Have you ever called a property valuations company for a valuation of your own property or one you’d like to purchase, only to be baffled by the question, “Is this a market valuation, or a bank valuation?”?

What is a market valuation, what is a bank valuation, and how are they different?

Let’s take a look.

First of all, it’s important to understand that property valuations are a key factor of any property transaction. You need to know what the property is worth before you buy it. You need to know what to expect before you sell it. And you need to have the confidence that the company providing you with these figures knows what they are doing.

1. How is a market valuation different from a bank valuation?

When we look at the market value of an asset, what we’re determining is how much the market is willing to pay for such an asset, on average, on the date of the valuation. Obviously market value fluctuates depending on a number of factors: the economy; changes in the area (such as development, which could increase the value), and how well the property has been marketed.

On the other hand, the bank value of the property is the amount a financial institution would be willing to lend to a property owner based on the collateral value of the asset.

In other words: Market value is what someone would be willing to pay for a property were they to buy it. Bank value is what the bank thinks it is worth.

2. Are bank valuations and market valuations always the same?

Often these numbers will match, but they may well be very different depending on the factors we’ve outlined above.  We have seen wide variances in property valuations between the market and bank value of an asset – even when those assessments are done in close time proximity to one another.

What could make the numbers different?

Banks have a duty to protect themselves, their shareholders, and their clients. That’s why they err on the side of caution. They need to be conservative. A conservative value estimate covers the banks if they need to sell the property quickly in the event of foreclosure or some unforeseen circumstance. It allows them to recover selling costs, and it protects them against any downward movement in the market.

On the other hand, market value is based on the current market state – the likelihood that the property will sell at a particular price, if it is properly marketed. Usually this number is less conservative than the bank value. It also is more likely to fluctuate over time, as the market changes.

3. Old or new?

There are two ways in which the age of a property affects its valuation.

First of all, a more established property has the benefit of history – especially if it is also in an established area. It is easier for both banks and market valuers to determine the value of the property based on the price it has achieved in the past, and/or the prices surrounding properties are sold for.

On the other hand, in most cases a new building has a longer life and better finishes than an older building. And it will require less maintenance. A new building also looks more attractive and can thus attract a higher price. However, it can be difficult for valuers to base their assessments on hard facts when there is no sales history for the building or the area with which to compare their estimates.

Experienced property valuations experts will consider these factors in their estimates, to ensure that every base is covered before they reach a conclusion.

4. Who should I get to evaluate my property?

Banks tend to be conservative in their valuations, as we’ve seen already. And with good reason. To quote an Australian property industry expert, “It [conservative valuations] is the cheapest insurance policy for banks.”

Of course, if you want a market-related evaluation for a property you’re trying to sell, or looking to buy, this may not be useful to you.

It makes sense to turn to the experts. An independent property valuations expert can give you a balanced, market-related property valuation without the bias that comes from being overly cautious.

What next?

If you are purchasing a property, and you feel that the asking price is to high, it pays to hire an independent property expert to conduct a market valuation of the property in question. Have them compare the property sales history and area sales history, too. This is likely to get you a more balanced and market-related result.

Also remember that, even with a professionally compiled market valuation, a lender might not agree to lend the full asking price for a property. In this case it could be beneficial to consult alternative lending institutions, or investigate other finance options.

The Property Partnership offers professional property valuations at competitive rates. Contact us on 086 099 9440 or visit our website to find out how our valuation services can be put to work for you.