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Monday, 13 September 2021 16:45

Bank valuation and market value - how do banks value property

By Guest Writer

Guest Opinion: As strange as it may seem, there are a number of values that can be put on your property. Even odder is that all of these may provide quite different figures. Valuations may depend on the way that they were done (“kerbside valuation”, “desktop valuation”).

Valuations of the same property may differ according to the party which is making them (“buyer evaluation”, “seller evaluation”). Then again these may depend on the depth of the evaluation itself (“full valuation”). Probably the most common and with the greatest impact on the property market is the bank valuation. The latter, as the name suggests, is an evaluation done on your property by a bank.

Why Would A Bank Make An Evaluation Of Your Property?

Normally a bank will make an evaluation of a given property, only when it is considering rendering a loan to its owner. In a credit transaction, the bank will be giving money to the property owner (this is usually done exactly for the purpose of acquiring the property). Prior to rendering the credit, the bank will make a credit assessment of its future client. In doing so, the bank tries to make an assessment of the risk, which this client presents to the bank. When real estate is concerned (as these transactions tend to be costly and loans relatively big), the bank will normally use the real estate as collateral to the credit transaction, thus reducing the risk on its investment. Exactly for this purpose, the bank will need to know the value of the property in question. This is why the bank will arrange for an evaluation of the property.

How Does Collateral Work?

Collateral to a loan is an asset, which in the event of non-payment by the debtor, will be disposed of (sold), and the proceeds of which will be used to cover the remaining balance of the loan. Putting it short, should you, as a debtor default on your mortgage credit, the creditor bank may sell your real estate in order to cover any outstanding credit balance which you owe. The collateral provides the reduction of the risk for the bank. In order for the collateral to have this effect, the bank will need a very precise and fair evaluation of the property. The result of this evaluation will determine the size of the credit, which the bank is willing to provide.

How Do Banks Value Property?

The name “bank valuation” is a tad misleading. The word “bank” here signifies the addressee of such an evaluation and not so much the party which is making it. Normally bank valuations will be done by independent evaluators, who are hired by the respective bank to make the valuation of the real estate on their behalf.

Property value: Market value vs. Price of property vs. Bank valuation

All of the three above for a single property will only rarely coincide.

The market value reflects the price which the buyers are willing to pay and the sellers willing to receive, in order for a real estate transaction to take place. This price will differ over time. The market value will be influenced by the size of the property, its location, its age, its condition, market trends, the levels of interest rates, the state of the economy, and last, but not least by extraordinary occurrences such as a pandemic. In times of economic recovery, sellers will be asking more for their real estate and buyers will be willing to pay. Market value will be on the rise. On the contrary, in times of economic slump buyers will be reluctant to pay much and sellers will be reducing their prices. Market value will be falling.

The price which the future homeowner is prepared to pay is probably the most volatile and most subjective of the three. Some buyers will pay a premium just for being in the same neighbourhood as their favourite gym. Yet the price of the property will gravitate to the market value.

In the midst of this turmoil of factors, the bank will be trying to make a fair evaluation taking into account all of the variables as stated above. At the same time, the bank valuation should be much more stable than the market valuation.

Otherwise, the bank will run into risky territory. Hence the bank, in its evaluation, will be looking at the above variables, but also into strategic value-forming factors, such as the structure of the building, condition of the property, neighbourhood development prospects, economic expectations.

As there is no “buyer anxiety” (boosting the property price), and no seller high expectations (which give a push to the “market value”) the bank valuation tends to be the lowest and most stable of the three.       

Guide To Property Values

While all of the above valuations tend to be forward-looking and taking into account future expectations a wonderful source and guide to property values are the statistics provided by the Valuer-General. If one wishes to get a meaningful sense of historical statistical data (real transactions which occurred, rather than future expectations) one may examine the annually published “Guides to Property Values” and other statistical information made public by the Valuer-General. The Valuer-General is a state official who is appointed by the Governor and is responsible for overseeing the valuation system and its flawless functioning. The “Guides to Property Values” represent an annual analysis of all property sales which took place on a given territory. The foundation of this data is the Notices of Acquisition which every property buyer is compelled to complete within one year of each property purchase. These statistics “Guides to Property Values” provide a comprehensive overview of the whole property market, all property transactions, type of property bought, and median sales price. All of these are compared to previous years and provide a useful benchmark for all types of property valuations, including bank valuations. 

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