I am seeing an increasing number of valuations returning below the purchase price of properties purchased both at auction and private treaty. This can create challenges as a lender will apply their lending margins against the lower of the two, (either the valuation or the purchase price). For example, if a property is purchased for $1,000,000, and the valuer appraises the property as being worth $900,000, if the borrower had applied for an 80% loan, the bank would then lend $720,000 (80% of $900K). In this example the borrower would need to contribute an additional $80,000 towards the purchase property they were not expecting.
Valuers generally utilize the most recent 3-6 (worst case 12) months of settled sales and don’t recognise properties that have sold that have not yet settled as favourably in their reports as these sales may still fall through. There are things that can be done to mitigate a valuation shortfall, such as:
· Getting a cooling off period/finance clause in the contract and getting the valuation completed prior to the expiry. (Noting that this is difficult to get in the current market).
· Getting valuations from other banks (we have access to around 40). One of them is likely to come in at the purchase price.
· Borrow a higher loan to value ratio than you were borrowing before, for example, 80% to 90%. This would incur LMI, however would allow you to settle on the property.
· Use a family guarantee to provide additional security to the bank.
· Pay an additional deposit as outlined in the above example.
Whilst there are back up plans, valuation shortfalls can cause stress in what should be a stressless/joyous time so it’s important to always discuss scenarios in which valuations may return below the purchase price with your broker.
Any questions, please reach out, Tom.
Written by Tom Morison