Property valuations are often discussed in broad terms—focusing on the pros and cons of various methods—but the real-world impact of choosing one method over another is seldom addressed in a way that helps people understand the potential consequences.
Understanding the consequences of property valuations is essential, as the method you select can significantly influence your lending outcomes.
In Australia, property valuations are essential for lenders and banks when approving loans for purchasing, refinancing, or accessing equity. Each type of valuation serves a different need, and understanding these methods and their implications will help you navigate your property journey and avoid potential complications down the line.
Firstly, here’s an overview of the key types of property valuations used by lenders:
Desktop Valuations
A desktop valuation, also known as an electronic valuation or automated valuation model (AVM), relies on publicly available data and online resources. A licensed appraiser conducts this valuation remotely, without inspecting the property in person. Banks and Mortgage Brokers may also have access to AVMs.
Desktop valuations are used for low-risk transactions, such as those with a low loan-to-value ratio (LVR), and work well for properties in established areas with plenty of comparable sales data. However, they are less suitable for volatile markets, rural areas, or properties with unique features.
This method is cost-effective, fast and often completed almost instantly. The downside is the lack of physical inspection, meaning the valuation may not fully reflect a property's condition, especially if it’s been poorly maintained or renovated.
Full Property Valuations
A full valuation involves an onsite inspection of the property by a licensed valuer, who assesses the interior and exterior, takes measurements, photographs, and looks at comparable sales data in the area.
Full valuations are required for high-risk loans with an LVR above 80%. They are also commonly used for vacant land, unusual properties with unique characteristics, or when there are concerns about the property's value or market conditions.
While full valuations provide the most accurate and reliable assessment, they come at a higher cost (often exceeding $1,000) and can take up to two weeks to complete, depending on the valuer's availability and access to the property.
Short-Form Valuations
A short-form valuation is a simplified version of a full valuation. It includes a physical inspection by a licensed valuer but the report is less detailed. This method focuses on the key aspects of the property and its market value.
Short-form valuations are used when a full valuation isn’t necessary, but a desktop valuation isn’t accurate enough. These are suitable for properties in standard condition or areas familiar to the lender.
The key advantage is cost-effectiveness when compared to full valuations. They are also quicker to complete. However, short-form valuations may not be ideal for properties with unique characteristics or poor conditions, as the report’s limited scope may miss crucial details. Not all lenders accept this type of valuation, so it’s essential to check their requirements.
Kerbside Valuations
A kerbside valuation, also known as a drive-by valuation, involves a valuer inspecting the property from the outside only, without entering the premises. The valuer assesses visible features and uses comparable sales data for an estimate.
Kerbside valuations are suitable for low- to medium-risk loans, such as those with an LVR under 80%. They are often used for refinancing, releasing equity, or properties with tenants that can’t be accessed internally.
Kerbside valuations are more affordable and have a quicker turnaround, often providing reports within 24 hours. However, because the valuer doesn’t enter the property, this method may not capture internal issues or unique features, which can lead to inaccuracies.
Implications of Property Valuation Methods For the Borrower
While the types of property valuations are useful to understand, the true implications extend beyond the typical pros and cons. The choice of valuation method can have significant consequences on your lending journey, depending on your specific circumstances. They are many instances where property valuations have caused grief with borrowers, and while we can't cover all possible scenarios, here are two examples that highlight the impacts:
Example 1:
A client purchases vacant land, pays the deposit, and signs a contract with the developer. Months or even years later, the developer notifies the client that settlement is approaching, urging them to secure financing quickly.
In this time-sensitive situation, if the full valuation comes in below the contract price, the buyer may need to contribute extra funds or pay for Mortgage Lenders’ Insurance (LMI) accompanied by higher interest rates. Also, there may be insufficient time to approach another lender if the initial valuation falls short. Developers often impose high interest rates and penalties for delays, so getting everything right from the start is very important.
For clients with limited cash, an experienced mortgage broker can help select a lender that allows the client to choose a valuer from the lender’s panel, guiding them toward selecting a valuer who is more likely to provide the desired valuation. While it’s not an exact science, this can increase the chances of a favourable valuation.
Example 2:
For clients who are not under time pressure, such as those seeking refinancing, there is the advantage of seeking a second valuation from another lender if the first valuation does not meet expectations.
In these cases, the expertise of a well-connected Mortgage Broker is essential. They can tap into their relationship with alternative lenders to ask that the same valuer who issued the initial lower valuation is not assigned again. Since banks often assign valuers randomly from their panel, there is a real risk that the same valuer may be selected again. A skilled Mortgage Broker can help you to navigate this process to minimise that risk. Behind the scenes, a broker’s established relationship with the lender’s Relationship Manager plays a key role in securing the best possible outcome for you.
What You Need to Know
Lenders in Australia use a variety of property valuations to assess the value of a property, depending on the purpose of the loan. Desktop valuations are fast and cost-effective but may lack accuracy. Full valuations are the most accurate but come with higher costs and are time-consuming. Short-form valuations provide a balance of detail and affordability, while kerbside valuations are quick and affordable but don’t include an interior inspection.
All that aside, knowing the types of valuations is just the beginning. What truly matters is understanding how these valuations work behind the scenes and how a skilled Mortgage Broker and lender can work together to ensure the best outcome for you. When planning your property journey, clients should partner with a forward thinking Mortgage Broker who can anticipate potential valuation challenges and implement proactive strategies to overcome any unexpected obstacles along the way.