Why banks and agents value your home differently
1. The bank value
If your home is or will be mortgaged, your lender will almost certainly need to value it. This gives the lender confidence your asset offers ample security against the borrowed amount if, for some reason, you cannot pay your mortgage and the lender must sell the property to recoup its debt.
It is therefore unsurprising that a bank valuation will usually be conservative, sometimes 10%-20% less than the current selling prices of comparable homes.
In this case, the Smiths’ bank assesses their home and decides its value is $500,000.
2. The selling agent’s price appraisal
Real estate agents are commonly asked to assess the market value of your property. This will often help a vendor decide who to engage to sell their home.
Before being chosen to act on a vendor’s behalf, an agent will typically inspect the home and research comparable sales in the local suburb or town, before producing written feedback and a sale price estimation such as “between $X and $X” or “from $X”.
This price guide is useful to a vendor when deciding what price to advertise.
The Smiths’ agent conducts an inspection of their home and, based on current strong demand for three-bedroom homes under 1km from the local primary school, estimates it will sell for $550,000 to $600,000.
3. The sale price
Regardless of whether the property is sold via private sale or auction, the price the successful buyer is prepared to pay on the day the contract is signed is the property’s legally binding sale price.
Hot markets, high demand in certain areas and a big turnout on auction day can all have an effect on the final sale price for a property.
In our scenario, a big crowd attends, including eight enthusiastic buyers. Bidding is active right from the start and the price quickly surpasses even the agent’s optimistic appraisal. The hammer falls on a bid of $630,000.
Sold sign
The final sale price of a property can depend on a number of factors, including a big turnout on auction day.
4. The local council’s valuation
Every year, when a property owner gets their local municipal rates bill, they will see on the notice a Capital Improved Value (CIV), site value, net annual value (NAV) and/or gross rental value (GRV).
These figures are calculated using varied methodology including comparable sales data and the bi-annual figures from the State Valuer-General’s offices.
Councils, and water and fire authorities, use these figures to work out how much homeowners owe them for using their infrastructure and services.
According to the Smiths’ rates notice, their property has a CIV of $480,000 – the value of the land and any capital additions such as a house – and a Site Value of $280,000 – land value excluding buildings.
5. The homeowners’ price
Every property owner will have a ‘wish price’ in their minds when they come to sell, and most will have a ‘this-is-the-lowest-I-will-go’ price, too. Both of these prices are based on a home’s location, aspect and features, but sometimes vendor price expectations are also influenced by emotion rather than facts.
Mr and Mrs Smith really didn’t know how to price their much-loved family home when they came to selling it.
They had been studying price data for their neighbourhood, which showed a median price of $510,000 for three-bedroom houses in their suburb over the past 12 months.
Mrs Smith thought their home’s sale price should reflect the median price figure, but Mr Smith thought the new pool they’d installed last year should add at least another $50,000 to their home’s sale price.
In the end, the market will usually decide a property’s value by what a buyer is willing to pay for it at auction or through private sale.
What should I do if the bank valuation is lower than the purchase price?
Banks tend to err on the side of caution when valuing a property, as they need to know that they could recover their money from the sale of the property, in the event that you default on your loan.