A property valuation is an essential step in your home buying journey as getting a clear indication of the home’s value will help you make the right decision.
When it comes to buying a house for the first time, as much as it is important for your lender to know how much the property is worth so they can be sure that the value of the property is more than the loan amount you’re wanting to borrow from them, it is also as important for you to know what the right price might be to pay for the property.
If you’re looking at refinancing, knowing how much equity you have on your current property will determine whether it is the right time for you to refinance your home loan.
To help you understand how valuation works, here we outline everything you need to know about property valuations:
What is a property valuation?
A valuation of a property or land is a professional opinion (by a certified valuer) of its dollar value for the purposes of a planned transaction, like a sale, a mortgage or for refinancing. Real estate transactions need these sorts of evaluations because every property is unique, especially in terms of their current condition, which is a key factor in setting value. Of course location matters but since property doesn’t (usually) change location, it’s the upgrades or improvements that most affect values within an area.
Types of valuations.
You can get an estimate of what your property is worth in two main ways: appraisals (market valuation) or formal valuations. They are not the same thing. Appraisals are only intended as a guide to pricing and usually given by a real estate agent using information about recent sale prices in the area. No fee is normally charged for this service.
A formal valuation on the other hand, gives a more accurate estimate of the property’s value, and can only be done by a certified Valuer.
A formal valuation will take into account things like:
- The location of the property
- The building structure and its condition
- Building/structural faults
- Features of the home
- Caveats or encumbrances on the property
- Local Council zoning
- Additional features of the property (particularly relevant in rural areas)
- Recent sales
Formal valuations start around $500 although it’s worth shopping around as you may be able to get it for less1. Some lenders will also offer free valuations as part of a home loan. At Pepper Money, if a valuation is ordered, this is included as part of the establishment fee.
What’s the difference between a property valuation and a market valuation?
Market value is basically the highest estimated price a buyer would pay and that a seller would accept in an open and competitive market. The main thing to understand about market value is that it generally relies on buyers emotions to drive up price.
Whereas market value can be impacted by human emotion, a property valuation, generally carried out by a bank, lender or independent agent, is data driven. A Valuer will physically assess your home’s key features as well as comparable sales to arrive at a value, which he or she believes the property would sell for at that moment in time.
What can you do if the valuation is too low?
If you believe that valuation of your property is incorrect, first get an understanding from your Lender or agent as to why the valuation is a lower than what you expected. You can also submit a formal written objection to government agencies in your state - some of the useful links are listed below:
- New South Wales: https://valuation.property.nsw.gov.au/
- Victoria: https://www.propertyandlandtitles.vic.gov.au/valuation/council-valuations/objecting-to-a-council-valuation
- South Australia: https://www.sa.gov.au/topics/planning-and-property/owning-a-property/objecting-to-a-property-valuation
Sometimes you may be faced with a valuation shortfall. This is a financial term, which usually means that a valuation is less than the price that has been paid or estimated for a property. It can apply for buying or refinancing. This may lead to a lender declining to fund a loan for the full amount you need to proceed with the purchase/ refinance, leaving you with a shortfall.
If you are ever facing a shortfall, there are a few options you can consider:
- Cover the shortfall difference if you can afford it, or
- Look for an alternative lender who can lend you a higher Loan to Value Ratio (LVR). Meaning the amount you might be eligible to borrow could be up to 95% of the property value which could provide you with enough funds to cover the shortfall.
To get started you can also find out how much you can possibly borrow using our home loan borrowing power tool in just minutes.