sales data but it is beyond doubt that a buyer holds it very close to his heart. Let me explain. Higher the comparable sales figures,  lower is the upfront cost pressure on a buyer.

Let us say there are four properties, A,B,C,and D in the neighbourhood. Now, if properties B,C,and D have sold for $400,000-$500,000 in the recent past, property A (presently under bank’s valuation) would be more likely to sell at the same price.

This is why banks provide a lot of significance to the comparable sales report. Invariably, banks tend to be more adventurous in servicing a loan if they see high figures for the comparable sales data. After all, they know that the property under question is suitably priced for them to recover their loan in case of a buyer default.

As a natural result, banks do not hesitate in taking a larger share of the burden on themselves and reducing the upfront cost for the buyers (so you understand why buyers hold the comparable sales data so dear).

Seeking ‘near perfect’ comparable sales data

There are certain hindrances in procuring the perfect example of comparable sales. However, to come as close to perfection as possible, you must remember to prefigure these attributes of comparable sales:

  • Property with which you are comparing the one under valuation must have been sold in a period no farther than 3 months in the past.
  • Property should ideally be in a radius of 400-800 metres
  • Square metre acreage of the property must be nearly identical
  • Construction materials used for both the properties need be similar
  • Age of the compared property should be identical to the one under valuation.

Valuers also need to guard against errors of comparing two different kinds of properties.

Valuers must not err in comparing property types

For example, you cannot seek the sales price of a “distress sale” or “foreclosure sale” property to reach the expected valuation of the property under inspection.

The article would be rendered incomplete without mentioning that a buyer can challenge a valuation if he finds it too conservative.

Did you personally gain from or lose due to the comparable sales figure?