| Bank Valuation vs Market Value
A property can have two different types of valuations: market valuation and bank valuation. A market valuation provides an indication of what the property may sell for, while a bank valuation is done by a lender to determine their risks in case of default. The bank valuation is often more conservative compared to the market valuation as it is designed to protect the lender from the risk of loan default.
The bank valuation is an internal tool that estimates what the lender can expect to recoup if they need to repossess and sell the property. The bank valuation also includes agent commissions and legal costs, which are not factored into market value calculations. If a borrower defaults on a mortgage, the bank needs to sell the property quickly and recover the amount owed, including all the costs involved in the sale.
A market valuation takes into account local fluctuations, location, buyer demographics, comparables, and desirability factors that the bank valuation does not factor in. It provides either a buyer or seller an indicative price that will be paid for the property.
If there is a large difference between the market and bank valuations, it may cause difficulties in getting final approval for a loan. To resolve this issue, one can renegotiate with the vendor, request a second valuation by another lender-approved valuer, dispute the bank valuation with solid evidence, or add extra deposit to cover the shortfall in the loan-to-value ratio (LVR).
In conclusion, proper research when buying property is essential, especially in determining the market value vs. bank valuation, to avoid agreeing to pay substantially more than the bank valuation and having issues with final loan approval.
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