Will you buy a property if the bank's evaluation comes under the purchase price ??

[xQuIz8]

Hi Guys,

I'm in need of help urgently..

I have put in an offer to the vendor that has been accepted.
I'm just paranoid that if the bank's evaluation comes under my purchase price
by say..$100k.. would it be advisable for me to still buy if thats the case ?

I understand that this will affect my LVR. But i've also heard that the banks
are usually conservative when it comes to evaluation of a property prior to
processing the loan. I have a big downpayment and I am borrowing about 70%
of the property.

What do you guys advice ? Please kindly respond to my plea !

 

[Spectre]

If the person you're dealing with at the bank is fair to you, they'll tell you what it came in at

Sometimes they might say - I cant tell you what it is but I can tell you what 80% of it is - never understood the logic behind that.

Or if you turn around and tell them you want to borrow 80% of the purchase price
Then see if you have mortgage insurance tacked on (assuming your servicing passes this level). Logic being you'd then keep the 10% difference in an offset account so you could have it for future investments etc...

If you have mortgage insurance tacked on then its come short (unless its westpac or ing)

All this being said, you could always get a valuation done yourself but you're probably too far down the road for that now.

 

[Xenia]

I personally do not buy properties unless the valuation is at or above the purchase price.

 

[buzzlightyear]

Hi Guys,

I'm in need of help urgently..

I have put in an offer to the vendor that has been accepted.
I'm just paranoid that if the bank's evaluation comes under my purchase price
by say..$100k.. would it be advisable for me to still buy if thats the case ?

I understand that this will affect my LVR. But i've also heard that the banks
are usually conservative when it comes to evaluation of a property prior to
processing the loan. I have a big downpayment and I am borrowing about 70%
of the property.

What do you guys advice ? Please kindly respond to my plea !

Is the offer subject to finance?

 

[boomtown]

Ive never had a problem getting bank val at my purchase price. I would want to take a pretty hard look at the reasons why not if it comes in low.

 

[Nathan]

i tend to buy way under market....

so i would be running if it was over bank val.

 

[fernfurn]

I understood the bank always valued at the purchase price, but that is probably because I always buy under market value.

 

[The Y-man]

I have put in an offer to the vendor that has been accepted.
I'm just paranoid that if the bank's evaluation comes under my purchase price
by say..$100k.. would it be advisable for me to still buy if thats the case ?

If the offer was unconditional, you have to proceed with the deal regardless. If the offer was made subject to finance, you can pull out, citing the low valuation as the reason. If the banks won't lend you the amount you want, there's some serious risk with the property that you have not seen.

Cheers,

The Y-man

 

[ianvestor]

I bought a place that was valued way under the purchase price.

The reasoning behind that one was most likely that the bank saw it as 'a house and land', whereas I was purchasing it as 'a blank canvas big enough to build 5 townhouses on'.

One is more valuable than the other.

 

[Jayro]

I purchased an IP earlier this yr that had the bank valuation come in less than I agreed to purchase the property for. My contract (like most) was subject to finance. When it came in less than I agreed to pay for it I negotiated a better purchase price. We are not talking alot of money in my case but within reason I cant see why you cold not go down a similar path.

Cheers Jayro!

 

[xQuIz8]

Thanks guys for your reply. Very appreciative.

I currently have my pre-approval and deposit all ready to go.

However, I've included few clauses in my contract :

* subject to lenders valuation being accepted by purchaser on or before date.
* subject to obtaining finance on or before date

My initial clause was "Subject to lenders valuation not coming in lower than purchase price". However, the agent reckon that this is absurd and that the evaluation of the property, an inner city apartment will most likely not come in or above the purchase price. This is my first time purchasing a property, therefore I do have lingering doubts.

To be fair, I have already checked similiar apartments in this area and the price is about right..if not lower. The property I'm purchasing is $550,000 and apartments in the Docklands area costs around this price..if not more.

My current LVR based on AUD550,000 is about 65% only. I know even if the valuation comes in at about AUD450k, I'll be fine in terms of getting a loan from the bank. The only thing that bothers me is that I am paying 100k more for a property thats worth 450k in the eyes of the bank.

Am I looking at this the right way ??

 

[buzzlightyear]

My initial clause was "Subject to lenders valuation not coming in lower than purchase price". However, the agent reckon that this is absurd and that the evaluation of the property, an inner city apartment will most likely not come in or above the purchase price. This is my first time purchasing a property, therefore I do have lingering doubts.

Did you mean to say the REA said the valuation would not come in below or above purchase price? No valuation, based on the short period of time between contract signing & proposed settlement, for initial purchase & financing of the property would give you a valuation higher than your purchase price.

To be fair, I have already checked similiar apartments in this area and the price is about right..if not lower. The property I'm purchasing is $550,000 and apartments in the Docklands area costs around this price..if not more.

