Why do banks need you to obtain a valuation

When you go to your bank to take out a home loan, the banks are increasingly likely to ask for a valuation on the real estate you are buying and any other property you are using as collateral (for those of you who have a portfolio of property and pool them together to take out a loan).

As the property market cools, there are some bargains to be found. And if you found a bargain, you may question why would the bank want a valuation on a property that you believe you have bought up for far less than its worth? Well, the banks are worried that the so called “bargain” price actually turns out to be the new market value.

Banks are increasingly cautious and need to protect themselves from lending more than their desired LVR ratios. If the loan is approaching their LVR, they will obviously request a registered valuation. This is especially the case for buying investment apartments. Not only do banks have a lower LVR ratio for apartments (typically 50%), they are also reluctant to touch any apartments with a floor area less than 30m2 and are even less likely to accept them as guarantees for other property loans.

The other common situation when a bank needs a valuation is where the property was sold under a private treaty. Private treaties are where the buyer and seller directly contracted with each other without a real estate agent being involved. This can happen between related parties. The bank almost always require a valuation in such instances because they are wary that the transaction may not be at market value so the transaction price may not be representative of the true market value.

The final situation which banks certainly require a valuation is for new builds – with regular progress reports updates. Construction of new builds are prone to cost over runs and the banks are likely to require valuations at each different stage of construction.

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