How do valuations work in a market like this?

I bought a place once that was valued 100k under contract price. I had to pay cash to make the difference as I knew it was a winner. It nearly doubled 3 years later but the banks didn't see the potential at the time so I had to swallow that bitter pill.

But today we're hearing people paying 300k+ over the median. I guess we've had a month of data now to support this, but what about 4-8 weeks ago? Wouldn't all these people have struggled to get finance?

Basically, during times where there are huge sudden jumps, how does this work with the banks?

 

Banks don't do the vals, it's outsourced to third parties.

Just about all banks use the same valuers.

Valuers use comparable sales based on the last 3 months sales around your area that best matches your property. Excluding development sales.

 

yes but point being comparable sales three months ago are several hundred thousand less than today’s purchase prices.

so do lenders no longer care as long as you have 20% of your current purchase price?

 

99% of the time valuers will recognise that the purchase price defines the market value of the property. They know better than you do how hot the market is. A property value is defined by what two people exchange the property for, so valuers look for reasons to agree with your purchase price, not the other way around.

Out of over a thousand property purchases I've financed in rising, falling and stagnant markets, I can only think of a handful of purchase valuations that had a problem. It's incredibly rare and in each case it was a high risk type of property. Off the plan, development sites & a client purchasing on The Block come to mind. In each of these cases I was able to resolve the problem fairly easily.

Take it from someone who organises finance for a living. Valuations aren't the things that keep us awake at night. Valuations are usually the easiest part of the finance process.

 

Good question.

I'm seeing a lot of Sydney contracts 20% above values 3-5 months ago at the moment. Sydney is about to record one of its biggest (if not biggest) EVER monthly price rise, in a shortened month too. This is all very very fast movement for property.

So far;
- Haven't seen any issues with vals yet
- It may take a bit of time to catchup

There is probably a little bit more risk with this now vs other market times, but it's still a small risk as valuers will see a lot of this.

 

The market value is really how much someone is willing to sell and someone is willing to buy at.

Not only property I deal with artworks. You should see some of the prices being achieved. Absolutely bonkers.

 

but with that logic no property ever would be valued under by the bank

 

I've never seen a valuation come back that far off actually in over 15 years of doing this. Isnt this the capitalist western countries we all want to live in? This is one of the fundamentals of a free market.

 

See my original post. I had one come in 100k under which was a tough pill to swallow.

 

Yeah I read. That is probably the biggest one I've seen ever in terms of valuation vs purchase price difference. Even on multi-million dollar homes they usually come pretty close to purchase.

Its a good question you got though. Some banks risk tolerance is not the same as others and neither are the valuators they use. (i/e) WBP group are much more lenient than CBRE when it comes down to their numbers.

In a market that's moving this fast its a difficult one for these guys to get right.

 

In a rising market like the one we're currently in?
A number of lenders now accept Contract of Sale price as the value, they don't even do a valuation

 

no it wasn’t rising. I think the point of my post has been lost here.

 

I know the point of your post but you're comparing your low val experience to the current market which is mostly rising, as a broker I'm yet to see a valuation come in lower than purchase price, doesn't mean it can't happen but shows that comparable sales are not the only metric used to determine value.

 

I understand the reason of your post, but can’t offer any contribution there. Do you know why your property was valued under?
Was there potential in it that only you saw? Redone etc?

 

My experience might have just confused the discussion I think. What I mean was what happens when the boom just comes almost out of nowhere, like the sales we saw in Jan. There was almost no precedent for sales being 300k+ over. After 4-8 weeks I guess that's enough data for people to see a boom is coming, but in the first week or two I wonder whether valuers are left scratching their heads.

 

Pretty much yeah. I saw the equivalent suburbs in Sydney sell for about $3m and was wondering why this suburb in another city was only about $600k. I was validated when prices doubled not long after.

 

Ive seen a fair few vals fall short; always either: big land content/development potentials, OTPs, one of unique factors.
For a standard dwelling, unlikely to fall short.
Some banks will just auto take contract of sale vals via their val tools now anyway, this is becoming less of a risk in 2021 given more sophisticated lending processes.

 

Well this just happened to us. We bought in a boom. Paid less than what we thought value of comparable properties would go at auction (by about 300k). Unfortunately when you buy in a boom market they can only go by settled property sales (which means comparable data is approximately 4-6 weeks old). Consolidate this with most buyers not electing to publish sale prices. Valuer has used data from January and hey presto, property is undervalued by 200k....Unfortunately for us we waived our cooling off because we were 100 percent confident of valuation coming in on purchase price ....and yes we have had to find the 160k shortfall leading to the worst, most stressful experience of our lives. Even though people may not post it on here, I assure you, there are big valuation shortfalls happening especially in areas where sold data is under reported and prices have outstripped supply. Also WBP was our valuer and are apparently notorious for undervaluing property. Google reviews say it all

 

Oh and our property is a 5 bedroom, 3 storey house with no material defects and no requirements for major renovation. Only unique feature is that it's on a sloping block on the upper North shore (2.1m was purchase price)

 

Did you buy at Auction?
Try another Lender and Valuation Firm