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What happens if a Registered Valuation isn’t high enough?

There are several reasons why you might need a Registered Valuation when purchasing a property:

  • if you are purchasing a property privately (not through a Real Estate Agent) and are borrowing over ~65%
  • if you are building a new property
  • if you are borrowing over 80% on any property (you have less than 20% deposit)
  • if you are purchasing significantly higher than the bank estimates the property is worth (only at some banks)

But what happens if your Registered Valuation comes back and it is not as high as you’d expect?

What is a Registered Valuation?

A Registered Valuation involves a Valuer visiting the property to inspect and assess the expected market value of the premises.  While Desktop Valuations use algorithms to “guess” how much a property is worth based on recent sales in the area, a registered valuation can account for all the unique aspects of the property including renovations done inside and out as well as landscaping and outlook.

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How to order a Registered Valuation

In the old days (pre-2015), valuations could be ordered by calling a friendly valuer.  The problem was that significant pressure could be placed on that valuer to get to the "correct" number.  The banks had no way of ensuring that the valuation was independent of pressure from one side or the other.

Since 2015, a valuation almost always has to be ordered through one of two available systems that the bank has approved.  Either the bank can organise this or your mortgage broker can order it. (Note: no payment or commission is made to the mortgage broker for this).  The local valuers then quote for the work and the client can choose the order they wish to go with.  They will not know who the valuer is until after the quote is approved and the valuer makes contact with the vendor.  Additionally, any attempt to put a desired price in the order is removed before the valuer sees it.

What if my registered valuation comes in below what it needs to be?

Pre-auction valuations

If you have less than 20% deposit and are hoping to bid at an auction, you will need to get a registered valuation prior to the auction.  If you wait until after the auction, you will be liable for 100% of the difference between the auction price and the valuation price.  Here's an example:

You are pre-approved to buy a house valued at $500k and have $50k deposit (90% LVR).  If the registered valuation for an auction comes back at $450k, that is deemed to be the market price and the bank will lend up to 90% of that price ($405k) and require the rest from you.  As you have $50k deposit, the maximum you can bid at this auction is $455k ($405k from the bank + your $50k deposit).

This is an important thing to understand with pre-approvals.  In this case, you are pre-approved to purchase an acceptable security for up to $500k.  The auction is acceptable up to $450k.

(here's an article we wrote giving 6 tips for bidding at auction)

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Isn't the auction price the market price?

Technically the auction price is the amount that the market is willing to pay for the property.  But auctions are high-intensity, high-excitement environments.  It is quite easy to go well over what the general market is willing to pay for a property at an auction.  This is why the banks can't allow the auction to be the market price for a property for higher-risk borrowers (those borrowing over 80%).

Tenders / Offers / Deadline Sales

If you are purchasing through a tender or similar sale method, the process around a lower-than-expected Registered Valuation is a lot less stressful.  You can make an offer that is subject to either a finance clause or specifically a Valuation clause (talk to your lawyer about which is more suitable for you).

If a registered valuation comes back lower than expected, you have 3 options:

  • negotiate a lower price with the vendor
  • walk away from the deal using your finance/valuation clause
  • appeal the valuation with the valuer showing evidence of comparable sales

Using the example above:

You make an offer on a property for $500k with the intention to borrow $450k from the bank.  The valuation comes back saying that the house is worth $450k.  You can now use that valuation to either renegotiate the price you are willing to pay or cancel the Sale and Purchase.  The bank will use the valued price as the market price measure.  You have a strong argument for a renegotiated price.

Can I use the valuation that the vendor has purchased?

Sometimes vendors order their own valuation to show the expected value of a property.  This isn't always for nefarious purposes.  They may have recently done extensive renovations which won't show on a desktop valuation.  Or they may have simply been trying to get a gauge on what market is willing to spend on their property.

Unfortunately, the bank can't use a valuation that a vendor produces.  There is no proof of independence or that there wasn't significant pressure put on the valuer to get a higher value.

Summary

The bank will use the value from a registered valuation to calculate the market price of a property and the Loan to Value Ratio. Any amount above this price will need to be covered 100% by the purchaser.  Depending on the method you are using to purchase, you can choose to limit the price you pay (at auction), renegotiate the deal or walk away from the purchase.


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