Bank Valuation vs Market Value

Property Apr 14, 2022

24 min read

bank valuation vs market value
bank valuation vs market value

Bank Valuation vs Market Value – Why Banks and Agents Value Your Home Differently

When it comes time to buy and sell property, one of the most important factors is what the property is worth – also known as its value. This determines what the vendor will likely get if they sell the property and conversely gives an indication to the buyer as to what they can expect to pay for the property. Bank valuation vs market value.

Property valuation is an interesting topic, some in the industry might even call it an art. There are also many different types of valuations. From what the bank values a property at, to what a real estate agent would, then there’s the price it actually sells for and yet a different value the council may use when issuing your rates notice.

What are property valuations for? Their main purpose is to establish what your property is going to be worth on the market at a given time. A valuation can be used by someone looking to sell a property, the council so they can charge appropriate rates, the ATO looking to calculate a capital gain, the bank to understand the value of the property for lending purposes or a real estate agent helping to price a property for sale.

Let’s look at the different types of valuations.


What is a bank valuation?

The bank will undertake a valuation when you purchase the property initially before offering you a loan. Then if you refinance or want to “top up” the loan, they will conduct another. The valuation of the property informs how much they will be prepared to lend you. Depending on the lender and your deposit, they will allow you to borrow up to a certain percentage of the value of the property.

Bank valuations tend to be very conservative. Why? The bank wants to ensure that in the event they need to sell the property to repay the mortgage that they will get their money back, no matter what market conditions are at that time. Bank valuations on property can sometimes come in as much as 10-20% under what the market valuation is.

It would be quite rare for a property to drop in value by 20% or more, especially over the long term. In fact, looking at averages, the largest drop over the past 60 or so years was in 2008/09 where prices decreased by 10% and then rose 15% the following year.

For instance, a loan with an 80% LVR means the bank will lend you up to 80% of what the property is valued at, and you cover the additional 20% with your deposit. Therefore, if you are buying a property valued at $1,000,000 the loan would be for $800,000 and the deposit would be $200,000. If the valuation came in at $900,000 and you still needed a loan for $800,000 then the LVR increases to 88.9% and you would be required to pay Lenders Mortgage Insurance (LMI) which will increase the overall cost of the loan to you.

It can also impact interest rates too, as lenders offer different rates for different LVR’s and loan amounts.

What is a market valuation?

A market valuation is a price range the valuer or agent believes the property is worth in the market at that point in time. Therefore, the market value is the highest price a buyer is prepared to pay, that a vendor is willing to accept. The market value establishes a range in which an agent or valuer believes the property will sell at in an arm’s length transaction. Only legally qualified valuers can offer genuine market valuations, a real estate agent provides a market appraisal.

A market appraisal is usually prepared by a real estate agent by comparing recently sold properties that are comparable to yours. This appraisal is not legally enforceable and it’s simply their best estimate as to what your property is worth.

This will include things like the number of bedrooms, bathrooms, car spaces and land size. They will generally look back over the past 3-6 months at the price they have sold for, determine where your property sits within the range and provide an estimate on what it will sell for accordingly. If your house is renovated, the land size is larger, the bedrooms are bigger and a range of other factors then your property would be priced at the higher end of the range.

In some instances, there may be nothing comparable that has sold near you in recent months, making a market value more challenging to provide. Or your property may be incredibly unique in the area making it difficult to predict what the value of the property should be. In this instance the real estate agent will use their experience and the closest comparable property to help determine what the value of the property is anticipated to be.

Alternatively, you can choose to engage a professional valuer to determine the value of the property and then work with the agent to achieve this during the marketing and sales process.

Why do banks use their own valuations?

The short answer is the banks want to make sure they will get their money back if you stop paying off your home loan. They definitely don’t want to lend you more than the house is worth or experience a situation where the sale of the property won’t pay off the loan.

Banks often outsource a valuation to a third-party organisation or utilise their own in-house valuers to determine the value of a property. They most definitely don’t rely on a real estate agents’ value, however there should still be overlap between what the agent has the property listed for and what the bank determines the value to be.

Bank valuations will also come in under a market valuation because they take into consideration the costs associated with selling the property including commissions payable to real estate agents, marketing/advertising fees, legal/conveyancing costs and other expenses.

How do banks value properties?

When valuing property the bank looks a range of different things including:

  • The location of the building/property
  • The condition of the building/structure
  • Any faults with the building
  • Upgrades and renovations
  • Zoning by local council

If you are in an area subject to flooding or extreme weather events this may impact the valuation too.

How do real estate agents value or appraise properties?

Market valuation if your property takes into consideration the state of the market at that point in time. You may hear about the property market dropping or increasing, talk of median houses prices and housing bubbles – all of these statements reference the market which your own property forms part of.

Therefore, when providing a market value, your property’s value is estimated to be similar to other properties like it in the surrounding area. The buyer and seller then use this information to negotiate a price which meets both of their requirements.

