Bank valuation vs market value – How much is your property worth?
Here’s the thing: Did you know that there are two potential values for your property?
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.
What is market value?
Market value is essentially the price that the property will trade for on the current market.
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 property. Part of the reason is they’re exhausted by the hunt for a property, 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.
Why is a bank value different?
Where market value can be impacted by emotion, a bank valuation is purely a numbers game.
That is, a professional valuer, will complete a 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, and tendency to be conservative.
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.
Can you influence the valuation of your property?
The answer is both ‘yes’ and ‘no’!
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.
Ensure they have all the information they need as well – 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.
Also, 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 is the best time?
Often, valuations are only completed when needed, but if you do have the option, consider getting a valuer in during a well-established rising market.
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.
How can you increase the value of your property?
One of the most common reasons for homeowners to get a bank valuation 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 of course!
But there are other attributes to look for in a home that can have a positive impact on it price.
These include such things as:
- General location and council zoning
- Overall size and number of rooms
- Vehicle access to the property
- Building structure and condition.
These are the same attributes you should look out for during your initial research when buying, as they usually have a favourable effect on the future price of the property.
During the ownership of your property – whether it’s a home or an investment – there are also many other ways that you can increase its value.
- Ongoing upkeep and maintenance
- Layout of the living area – such as 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.
So, while we might just have to accept that market and bank values are often different, that doesn’t necessarily mean that you can’t have a positive influence on both of them.
Intuitive Finance — the smart choice
Depending on whether you’re selling, buying or refinancing, your property could potentially have two different values.
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 were named Victoria’s favourite mortgage broker at the 2015 Investors Choice Awards as well as many other industry awards since.
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?
Discuss your specific needs & formulate the right strategy for you. Get in touch to organise your complimentary 60min session today!
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.