Bank valuation vs market value – How much is your property worth?

Unfortunately, many homeowners don’t understand the difference between a market value and a bank value – but it’s vitally important that they do.

In fact, sometimes when a homeowner wants to draw on some of the equity in their property, they are shocked when the bank valuation comes in below the market value they had already assessed in their head.

So, why does this happen? How can two “values” be so different for the same property?

This article will outline why a market value and a bank value are not necessarily the same thing.

A more formal way of putting it is: “The estimated value that a buyer would pay and a seller would accept for an item in an open and competitive market.”

The main thing to understand about market value is there’s an element of emotion, and sometimes ego, that can drive up the price.

A great example of this is at auctions where buyers can get carried away with the competitive environment and end up paying much more than their budget to ‘win’ the property.

This is particularly the case when they fall in love with a home and are willing to extend themselves in order to secure it.

Likewise, when a market is hot, then buyers can have FOMO (or Fear Of Missing Out) and end up paying too much for a property. Part of the reason is they’re exhausted by the purchasing hunt, and sick of finding the right asset only to be gazumped by another buyer.

While it’s impossible to say exactly what a property will sell for on any given day, by researching comparable sales properly, most homeowners can get an idea of what the market value may be for their asset.

Lenders have qualified valuers on staff (or on retainer) who will assess a property and create a report that determines the property’s value. It’s important to understand that a bank valuation for property is typically lower than the local real estate agent’s price appraisal, or price estimate.

The term ‘valuation’ refers only to the estimate provided by a professional, qualified valuer.  

A valuer is a tertiary qualified professional, a third party who determines the value of land and property, through research. They will typically provide a report for their client or employer and these can range from lending institutions to government, private business, even private vendors (sellers).

A professional valuer will complete a bank valuation on the property without any emotion whatsoever.

The valuer will physically assess your home 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.

The valuer is also assessing your home ‘as is’ which means if there’s a minor state of disrepair, or low-quality presentation, they’ll factor that into their assessment.

The main point here is a bank value is often lower than market value because of its objectivity, lack of emotion, tendency to be conservative and ‘as of the moment and condition’ approach.

Of course, this can be annoying to anyone wanting to refinance and access equity, or for buyers who have to come up with a bigger deposit because banks will only lend a percentage (loan-to-value ratio) of the bank valuation not the market value.

Just as you can improve the sale price of your property by making sure it looks its best, the same goes when it comes time for the bank to value your home.

You should ensure your property has had any necessary cosmetic updates completed, such as a fresh coat of paint and landscaping, so the valuer enters your home with a smile and not a frown.

Also – make sure you complete any unfinished renovation work. It’s hard for a valuer to be excited about a home that’s missing half its tiling, or is waiting for a kitchen cabinet to be installed.

Likewise, you want the valuer to be able to assess your home without worrying about tripping over children’s toys or walking into the boxes of paperwork that festoon your hallway and study.

You may also be able to influence the end result by doing your research on comparable sales in the local area – especially if your home is unusual or there have been recent transactions that have not come through the official databases as yet. Often, property owners know about sales in their suburb well before the valuers who rely on them.

In addition, ensure they have all the information they need about your property – particularly hard to spot features.

If you’re in a unit complex, do you have an exclusive-use yard or separate storeroom on title? Make sure they’re aware of these.

Perhaps your home has a size and zoning that would allow future development? Let the valuer know.

Plus, if you are aware of very recent sales that show how your market is strengthening, or why your particular enclave of the suburb is superior, then be sure to give these to the valuer.

While you’re at it, highlight why your home is superior to this comparable evidence.

It could be land size, number of bedrooms or extent of site improvements – whatever paints your home in a positive light.

That said, while professional valuers will be happy to consider your research, you probably shouldn’t wander around behind them pointing out every small modification during their inspection.

Rather, you should highlight at the outset any improvements they might miss, and then let them get on with their job without interruption.

Annoying the valuer is unlikely to end in a favourable result!

When prices have been on the up and appear to be getting stronger week-by-week, the valuer will be more inclined toward an optimistic outlook on your property’s price.

They may even comment on expectations of likely value rises to the lender.

Valuations completed immediately after all renovations are completed do well too. Why? Well a valuer can see exactly what they are valuing and apply that to the market and comparable sales.

