If you are set on buying your home, or if you are considering refinancing your mortgage you will definitely need a bank valuation for your property, or the one you intend to acquire. Your lender will most likely arrange it on your behalf and probably charge you for this.
As simple and straightforward as it may seem there are a few things that you need to know. These will most certainly curb confusion and dissatisfaction:
What Is A Bank Valuation For Your Property?
The bank valuation is a price estimate of your property. An expert hired by the bank will collect all of the necessary information and come up with a price estimate.
The evaluator will take into consideration the location of the property and its council zoning. The reason for this is obvious – a house in a good suburb will cost more than a house in a bad suburb. When a bank evaluation is concerned the terms “good” and “bad” lack their emotional meaning. What is analysed is rather the infrastructure, the proximity to the city centre, the amenities within reach. The same brick and mortar will be valued differently in different locations.
Then comes the brick and mortar. The evaluator will examine the building structure, the materials used, its age and its condition. Good materials, recent construction, proper maintenance will be appreciated here.
Now the evaluator comes to the interior. She will examine the overall size of the property, the size of the home, the number of rooms, the number of bathrooms, the practical configuration of rooms, and so on.
The evaluator will then price in-vehicle access, and ancillaries (fences, pools, tennis courts, walkways, etc.), as well as all other things which may influence its price (like proper maintenance and repair).
What sets aside bank valuations is the fact that the evaluator will also take into consideration the state of the market, availability of credit, the expected interest rates, as well as possible developments, with a potential effect on property prices.
Why Are Bank Valuations Needed?
The chief purpose of bank valuations is the establish the risk which it is about to undertake. It is actually the “lender valuation”. This valuation needs to be as unbiased as possible.
Here is how this works: The bank is about to lend money for the purchase or refinance of a property. This same property is the bank’s main, and usually only, collateral. In the event that you cannot meet the payments on your mortgage loan, the bank will claim your home and auction it off. With the proceeds of the property sale, it will settle all outstanding loan obligations on your credit.
Hence the value of the property and its relation to the loan amount is very important to the bank (loan-to-value ratio). This is why it needs the evaluation of the property value. This is also why it normally requires your financial participation (when purchasing a property). The idea of the bank is always to have collateral, which costs more than the outstanding loan amount. If it is vice versa, the possibility of debtors losing their motivation for repayment increases.
Bank Valuation May Differ From Market Valuations
There are other kinds of valuations. A popular one is the market valuation.
The market valuation determines the price of the property at any given moment. What is specific to the property market and respectively the market value is that it is determined often by emotion. This may be a trend, a hype, a way to express yourself, even a fashion. These factors will throw the price way off. It is rather hard to pinpoint the exact market value of a property. However, property owners or buyers can reach a reasonable market price estimate just by comparing current similar properties which were already sold.
On the other hand, bank valuations will be exempt from emotion, hype or trends. The bank valuations will be much more objective. They will focus on financial forecasts, liquidity of the market and risk estimation.
This, of course, means that these two valuations will often differ. Normally the bank valuations tend to be lower than the market ones. The home mortgage value will normally be lower than the price of the house. This may cause confusion or irritation in future borrowers, who are not familiar with the topic but have a higher equity value in mind.
Types Of Bank Valuations Of The Property
There are several different types of bank valuation. These mainly differ from the depth of research linked with the valuation:
These are basic valuations that are made by a computer algorithm. With AI gaining ground the automated valuation will become more detailed and precise. For now, their use is mainly for providing a rough estimate of the bank valuation.
As the name suggests, the valuation expert will never leave the comfort of her office. These valuations are very quick to make and are usually needed when an update of the valuation is necessary (say 10 years after home purchase and loan disbursal). The desktop valuation normally will not take into consideration much detail about the property.
In this type, the valuation expert is “staying on the curb” and watching the property. The curbside valuation will have a bit more detail compared with the desktop one. Certainly, it will take into account the current state of the property, or at least how it is seen from the outside. This may be done by the bank in the instance of faltering repayments on the loan.
The full valuation will certainly be needed when preparing a home mortgage value or its refinancing. It will include all the details (as described above) and will be much more precise.
Hopefully, by now you know what bank valuations are used for, how they are made and why they may differ from the market price of your house. By knowing the logic of valuations you will know what to expect and evade any unnecessary confusion.