This is the ultimate test. If you are seriously comparing like for like, then you are jumping at shadows re valuation issue.

My current LVR based on AUD550,000 is about 65% only. I know even if the valuation comes in at about AUD450k, I'll be fine in terms of getting a loan from the bank. The only thing that bothers me is that I am paying 100k more for a property thats worth 450k in the eyes of the bank.

It's one thing to be able to complete the purchase and add in extra dollars given your financial position, its another to thing to decide whether the purchase makes financial sense. You need to view it as a stand alone purchase

I would not be buying a property that had a valuation that was 20% lower than the purchase price. Why would you do that? There would be plenty of other options.

 

[xQuIz8]

Did you mean to say the REA said the valuation would not come in below or above purchase price? No valuation, based on the short period of time between contract signing & proposed settlement, for initial purchase & financing of the property would give you a valuation higher than your purchase price.

Since you have mentioned this, how much lower does it usually come in at ?


This is the ultimate test. If you are seriously comparing like for like, then you are jumping at shadows re valuation issue.

I'm not familiar with the term "shadows re valuation" Buzz..

It's one thing to be able to complete the purchase and add in extra dollars given your financial position, its another to thing to decide whether the purchase makes financial sense. You need to view it as a stand alone purchase

If its valued at 20% lower, I dont think it makes sense. But the property agent mentioned that he sold 50 apartments in Docklands last year and almost always the valuation comes in lower..say 450k.

I would not be buying a property that had a valuation that was 20% lower than the purchase price. Why would you do that? There would be plenty of other options.

It makes perfect sense. So what guidelines should I follow ? How much is the lowest valuation I should accept on the property based on the purchase price of $550,000 and the fact that lenders are always conservative when it comes to valuation between contract signing and settlement date ?

Do note that this valuation is different from the independent valuation that one would get when they actually decide to sell a property of their own before they put it on the market/decide at what price they should sell.
Is my assumption right ?

Thank you very very much for your advice Buzz..

 

[Rolf Latham]

Hya XQ

get your own val done........that way you will have some more confidence, OR tell the bank you want to increase your lvr to 90 %.

That way you will a lot more comfort that the bank val will actually mean something
ta
rolf

 

[buzzlightyear]

Your questions I have bolded and italicised,

Since you have mentioned this, how much lower does it usually come in at ?

They don't necessarily come in below. In my experience, for the properties that I knew the result of valuations (3), they were the same as the purchase price. I suspect (my opinion only) that this would generally be the 'norm'.

I'm not familiar with the term "shadows re valuation" Buzz..

No you misunderstood what I was saying, I said you are 'jumping at shadows' re valuation, meaning, if you have already done the research as you mentioned, you are worrying too much about the valuation issue.


But the property agent mentioned that he sold 50 apartments in Docklands last year and almost always the valuation comes in lower..say 450k.

Sworn valuations would be based on comparable sales information. Its not a theoretical number. There is no great mystique how they are determined. My first reaction would be ok, then my offer is too much, my revised offer is $x.

Some other thoughts - How we he/she have access to that information? Not sure what the REA is playing at. To me that's a silly thing to say to a prospective purchaser. Maybe he saw your concern about the valuation issue and was trying to calm you down. Either way, he/she sounds like a, well, how do I put it politely.............A tosser.

It makes perfect sense. So what guidelines should I follow ? How much is the lowest valuation I should accept on the property based on the purchase price of $550,000 and the fact that lenders are always conservative when it comes to valuation between contract signing and settlement date ?

Again, sworn valuations are based on comparable sales information. If as you mentioned earlier, other similar properties, have sold for $xxx,000, then if you have offered similar, then, that should be OK. Given that you have signed the contract subject to the clauses you mentioned, then if the valuation comes in lower, then you might have the ability to re-negotiate.

A direct answer to your question, re what is the lowest valuation you should accept? If the wording on the contract allows you to, anything less than the purchase price, I would back away.


Do note that this valuation is different from the independent valuation that one would get when they actually decide to sell a property of their own before they put it on the market/decide at what price they should sell.
Is my assumption right ?

Yes you are correct. A REA sales appraisal which is what they define as an independent valuation (a clever marketing term) , is simply their opinion on price. Generally they shouldn't be too far off the mark though.

A sworn valuation from a licensed or registered valuer is defined by the law (state) given the education, professional & legal requirements for one to become a valuer. This is what the banks use.

 

[Rolf Latham]

Hiya Buzz and XQ

having read Buzz's reposnse to your questions, my alarm bells have started to ring.

The "we have sold apptmts where the vals have come in at 450" sounds like you are being prepared for the inevitable, perhaps a val that will come in at 50 k less than the 550 buy price.

