The murky waters of bank valuations: Mark Armstrong

Recently I was speaking with an investor who was facing a major dilemma. He had bought an apartment in Abbotsford off-the-plan and now that the property was due to settle he was having problems getting finance approved.  

This was causing him significant stress, as the penalties for not settling are significant. They include losing his deposit and the risk of being sued by the vendor to cover any out of pocket expenses.  

As we discussed his situation it soon became clear how murky his position had become.  

The sales person told him the property had originally been purchased 12 months earlier for $450,000 and was now being on sold prior to completion. Although due to the fact the property had never been settled there was no way to confirm this was correct.  On the surface it appeared to this individual the asking price of $406,000 was a bargain to good to refuse and he signed a contract to purchase the property.  

Prior to signing the contract he had put in place a loan preapproval so he was confident getting a loan would not be an issue and as a result did not buy subject to finance. The next hurdle to clear was to get unconditionally approved. To do this his bank ordered a valuation and this is where his problems started.  

The valuation came back a long way below the contract price at $340,000 and he was being forced him into a position where he would be unable to settle. The real estate mantra of Caveat Emptor, Buyer Beware, meant severe penalties were looming.      

Not all was lost however and like going to a doctor for a second opinion he approached a different bank. Sure enough the valuation came back at the purchase price and his loan was approved.        

So how can one bank value a property so much less than another? The answer lies in the individual bank's tolerance for risk and the kind of property they view as being a safe security.  

The Abbotsford apartment had one bedroom and was only 37m2. Although one-bedroom apartments can make great investments if they are under 50m2 alarm bells start ringing at many banks. A small apartment size is a signal the property maybe a serviced apartment or student accommodation which most banks approach with trepidation.  

In addition banks have postcode restrictions in place that determine their lending policies and these vary from bank to bank. Established apartment markets such as South Yarra and Port Melbourne are more likely to get the nod. However an apartment under 50m2 in an emerging market like Abbotsford is more likely face harsher lending policies.  

Although the valuation is independent the valuer will have an understanding of the banks policy and take this into account. Remember if a valuation comes in too high and the bank loses money on the loan then the valuer maybe legally liable.  

Mark Armstrong is a director of iProperty Plan, which provides independent analysis and tailored advice to investors and home buyers.