I’ve been involved in the property industry for 24 years (as a mortgage broker, real estate agent and investor). In recent times, flawed valuations have become a significant source of complaint from buyers, sellers and agents. Why? Because valuers are routinely undervaluing property, resulting in contracts being terminated.
What most people don’t know is that the cause of this problem is often the type of valuations that lenders demand.
Read on to discover the secret tactics used by many lenders to manipulate property values, boost profits and protect their backsides… all at your expense.
As you are probably aware, if you buy a property which requires financing, the lender will usually insist on having a valuation done. This is a sensible precaution to take when hundreds of thousands of dollars may be at stake. The lender needs to feel confident that should you default on the loan, a forced sale will yield sufficient funds to pay out the loan balance, plus accrued interest, agent’s commission, lender’s legal fees and advertising costs.
While no one objects to lenders fairly protecting their interests, some of the methods used to value residential property are intentionally secretive and deceptive.
Most people innocently assume that when a valuation is conducted for mortgage security purposes, it is done on the basis of Market Value.
So what exactly does Market Value mean? The Australian Property Institute defines it as “The estimated amount for which an asset or liability should exchange on the valuation date between a willing buyer and a willing seller in an arm’s length transaction, after proper marketing and where the parties had each acted knowledgeably, prudently and without compulsion.”
Unfortunately, many lenders instruct valuers to prepare Bank or Forced Sale Valuations (think ‘mortgagee in possession’), rather than genuine Market Valuations.
Bank Valuations are often 5% – 10% lower than Market Valuations. This means that average homes in Brisbane, Melbourne and Sydney could easily be undervalued by $25,000 – $100,000!
Banks rarely explain this to borrowers and usually refuse to provide them with a copy of the valuer’s report. In lying by omission, banks are denying borrowers the right of informed consent.
Such unscrupulous behaviour contravenes the Australian Banking Association’s Code of Banking Practice which promises customers “effective disclosure of information” and to “act fairly and reasonably towards you in a consistent and ethical manner.”
This practice of deliberately undervaluing property affords lenders and Mortgage Insurers these major benefits:
- It provides them with the maximum safety margin in the event that borrowers default on their loans and properties need to be forcibly sold at auction.
- It coerces people into borrowing more money than they intended because they need to pay inflated Lenders Mortgage Insurance premiums. This results in higher interest payments that boost lenders’ profits by millions of dollars every year.
- Mortgage Insurers also make bigger profits by charging higher premiums.
Here’s an example of how the scam works. If a bank was lending you 90% of Market Value to buy a $600,000 home, you would borrow $540,000 and provide a $60,000 deposit. But, if the property is valued at just $570,000 on a Bank Valuation, your 90% loan is reduced to $513,000 and you suddenly need to find a deposit of $87,000.
If you don’t have the extra $27,000 the bank may agree to lend it to you, however because your ‘loan to valuation ratio’ has jumped to 94.7% you would be hit with additional Lenders Mortgage Insurance (LMI) of $10,800. With the LMI added to the loan, you are now borrowing $550,800 instead of the original $540,000.
On a principle & interest loan at 6% p.a. your repayments will increase by $70 per month and you will pay an extra $10,076 in interest over the next 25 years.
In total, you will repay $20,876 in additional borrowings and interest charges ($10,800 + $10,076) which would have been completely unnecessary if the home was valued honestly in the first place.
And it gets even worse. Because lenders want to pay valuers the lowest fees possible, they will often instruct them to conduct Desktop Assessments. As the name suggests, this is where the valuer prepares a written report from the comfort of his or her office, without ever seeing the property in question!
A slightly better version is known as a Restricted Assessment (kerbside inspection). In this case the valuer is prohibited from entering the property and simply stands on the footpath, estimates its age and condition and takes a photo.
Unless valuers possess x-ray vision or some other kind of supernatural powers, these are absurd methods of valuing someone’s most important asset.
