5 August 2021

What To Do When The Bank Valuation Is Lower Than Purchase Price

Written by Tuan Duong
Founder & Director

We’ve recently seen a significant rise in auctions rather than private treaties. 

Unfortunately, too few people go into these auctions knowing the property’s actual value and end up being caught out by a bank valuation that’s lower than the purchase price. 

It might sound like a nightmare scenario, but it happens. 

So, what if you buy a property and the bank valuation comes back lower than the purchase price? 

There are a few things to consider before panicking. 

One solution would be to order a pre-purchase valuation before closing in on the auction. 

Here’s what you need to know. 

What Is a Bank Valuation and Why Does it Differ From the Market Value?

It’s common for a bank or lender to request a property valuation during the home loan process. This is because they use your property as security for the home loan. 

In other words, if you default on your home loan repayments, the lender wants to know that they can sell your property at a price that will allow them to recover the outstanding loan amount. 

So, essentially, the bank values give them an idea of how much they can lend you for your home loan. 

The lender will typically appoint an independent property valuer for the bank valuation to assess the property and collect comparable sales data to calculate a reasonable selling price.

However, the bank valuation is generally on the conservative side - meaning that it’s often on the lower end of the value spectrum because they’re not looking to gauge the fair market price (as with a market valuation). They simply want to be able to recover the outstanding loan amount. 

On the other hand, a market valuation considers the higher price that a buyer would be willing to pay for an investment property, and a seller would be willing to accept in an open and competitive market. 

We’ve also put together a guide to help you identify the difference between a bank valuation and the market value - make sure to check it out!

Why Is the Bank Valuation Lower than Purchase Price?

Unfortunately, if you put in an offer for a property and the bank confirms that their valuation is less than that offer, you’ll end up sitting with a valuation shortfall. 

In other words, the banks are not willing to lend you the amount you originally applied for. 

There could be several reasons for a valuation shortfall. 

For example, the property market might be recovering, but the bank valuers still rely on old sales data that is way below the current market. Or, in some instances, like with auctions, properties may end up being sold way above the market value. 

While you can speak to the lender to try and gauge an understanding of why their valuation is lower, most of the time, you’ll either have covered the shortfall difference of the loan and lenders mortgage insurance (provided you can afford it). 

Or you can start the home loan process from scratch with a mortgage broker who can find an alternative lender willing to fund your loan. 

The best solution to avoid sitting in a valuation shortfall situation would be to know what the market looks like. The property market fluctuates quite frequently - especially in times of economic turbulence. 

So, it would be wise to seek professional advice and get in touch with a property valuer to get your hands on a pre-purchase valuation.

What Is a Pre-Purchase Valuation?

Pre-purchase property valuations identify the approximate value that the market suggests the property is worth at a particular time.

The most significant benefit of obtaining a pre-purchase valuation is that it can help reduce the risk of buying a property for more than it’s worth in terms of its market value.

This is because you can use the market value as a foundation to negotiate a purchase price that you’re prepared to pay and the seller (or auctioneer) is willing to accept. 

How Do Pre-Purchase Valuations Work For the Property Market?

To get an accurate, fair market value, you’ll need to order a pre-purchase valuation report from a Certified Practising Valuer

While it’s possible to obtain a market appraisal from a Real Estate Agent,  it’s usually only an estimation and might not necessarily be beneficial if you’re looking to ensure that you’re not paying more than the market value. 

A Certified Practising Valuer will consider a variety of factors during the valuation process, such as: 

  • the current state of the property market, 
  • economic conditions, 
  • recent comparable sales of similar properties, 
  • the type of property being sold (or auctioned off), and 
  • the location (including surround amenities). 

All the information will be documented in a legally enforceable document which you can use to negotiate a price that you can afford, and the seller is willing to accept. 

This way, you can avoid being in a situation where your home loan application is declined or where you have to pay in more funds than the expected deposit towards the approved home loan. 

How Duo Tax Can Help

As we mentioned earlier, only Certified Practising Valuers, accredited by the Australian Property Institute, can offer accurate pre-purchase valuations. 

This is because they focus on providing valuations in line with well-established processes and standards. They have no vested interest in the sale or purchase of your property, so their reports are independent and legally enforceable. 

Here at Duo Tax, our Property Valuers are registered with the Australian Property Institute and qualify as Certified Practising Valuers. 

And we know that every penny counts when it comes to your investing journey, so we’ve always been has committed to finding ways to save our clients money where we can. 

That’s why we offer a range of property valuations, including pre-purchase valuations, at affordable prices and with a fast turnaround time - so that you can close in on that auction sale. 

We also have a nationwide presence - so we can help property investors across Australia save money where they can. 

Key Takeaways

People who are looking to buy property may be wondering what they should do when the bank valuation is lower than the purchase price. This is a common problem for people buying property, especially if they’re buying on auction, where properties are often sold above market value. 

While bank valuations are known to be slightly lower than market valuations, more and more property buyers are finding themselves in an impossible situation where a lender is declining to fund a loan for the property they’ve put an offer on. 

You could object to the bank’s valuation - but that can be a lengthy process. Or you could fund the shortfall - provided you have enough income to do so. 

However, the best solution would be to get your hands on a pre-purchase valuation before even putting in an offer. 

This way, you’ll have an exact idea of what the property is actually worth, and you can negotiate a reasonable buying price and reduce the risk of having to pay more for a property than what it’s worth. 

So, if you would like to discuss and organise your next pre-purchase valuation with one of our friendly certified Property Valuers, get in touch today!

Disclaimer: Please note that every effort has been made to ensure that the information provided in this guide is accurate. You should note, however, that the information is intended as a guide only, providing an overview of general information available to property investors. This guide is not intended to be an exhaustive source of information and should not be seen to constitute legal or tax advice. You should, where necessary, seek a second professional opinion for any legal or tax issues raised in your investing affairs.
Tuan Duong is an award winning Quantity Surveyor and leads Duo Tax Quantity Surveyors – Australia’s fastest growing provider of Tax Depreciation. Reach out to him directly on 0431 154 356 or email tuan@duotax.com.au
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