Bank Valuation vs Market Value

Bank Valuation vs Market Value

A property can have two different valuations: a market valuation, which indicates what the property may sell for, and a bank valuation, which is done by a lender to help determine its risks.

About Bank Valuations

More often than not, the bank valuation will be more conservative and does not reflect the market value of the property. The bank valuation is designed to protect the lender from the risk of defaulting on the loan.

A bank valuation is an internal business tool that estimates what a lender can expect to recoup if they ever need to repossess and sell the property. They also factor in agent commissions and legal costs, so it provides a different perspective than market value calculations.

If you default on the mortgage, the bank needs to sell the property and incur all the costs involved in the sale. So, the bank valuation is the amount they think they could reasonably recoup quickly should they need to repossess and sell the property.

If you encounter financial hardship and default on your mortgage payments, it’s best to try and sell the property yourself for “market value” before the bank steps in and sells it for whatever it can quickly get.

A bank valuation, although not an accurate reflection of the true property value, is a major determining factor in whether you qualify for a loan. Some lenders will charge you for the bank valuation, while others offer free valuations when you apply.

About Market Valuations

A market valuation is an estimation of a property's value on the real estate market and will most times be higher than the bank valuation. It takes into account local fluctuations, location, buyer demographics, comparables, and desirability—all factors the bank valuation doesn’t consider. The bank valuation is simply based on cold, hard numbers. A market valuation provides a buyer or a seller with an indicative price that will be paid for the property. It helps you decide how much to buy or sell a property for.

What if There is a Large Difference?

The conservative bank valuation is what the bank uses to determine if it will lend you the money. Even with a pre-approved loan, if there is a substantial discrepancy between what you have agreed to pay for the property and what the bank values it at, you may run into difficulties. If you cannot meet the lender's required loan-to-value ratio (LVR), you may not get final approval for the loan.

Options if There's a Large Difference

• Renegotiate with the Vendor: Try to lower the purchase price.
• Request a Second Valuation: Ask another valuer approved by the lender to conduct a new valuation.
• Dispute the Bank Valuation: This requires solid evidence and research to support your case, though it is not often successful.
• Add Extra Deposit: Find a way to cover the shortfall in the LVR.

The Key to Success: Research

When buying property, research is crucial. In the case of market value vs. bank valuation, proper research will reduce the likelihood of agreeing to pay substantially more than the bank valuation and, in turn, help avoid issues with final loan approval.

Welcome Home

At JKL, we’re here to support you through every step of your property journey. Our experienced team will help you navigate the complexities of bank valuations and market values, ensuring you make informed and confident decisions.

Experience our JKL real estate family. We’ll put the welcome mat out for you!