The truth behind bank valuations

Navigating a hot property market can be tricky, and one of the biggest nightmare scenarios is overpaying for a property. Not just the feeling that you've splashed too much cash but a situation where the bank won’t give you the mortgage you need because they don’t think the property is worth it. 

Ouch! 

So how do people find themselves in such a sticky spot? Well, the culprit is usually bank valuations. Or, more accurately, a lack of understanding about the process of a bank valuation.

Pre-approval indicates your value as a borrower, NOT the property’s value.

Many people forget that getting preapproval for a home loan doesn’t secure you that money. Pre-approval only assesses your desirability as a borrower based on your income, financial history and ability to make your mortgage payments. 

The figure is only an estimate of what the bank is confident you’ll be able to pay back. The bank still needs to see that the property you choose to buy is worth the loan’s value, so they have appropriate collateral should things go South. 

Pre-approval is an important number and will help you narrow your search. But it doesn’t give you the freedom to spend that amount of money on any old property. 

A bank won’t value your property until you’ve signed on the dotted line. 

It’s an unfortunate factor of purchasing a property that a bank won’t have a valuation completed and tell you how much they’re willing to lend until you’ve already signed the contract of sale. 

Too many buyers don’t factor this in and base their offers on their loan pre-approval valuation. Or it’s becoming increasingly common for people to jump on the banks’ free property price estimators. Neither of these options are entirely reliable and can be misleading to your purchasing decisions.

The problem here is obvious. You bid high in a hot market because the bank has told you they’re willing to lend you the money. When you sign the contract, they do the valuation, decide the property isn’t worth it, and won’t lend you the money you need. If you can’t secure finances elsewhere, then your deposit is gone! And with property values as they are I don’t need to tell you that losing your hard earned 5 or 10% deposit is a bitter pill to swallow.

Inaccurate valuations also present less obvious issues. 

The real estate market fluctuates quickly. If you purchase when the market is hot at the top end of your budget based on what the bank is willing to lend you, you’ll find yourself in hot water when interest rates rise, the market changes, and your property loses value. You run the risk of its value being less than what you borrowed and face significant challenges if you need to make a move before the market recovers. 

This situation is the perfect example of why valuing a property is about so much more than simply running numbers. You need to consider the current market, the emotion that goes into buying a property, and the potential of the market to change in the future. 

So, how can you get an accurate valuation before you buy? 

There’s a lot of research and data to generate an accurate valuation of a property before it gets sold. My team and I spend a lot of time considering every possible factor before pricing a property. Having a reasonable estimate before you bid is critical, not just to the sale but to future financial stability. 

If you thought that a Buyer's Agent's job is just to find you a property that’s within your budget, then think again. Our job is to weigh up a thousand factors that make sure the sale price matches its valuation, so you can get the property you love and a loan you can manage into the future.

If you want to know more about how banks value property or the process my team and I use, please don’t hesitate to reach out.