Market Valuer vs Bank Value

Did you know 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 equity in their property, they’re shocked when the bank valuation comes in below the market value they had already assessed. This is particularly the case in today’s strong market, where rapidly rising property values can make a significant difference between the two.

So why does this happen? How can two “values” be so different for the same property?

This article outlines why market value and bank value are not necessarily the same, and what you, as the owner, can do to ensure you get the best possible outcome.

What is market value?

Market value is the price that a property will trade for on the current open market.

A more formal definition is: “The estimated value that a buyer would pay, and a seller would accept for an asset in an open and competitive market.”

The main thing to understand about market value is that there’s an element of emotion, and sometimes ego, in the price. This is particularly so in strong, bullish real estate markets like those we’re seeing across the country right now.

A great example is auctions, where buyers can get carried away with the competitive environment and end up paying much more than their budget to ‘win’ the property. When buyers fall in love with a home and are willing to extend themselves to secure it – and when competition among buyers is intense – prices often exceed expectations.

Likewise, in hot markets, buyers can experience FOMO (Fear Of Missing Out) and end up paying too much. Part of this stems from exhaustion in the purchasing hunt and frustration at being gazumped by other buyers.

While it’s impossible to say precisely what a property will sell for on any given day, most homeowners can get a reasonable idea of market value by researching comparable sales.

Real estate professionals use a range of data points to determine market value, including recent comparable sales data, current market climate (informed by buyer and seller inquiry levels), and how ‘hot’ or ‘cool’ the market is based on experience and expert judgment.

You could say their market value balances both ‘hard’ data and ‘soft’ data.

Market value is also very up-to-date. It represents a moment in time that reflects the current mood among buyers and sellers.

How do banks value property?

Unlike real estate agents, banks require a much more considered and conservative approach to property valuation.

Lenders engage qualified valuers – usually independent contractors – who assess a property and prepare a valuation report evaluating a home’s bank value. I note here that the term ‘valuation’ refers specifically to an estimate provided by a professional, qualified valuer.

The valuation, which ultimately influences whether and how much money someone can borrow, is prepared in accordance with rules set out by financiers and their governing bodies. These rules specify how the property can be treated as an asset in a valuation, and what types of comparable sales can be used in the report.

It’s important to understand that a bank valuation is typically lower than the local real estate agent’s appraisal.

Why is a bank value different?

Whereas market value can be impacted by emotion, a bank valuation is purely a numbers game.

A professional valuer completes a bank valuation without any emotion whatsoever. They will physically assess your home and review comparable sales to arrive at a value they believe the property would sell for at that moment in time. They will not speculate on whether the market is moving up or down quickly, like it is in many cities at the moment.

Valuers must also rely on sales that have already occurred, and have been settled and finalised. They cannot reference current listings or offers, nor can they use sales that are contracted but not yet settled.

This is a significant reason why bank valuations can be so conservative in rising markets like those we’re experiencing now. Settled sales will almost always be at least 30 days old – some even longer. When prices are rising quickly, by the time they’re settled and acceptable for use in a valuation, they no longer reflect market conditions.

The valuer also assesses your home ‘as is’, meaning that minor disrepair or low-quality presentation will be factored into their assessment. You don’t have the opportunity to do the normal preparation you would for a sales campaign – no paint touch-ups, no floor covering replacement, no professional staging. It’s a straightforward walk-through view of its value as seen on the day. Unfortunately, your home may not appear in its most pristine state on that day, which can influence the assessment.

In summary, a bank value is often lower than market value because of its objectivity, lack of emotion, conservative approach, and ‘as is’ methodology.

Of course, this can be frustrating for anyone wanting to refinance and access equity, or for buyers who must come up with a larger deposit because banks lend only a percentage (loan-to-value ratio) of the bank valuation, not the market value.

Can you influence the bank valuation?

The answer is both ‘yes’ and ‘no’!

Just as you can improve the sale price of your property by ensuring it looks its best, the same applies when the bank values your home. Ensure any necessary cosmetic updates – such as a fresh coat of paint and landscaping – are completed so the valuer enters your home with a positive impression.

Also, complete any unfinished renovation work. It’s hard for a valuer to assess a home positively when tiling is missing or kitchen benchtops are awaiting delivery.

