Quite often the most misunderstood aspect of buying property is the importance played by the valuation when borrowing to purchase. The ratio, e.g. 82%, 90%, 95% of your borrowing compared to the purchase price of the property dictates the requirement of a valuation.
For example if you have up to say, 35% of the purchase price in cash then (% varies from lender to lender) many lending institutions will not require a formal valuation and subsequently will resort to Branch Managers using the internet to apportion an opinion on value, on which they subsequently rely. However if you have a smaller deposit say between 5 to 18% then a formal valuation is required at your expense on which the lender will then advance funds in accordance with your borrowing power but for argument say up to 78% of the valuation.
This is where the formal valuation is important because if the value stated is less than the sale price then the borrower needs to find their deposit and that shortfall difference. For example,
Buyer goes to contract on a property for $350,000 (subject to finance)
Valuation ordered by lender and returns @ $340,000 ($10,000 Shortfall)
Say maximum loan of 95% of value $323,000
Buyer has to find 5% plus the shortfall $27,000
The importance of a valuation to both vendor and purchaser is as follows;
Purchaser, you may not be aware of recent sales in the area which will impact value as is often the case in difficult economic times with financially distressed vendors selling below value due to pressure from lenders or creditors. Distressed sales have the effect of creating lower valuations than purchase prices. That $10,000 difference may equate to 5 years capital growth to recover to a break even position with value. However why take the chance that your lander may decline your loan!
Vendors, it is important for any vendor to have a current valuation as a backup to the agents Market Appraisal especially if the property has been on the market for 6 to 8 weeks without interest. Equally vendors often have unrealistic expectations regarding value of the family home or investment property when a valuation would have resolved any doubt. Having a valuation doesn’t preclude the vendor for listing the property for a sale price above the valuation; just don’t show the valuation to prospects in this instance.
Moreover for vendors a valuation would not allow agents to list properties well above the valuation range in order to placate vendors or otherwise just to get a listing, because valuers value like properties with like properties, it’s unlikely that a new bank valuer having the same sales evidence as the first valuer will come along and value up $15,000 or $20,000 more. Therefore a sale that ignores a recent valuation, selling for a higher price will put the sale under duress and may not proceed unless the purchaser has extra cash over borrowings like the above example or is a cash buyer, why wouldn’t you want to be sure that your sale would proceed?
Our valuations start from $495, why wouldn’t you want to be sure? Contact our staff valuer John Sinclair on 0408 205 823