Im not sure, but I think I recall from my "hard sell" training days that this is called "conditioning the buyer"

Id be looking real hard at getting val done using my own valuer.

I do hpe your finance and legals are separate to the sellers agents advice ?

ta
rolf

 

[boomtown]

Im with you Rolf.

Im suddenly concerned about your due diligence. How did you determine comparable prices?

You aren't buying off the plan are you?

 

[Perp]

If the offer was made subject to finance, you can pull out, citing the low valuation as the reason.

Careful! Not necessarily. Being "subject to finance" and "subject to valuation" are not the same thing. If you try and withdraw based on a low valuation and your finance clause, you must be careful not to say that it's due specifically to the valuation, because your contract is not subject to valuation. You can only withdraw based on a low valuation and a "subject to finance" clause if that low valuation renders you unable to obtain finance. You need to make sure that you can back your withdrawal from the contract with rejected finance applications, in case the vendor doesn't want to accept your withdrawal and wants to take it further. If you only applied for 60%, say, and the valuation still supports you borrowing that 60% (even though that represents 80% of a low valuation, of 75% of purchase price), then you probably couldn't get out of the contract based on your finance clause, because you can still borrow exactly what you intended. If the vendor could show that you only wanted to borrow 60%, and that was approved despite the low valuation, a court would be likely to enforce specific performance (ie that you complete the contract).

Also, depending on the wording of your subject to finance clause, regardless of the valuation and what the lenders will give you, you could even be compelled to accept vendor finance for the surplus that the bank won't lend you.

I know of somebody who wanted to borrow, say, 80% of a $500K purchase price, or $400K. Valuation came in at $400K, lender would only lend $320K. Purchaser notified intention to cancel, vendor (a developer) replied "no worries, I'll lend you the other $80K at 15%pa", and the purchaser was compelled to accept this. This may be the case if your finance clause simply says "sufficient to complete" or something wussy like that. If it was well-written and purchaser-friendly, the finance clause would instead say something like "subject to the purchase attaining finance on terms acceptable to the purchaser at their absolute discretion".

* subject to lenders valuation being accepted by purchaser on or before date.

That, however, is an out, and a good one - nice and wide degree of latitude for you.

As others have said, I would not be interested in completing a purchase where the valuation comes in (significantly) lower than purchase price, unless, as in ianvestor's case, there are good reasons for it and the deal still makes financial sense. But generally the answer to your question is that valuations should not come in below purchase price. The vast majority of the time they come in at exactly purchase price.

If, as the agent suggests, this complex seems to always be valued under purchase price, I'd be wanting to find out why. Ring a valuer other than the panel valuer, and ask the question. They may or may not be willing to talk to you. I've found a lot of them are quite happy to "shoot the breeze".

Good luck, and hope this is all theoretical, and your valuation comes in at $550K.

 

[Steve Cockrane]

xQuIz8

As Buzzlightyear said,

Since you have mentioned this, how much lower does it usually come in at ?

They don't necessarily come in below. In my experience, for the properties that I knew the result of valuations (3), they were the same as the purchase price. I suspect (my opinion only) that this would generally be the 'norm'.

He's quite right a valuation coming in at the purchase price is generally speaking the 'norm'.

A property valuer's obligation is to provide the lender with an opinion as to the market value of a property the lender is gong to lend against. It is very hard for a valuer to mount a argument that the market value is something different to what the market has determined is it's value.

The vast majority of valuations for properties being purchased (as opposed to being refinanced) will come in at the contract price. The only time I've seen valuations come in at a level different to that of a contract are:

• The transaction was not a genuine at market transaction. In this case the sale was a private sale between vendor and purchaser with no 3rd party (ie REA) involved, the valuation came in $50,000 below the contract price.

• There has been a long time (> 3months) between the contract date and settlement. The best example of this is a "off the plan" purchase with settlement some 6 to 12 months after the date of the contract. I have seen valuations in these cases come in both above and below contract price. In most of these cases the lender will go with the lower of the two valuations. For example let's say you purchased your apartment off the plan 12 months ago for $450,00 and now it's valued at $550,00 the lender will try to go with the value as per the contract, if however it came in at $350,000 they'd want to go with that. Just one of the risks you have to take into account when buying off the plan - the market can move against you.

I hope this helps, it's a "general rule of thumb" view of how valuations can work.

Cheers

Steve Cockrane

 

[ianvestor]

You can only withdraw based on a low valuation and a "subject to finance" clause if that low valuation renders you unable to obtain finance.

As I understand it (and everyone's contract is different), you should be putting "Subject to finance satisfactory to buyer" or something like that, and then you don't have to be unable to get finance to get out, you just need to be genuinely dissatisfied with any finance you're able to get, which could be caused by a low valuation.