Likewise, ensure the valuer can assess your home without worrying about tripping over children’s toys or walking around boxes of paperwork in the hallways.

You may also influence the outcome by conducting your own research on comparable sales in the local area – especially if your home is unusual or recent transactions haven’t yet appeared in official databases. Property owners often know about sales in their suburb well before valuers, who rely mostly on formal records.

In addition, ensure valuers have all the information they need about your property, particularly hard-to-spot features. For example, if you’re in a unit complex, do you have an exclusive-use yard or separate storeroom on title? Make sure they know. Does your detached home have zoning that would allow future development? Let the valuer know so they can factor that in.

Plus, if you’re aware of very recent sales that show your market is strengthening or why your particular area is superior, provide them to the valuer. I suggest checking listing portals like realestate.com.au for sold properties. These may not yet be recorded in official databases, but are still excellent evidence.

While you’re at it, highlight why your home is superior to comparable evidence – whether that’s land size, number of bedrooms, or extent of site improvements.

That said, while professional valuers will consider your research, you shouldn’t hover over them during their inspection, pointing out every small modification. Instead, highlight any improvements they might miss at the outset, 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 to get a valuation?

Valuations are typically only completed when a change in home mortgage value is needed, but if you have the option, consider getting a valuer in during a well-established rising market. When prices seem to be increasing daily, 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 renovations are finished also do well. A valuer can see exactly what they’re valuing and apply that to the market and comparable sales. New fittings and fixtures look their best too. This effectively takes advantage of the ‘valuation as is’ rule, because the assessment is based on your post-renovation home being in both new condition and ideal presentation.

What if the bank valuation is less than your offer price

If you’ve put in an offer on a property and received a bank valuation less than your offer, don’t panic. A bank valuation less than the purchase price is called a valuation shortfall and could reflect several factors:

• Is the valuer relying on outdated comparable sales data?
• Has the lender’s valuation missed any comparable, recent, high-value sales?
• Is the market rising quickly? Has the valuer factored this in?

If facing a valuation shortfall, start by speaking to your lender to understand why the valuation was lower than your price. Explain to your lender why you think the bank valuation is inaccurate.

If this fails to change the outcome, you have three options:

• Find additional money to make up the shortfall in your offer
• Look for an alternative lender who may be more flexible with the loan
• Talk to a mortgage broker to see what they can do. A good broker will have knowledge across a range of financial products and established relationships with lenders that may help.

How can you increase the value of your property?

Some fundamental physical components influence value. They fall into three categories:

• Land – location, position, elevation, orientation, outlook, size, shape, topography and accessibility
• Dwelling – age, condition, accommodation and utility of layout. This could include ancillary dwellings such as an attached granny flat
• Ancillaries – other site improvements such as landscaping, fencing, paths and driveways, and pools. Key elements include age, condition, aesthetics and utility

Some of these fundamentals can be changed to enhance value – adding a pool, changing floor coverings or upgrading appliances. Others cannot, such as location and position.

One of the most common reasons homeowners get a bank valuation is after completing renovations, when they want to access the increased equity. Cosmetic or structural improvements are likely to increase market or bank value, as long as they’re done well. These might include:

• Altering the layout – such as creating open-plan living to create the illusion of space
• Updated appliances – air conditioning, kitchen appliances, etc.
• Fresh finishes such as new paint or new flooring
• Updating the kitchen or bathroom for a renewed look

There are also non-tangible influences to consider. The most obvious is local planning and council zoning, which directly impact how your property can be used and future redevelopment options. In some instances, making applications to gain certain approvals or allowable changes of use can enhance value. For example, approval to build townhouses can bring significant value increases in certain suburbs.

It’s also worth staying abreast of town planning changes. Recent demand for more housing supply has seen rules relaxed in some jurisdictions to make it easier to create higher-density housing. 

Other non-tangibles include legal elements such as easements or encumbrances. Altering these on the property title can benefit your property and increase its value.

While we might have to accept that market and bank values often differ, that doesn’t mean you can’t have a positive influence on both.

Simply ask yourself: ‘What influences me to pay more or less for a particular property?’ If any of those things can be changed in a beneficial way, you’re likely to improve your property’s value.