Valuation and Loans

Hi All,

I understand the need for valuation and loans.
However, what happens when the valuation is higher then the purchase price?
What happens when valuation is lower then the purchase price? I'm guessing banks will more then happy to loan you the money.
What happens when valuation comes back at the purchase price?

I've just been advised my valuation has been at made in line with my purchase price. Does this mean I pretty much paid fair market value for this property?

Regards,
Shawn
 
Hi Shawn

The vast majority of purchase valuations come back at purchase price.

Rarely they will come back lower.

In some instances they will come back higher - and that's usually when it's a favourable purchase (a recent example I had was mum/dad selling property to their kid) and off the plan purchases where contracts exchanged quite a while before settlement.

In these instances - the bank may go off the valuation over purchase price. This will reduce the LVR.

If your purchase was a standard one - and the valuation happened to come in higher (which I've only ever seen once) the bank will still lend against the purchase price.

Cheers

Jamie
 
If valuation comes back higher than purchase price - Happy Days!

If valuation comes back at purchase price - if you paid market value that's to be expected and is usually the case.

If valuation comes back lower than purchase price, ask for another valuation if its not too much lower. Failing that, put in some more money of your own or let the deal fall over if contract is subject to finance.
 
If valuation come back lower than your purchase price = you need to pay the gap between the LVR you are seeking

If valuation come back high than your purchase price = nothing will happen and very likely this is not going to happen, it can but very rare

If valuation come back at your purchase price = nothing will happen

You probably can base on this as an indication of the real market value but it really depends on how hot the market is. Also valuations are a very complex area it doesn't simply look at comparable, it also look at the infrastructure that you are surrounded with if they are high or low risk etc..
 
Valuations higher than purchase price only tends to happen with off the plan properties, and that only gets recognised by lenders if the valuation is at least 6 months after the purchase. Even then it's touch and go.

I'd say the number of valuations for a negotiated private sale that come back different from the purchase price are probably less than 1%. I haven't tracked this, but the last time it occurred for a client was over 18 months ago.

I'm excluding ultra high risk areas such as mining towns and off the plan properties in this estimate. I'm also ignoring the one 12 months ago where the valuer misread the contract of sale.

In 10 years I've only experienced one valuation that didn't stack up for a purchase at auction. You may have watched that auction on reality TV a few years ago (The Block). Fair to say that was an unusual property.

There may be problems if you're buying in more exceptional markets, but for the average property in a reasonable location, valuations tend to fall in line with the purchase price.
 
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I've been a broker for about 14 years and have only seen 3 purchases come in above contract price. One was a unit where an identical unit next door went for about 20% more. We were able to get the client a 95% loan with no LMI because the loan was less than 80% of the value - this was a while back and doesn't happen anymore apparently.
 
Speaking about valuation come back lower, last year my friend bought a house in Epping at an auction for $1.2mil, and most bank only valued it at 980k some even come back with 950k.

It was pretty stressed as he is running out of options but end up I think citi bank or anz acknowledged the valuation but I think with a slightly not so good rate.

My other lender friends also seen quite a few OTPs come back lower than contracted price.
 
Correct me if I am wrong, does this then mean that Valuers are valuing the property with my purchase price in mind, thus why the valuation comes out at the purchase price?

I was under the impression Valuers did not have the purchase price in front of them, thus creating their own intelligent estimate.

Feel free to correct me where I'm wrong. Just trying to better understand the process.
 
Correct me if I am wrong, does this then mean that Valuers are valuing the property with my purchase price in mind, thus why the valuation comes out at the purchase price?

I was under the impression Valuers did not have the purchase price in front of them, thus creating their own intelligent estimate.

Feel free to correct me where I'm wrong. Just trying to better understand the process.

Sorry, you're wrong.

Your purchase price effectively defines what the market is. Two people agreed on that price, the buyer and the seller. I'm sure they wanted more and you wanted to pay less, but you can to an agreement thus defining what the market value is for that property.

The valuation includes a lot more information than just the number. It also includes risk assessments for the property, which lenders use as part of the overall assessment. Just because the number is okay it doesn't mean that the lender will automatically give you the money. They also want to make sure it's not going to suddenly drop in value. Then there's the replacement value, which you'll need to have covered by insurance.

Keep in mind that property value is fairly subjective. The weather can be the difference between a good auction result and an average one. Valuers generally look at the contract and purchase price. If they think it's reasonable, they agree with it. If it's no reasonable, they'll say so.
 
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