Expert Advice by Michelle Coleman

17/09/2014

If you speak to any group of property investors you could safely bet the house that over 80% of them would have a story to tell how a valuation has affected their investment journey – some would be good news, but I daresay a lot be tales of how the outcome of a valuation threw a curve ball to their plans of wealth creation.

A valuation by definition as outlined in API Guidelines:

The International Valuation Standards Council International Valuation Glossary defines market value as:

“The estimated amount for which an asset or liability should exchange on the date of valuation

between a willing buyer and a willing seller in an arm’s length transaction after proper marketing

wherein the parties had each acted knowledgeably, prudently, and without compulsion.”

Valuations are certainly a hot topic in the mortgage industry at the moment and not just from a mortgage broker perspective.  There are frustrations at a branch level as well, and even lender’s representatives have expressed frustration about the inconsistencies within the industry and the acute variances from one valuation to another (without any recourse).

The reason it’s at the forefront is that lenders will lend based on the results of a certified valuation, not on a contract of sale or general comparative sales, and valuation reports are based on the opinion of the individual completing the report.  Variances between the valuation outcomes to purchase price/estimated value can affect the amount of money that needs to be contributed, or in cases of refinance, how much you get released to the client.

The hidden pressure that creates valuers’ conservatism is that they put their licence is on the table when doing a valuation for mortgage purposes. If a lender or mortgage insurer loses money on a property through default and they can prove the valuer over estimated – the valuer may be liable for their loss.  This is further exacerbated when the fee for a valuation has gone down from approximately $600 to an average of $250 – it’s a lot to risk for such a small fee.

Valuers across the board have to be able to make judgements based on intimate knowledge of the markets they’re valuing in and as the results are highly dependant on their personal opinion.  This is the intangible factor that affects any valuation on top of the location, size, and condition of the property.  Given this it is very challenging to dispute valuation results. Unless there has been an error in the actual specifications of the property (size, number of bedrooms) it’s highly unlikely any report will be changed. 

Unfortunately we’re seeing excessive variances even in cases where two valuers have assessed the exact same property, prompting concerns that there is not enough regulation of the standard of knowledge being used as a base for valuation reports.

To be fair, it is standard that a valuation report can sway 10% either way depending on the market, but it’s the more recent epidemic that we have had to cope with up to 30% variances from one valuer’s report to another.  To put that in perspective, on a property worth $300,000 a client may need to contribute an extra $30,000 - $90,000 in addition to the deposit and costs already allowed for.  This could mean using funds you’ve set-aside for your next deposit, or having the transaction swallow your entire buffer whole, leaving you at risk financially.

 

It’s awful seeing any client put under this kind of stress and it would be all too easy to jump on my soapbox and administer a bit of a smack down on the industry as a whole, but that doesn’t help you as an investor.  With any contentious issue, we as brokers need to step back and really think about how our experience with navigating this process can help you to improve your chances of mitigating your risk when it comes to valuations. In this case, the points of interest you would be encouraged to understand are:

  • When is a valuation required?
  • What types of valuations are there?
  • What is the process for conducting a valuation for mortgage purpose?
  • Is a valuation it the same as fair market value?
  • Who is Valex or VMS?
  • What are key elements of a valuation report that can affect finance? (It’s not just the dollar amount)
  • What are my options when I get a bad valuation?
  • What can I do to get a better valuation on my property?
These are all crucial points to understand but if you only had one thing to take away, my golden nugget of wisdom is: Get a second opinion, or even a third!

What I mean by this is work with a mortgage broker that understands the importance of upfront valuations.  Most lenders will allow you to do this either free or for a small fee (this is for both refinances, purchases and construction).  You want to ensure that you confirm the value of the property before you go down the application process and have credit checks performed on you, get approved only to then get a low valuation that you can’t proceed with. 

As frustrating as it may sound, it’s worthwhile; we’ve experienced clients whose purchase was the subject of differences up to $50k between four different valuations for a $400k.

In not doing so, not only would you have the disappointment of a low valuation, you have a wasted credit hit on your file which as you know from earlier discussions, isn’t great especially with the way that lenders are credit scoring.  Not to mention, that choosing a lender can be a complex process depending on your situation and it’s not always easy to flit from one to another.  Sometimes our clients’ circumstances are only suited to one or two products across the board.

But as always there is good news to all of this!  If you do get a bad valuation you have good chance of getting a better one somewhere else. So don’t give up, It just means you have to understand (or your mortgage broker at the very least) how the valuations systems work with each lender. Whilst there is no real way to pick your valuer your mortgage broker can order another valuation with another lender and try and get the result you need.  So when you are considering all of your lender options not only now do you consider all of the normal selection criteria in your strategy you now need to add valuations into that.

Michelle Coleman is a first-rate mortgage strategist and mum, and she heads up the team at W Financial.  She is without a doubt, a legend of the Australian mortgage broking industry, having achieved over $500M of settlements in her 12+ year career to date, and won numerous industry awards, including #3 MPA Top Broker.  Michelle is also a highly experienced property investor.  www.wfinancial.com.au

To read more Expert Advice articles by Michelle, click here

Disclaimer: while due care is taken, the viewpoints expressed by contributors do not necessarily reflect the opinions of Your Investment Property.