While we’ll get into the benefits of renovation to your asset’s value in a moment, there is a practical reason for an updated valuation as soon as possible after a reno.

The value-depreciating effects of wear and tear are yet to take hold, so a valuer is assessing your asset in its most pristine state.

This provides maximum benefit in value upside from your hard work.

In effect, it takes advantage of the ‘valuation as is’ rule, because the assessment is based on your post-renovation home being in both ‘new’ condition, and ideal presentation.

A bank valuation less than the purchase price is also called a valuation shortfall and this could be a reflection of a few factors:

• Is the valuer relying on outdated comparable sales data? 
• Has the lender valuation missed any comparable, recent, high-value sales?
• Is the market rising quickly? Has the valuer factored this in? 

If you are facing a valuation shortfall, the first step is to speak to your lender to get an understanding of why the valuation was lower than you expected. Explain to your lender why you think the bank valuation is inaccurate or incorrect. 

If this fails to change the outcome you have three options:

• Find the additional money to make up the shortfall in the offer
• Look for an alternative lender who may come to the party on the loan
• Talk to a broker to see what they may be able to do. A good mortgage broker will have knowledge across a range of financial products as well as have established relationships with lenders that may help.

• Land – looking at location, position, elevation, orientation, outlook, size, shape, topography and accessibility.
• Dwelling – age, condition, accommodation and utility/usability of layout. It could include ancillary dwellings such as an attached granny flat.
• Ancillaries – This refers to other site improvements such as landscaping, fencing, paths and driveways, pools and tennis courts. The important elements here include age, condition, aesthetics and utility.

Guide to Property Values

Some of these fundamentals can be changed to enhance value, such as adding pool, changing floor coverings or upgrading appliances. Others can’t, such as location and position.

One of the most common reasons for homeowners to get a bank valuation for property is when they’ve completed renovations on their home and perhaps want to access the increased equity to buy another property.

Of course, cosmetic or structural improvements to a property are likely to increase its market or bank value – as long as they’re done well! These might include:

• Altering the layout – such as creating open-plan living to create the illusion of space
• Updated appliances – air conditioning, kitchen appliances, etc.
• Fresh finishes such as a new coat of paint or new flooring
• Update the kitchen or bathroom for a renewed look.

There are non-tangible influences which should be taken into consideration as well.

The most obvious is local planning and council zoning. These have a direct impact on how your property can be used and future redevelopment options. In some instances, making application to gain certain approvals or allowable changes of use can enhance value. For example, an approval to build townhouses can bring a huge boost in certain suburbs.

Some capital city suburbs, particularly in Melbourne and Brisbane, have seen extensive flurries of activity of small, mum-and-dad developers buying properties on large blocks where favourable zoning allows them to create townhouse developments. These small-scale developers are boosting a property’s value through the unrealised potential. 

Property investors in Melbourne, Sydney and Brisbane are also looking for those opportunities that can allow for a cosmetic update to a property before putting it onto the rental market.

Other non-tangibles might include legal elements such as easements or encumbrances. Again, altering these on the property title can bring benefit to your property and result in a value increase.

So, while we might just have to accept that market and bank values are often different, that doesn’t necessarily mean you can’t have a positive influence on both of them.

In short, ask yourself – “What influences me to pay more or less for a particular property?”. If any of those things can be changed in a beneficial way, then you’re likely to improve the property’s value.

The market value is usually higher, because it’s generally positively impacted by human emotion, whereas the bank value is likely to be more conservative and calculated without any emotion whatsoever.

The world of banking and finance can be a pretty daunting one for both novice and sophisticated investors and since our establishment in 2002 we’ve focused on providing outstanding service and business standards.

This approach was vindicated when we won the 2022 – Broker Of The Year in the Connective Excellence Awards and many other industry awards spanning our many years in business.

If you’re considering refinancing to access equity or are on the hunt for your first, or next, property, why now contact Intuitive Finance today to ensure you have the right information and expert support on your side no matter what stage of the property ownership journey you are on?

The information provided in this article is general in nature and does not constitute personal financial advice. The information has been prepared without taking into account your personal objectives, financial situation or needs. Before acting on any information you should consider the appropriateness of the information with regard to your objectives, financial situation and needs.