Things they look at include:

  • Property size – this is the size of the overall block of land, the size and quality of the building/s on the land and the size of rooms and areas within the building.
  • Outdoor areas and buildings – such as garage, terrace, courtyard and/or garden.
  • Number of bedrooms – one of the key factors in the appraisal process is the number of bedrooms in the building.
  • Fixtures and fittings – not all fixtures and fittings are sold with the property so when pricing a property agents will consider this. If a buyer walks in and knows they have to buy new curtains and lights for the entire property this may push down the price.
  • Areas for improvement – an agent may be able to provide guidance on this however you are best off speaking with a vendor’s advocate who can project manage all aspects of your sale. When pricing the home they will determine whether your home is comparable in quality when looking at like properties. A home that has been fully renovated compared with one that is quite dated and needs work will not be priced quite the same.
  • Location – the big one! There are markets within markets and when looking at Melbourne’s overall median price you don’t expect to pay that in every single suburb. In tightly held and highly sought after areas like Brighton, the prices are well above the Melbourne media. Same goes for far flung or developing areas, you don’t expect to pay Toorak prices for a 3 bedder 40km away from the CBD.
  • Building structure and condition – you’d be hard pressed to find a buyer who doesn’t get a building and pest inspection done. If there is pest activity or structural issues with the property then this is naturally going to impact the market value as the buyer will have to pay to have these issues resolved.
  • Planning and restrictions – if local council has a lot of planning restrictions in place certain buyers may be put off. The agent will consider these as part of the marketing of the property and its potential.

When appraising a property before listing it, the agent generally will look at all of the above factors and potentially a few more, before they provide a price estimation and recommendations.

How and why do these two differ?

So, where the bank valuation is based on the condition of the property, a market valuation takes into consideration the value of like properties which have sold in the area recently. The agent and vendor can use similar property sales when they commence negotiations with a prospective buyer.

The actual sale price is then a combination of the condition of the property, what other similar properties have sold for recently and of course, the emotions of both vendor and buyer. If a buyer wants a property enough, they may pay well over what the vendor anticipated.

In recent months, there have indeed been many properties selling way above the anticipated market value as many buyers have been prepared to pay a lot more than pre-pandemic prices indicated.

What happens if the bank valuation comes in less than the purchase price?

It doesn’t happen very often, but when a bank valuation comes in under the purchase price it can play out a few different ways. If the valuation comes in way below the purchase price, the bank may opt not to offer you a loan at all. If the valuation comes in at a little lower than purchase price, they may offer you a loan based on that price and you would need to cover any shortfall.

What can be done if your valuation comes in too low?

Entourage Finance has assisted clients over the years who have experienced this issue. In some cases, it may be that the valuation is incorrect and ordering another valuation through a more experienced organisation or local valuation firm is all that is needed to resolve the issue.

Or it might simply mean that the Loan-Value-Ratio (LVR) is higher than you had originally anticipated and rather than an 80% LVR you’re looking at a 90% LVR.

There are some things you can choose to do depending on how you have purchased the property and what exit or termination clauses you have available.

If you really love the property, intend on holding it a long time and believe the value is going to increase during that period of time then you might be happy to increase the loan amount or cover any shortfall and accept a lower loan offer from the bank.

If you aren’t able to cover the shortfall or don’t believe the property is worth overpaying for then you may be able to revise or withdraw your offer via the finance clausedepending on its wording (It’s very important your solicitor has looked at this and ensured you can terminate if you can’t finance the full amount you need to purchase). By not having your finance in place by the deadline, it allows you to withdraw your offer and the vendor can resume their sales campaign.

If you have purchased at auction, it means the sale is unconditional and you can’t back out due to not having your finances in place. If you decide to withdraw from the sale, you can lose your deposit and more.

Another option, and the benefit of working with a broker, is that we can also speak with other lenders. A different lender may decide the property is worth more and be happy to lend the funds to you.

How is off-the-plan (OTP) property affected by valuations?

Off-the-plan (OTP) purchases have their own set of considerations. Quite often, home buyers will commit to a house and land package up to several years prior to the home actually being built and settling.

The figure they commit to when signing that initial contract may end up being different to what the build comes in at when all is said and done. Most developers rely on prices increasing over time, that means what they charge for the build will cover costs and add profit to their business but the homebuyer will benefit with capital gains across the time from signing to moving in.

This is all subject to whatever is happening in the broader market and there have been times when we have seen a client ready to move into their completed home, but the bank valuation comes in under the contracted price. This can be due to market conditions but it can also be due to the finished product.

One Entourage client recently had a horrible incident where the house they signed and paid for ended up having one less bedroom than it was supposed to. This then had a flow on effect on what the client thought they were purchasing and of course, the value of the property.

Getting professional help along the way

Entourage have a great team on hand to support you throughout the buying and selling process. No matter whether you are buying, selling or both, our expert team of mortgage brokers and property advisors with a network of lenders and real estate agents on speed dial, the team can help you every step of the way throughout the transaction.

From organising property appraisals and selecting the real estate agent through to organising pre-approval and conducting contract checks, your Entourage is with you every step of the way.

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