I once inspected a house that appeared to be quite nice from the outside, however upon entering I discovered that feral tenants had kicked holes in every wall panel, ripped doors off cupboards and poured paint on timber floors and carpets. This obviously had a serious impact on the property’s value, but without a physical inspection this would have been impossible for a valuer or lender to know.
For peace-of-mind you should always insist on having a Market Valuation done on any property you are buying or re-financing.
In my experience most valuers are very professional, but I have met a few who were totally incompetent. Here’s a couple of horror stories from my office files…
Recently, CBA requested a Desktop Assessment on a new apartment at Maroochydore on the Sunshine Coast. Because the valuer was lazy, he didn’t bother contacting the selling agent (me) or the developer to confirm details about the property. A few days later the distressed buyer called me to say his $495,000 unit had been valued at just $400,000. That’s a whopping $95,000 shortfall!
After speaking with his lending manager I quickly realised that the valuer had assessed the wrong unit within the complex. Although the internal floor plan was correct, he had valued one with an 8m² balcony instead of the actual unit which had a massive 97m² courtyard. Naturally, we demanded a new valuation to be conducted by another firm. Unfortunately, CBA’s bureaucratic rules only permitted the same valuer to re-assess the property. He begrudgingly increased his figure by a paltry $25,000.
I then referred my buyer to an independent mortgage broker who arranged for another valuation to be done at Market Value. Not surprisingly, and to the great relief of my buyer, this came in at full contract price.
On another occasion I sold a new 2 bedroom luxury apartment in Bulimba for $645,000, but the valuer said it was only worth $556,000. On my insistence, the buyer complained to her bank and we were able to obtain a copy of the valuer’s report. What a shocker! One of the properties listed as ‘comparable’ was a 30 year old renovated townhouse located 5km away in the suburb of Morningside, where the median house price was $100,000 lower.
To call these properties comparable is like saying that a surfboard and a jet ski are similar. When I brought this obvious flaw to the attention of the bank they engaged a valuer from another firm. The new figure was for the full purchase price. That’s a huge $89,000 difference between valuers!
So how could they get things so wrong?
Contrary to what some people may believe, valuing real estate is not an exact science and outcomes are subject to the personal views and experience of individual valuers.
If you want to test this, phone three different valuation firms and ask them to value your own home. The result will most likely be a variance of up to 15% between the highest and lowest figures. This could easily equate to tens of thousands of dollars.
The next time you need to borrow for a purchase or re-finance you should have a frank discussion with your lender and find out what type of valuation they intend to request. If you don’t get the right answers you should consider using a mortgage broker. (Contact me if you’d like a referral).
And a few more tips…
If a seller is offering incentives such as a cash rebate at settlement, or paying your transfer (stamp) duty, valuers will usually deduct these amounts from the contract price.
Also, if a developer is supplying a free furniture package valuers will often discount the purchase price by the equivalent value of the furnishings. This is because banks cannot take security over removable items (chattels).
So, it is always advisable to have surplus cash available (or access to equity in another property) to meet any potential shortfall caused by a low valuation.
P.S. As outlined in this article, lenders rarely advise borrowers they are using forced sale values, but buried deep within NAB’s website I found the following admissions…
“Sometimes, the figure we use will be less than the market value of your home and we don’t always tell you how much it is.”
“A bank valuation is not the same as the market value.”
“A bank valuation will nearly always be less than the market value. This is because they’re not the same thing.”
“if you have difficulties with the loan and you’re no longer able to make the repayments, we may have to sell the property to pay back the loan. If this happens, we’ll sell the home quickly to avoid the interest accumulating over a long period. Unfortunately, we may sell the home at a lower price than you’d get if you sold the home without this time limitation. This is the figure we assess for when we get a bank valuation.”
UPDATE: After I exposed NAB’s sneaky valuation tactics the bank heavily edited its website article to remove most of the above statements. Fortunately, I saved a screenshot of the original document. Contact me if you’d like a copy.
© Brian White – This article courtesy of https://www.brisbaneunitsales.com.au The article may be reproduced provided the above courtesy notice and author name remain intact.