If I was asked what the single most influential element that defines the success of a loan application was, the answer undoubtedly would be the valuation.
Frustration will arise from time to time when the borrower's expectation is at odds with the valuer's. So why does this happen?
In most instances, the borrower's home is their most valuable asset and it defines their net worth – and if you live in Sydney or Melbourne their dinner conversation! There's a seemingly impenetrable view that houses will always go up in value; this strange concept seemed to prevail even during the GFC, despite overwhelming evidence to the contrary, and thanks to the plethora of reality shows the questionable impact that home improvements have (regardless how minor) on the improved value of a property.
The mortgage broker
Completing the application, the borrower will be asked for their estimate of the property's value. This subjective and often inflated figure will mostly go unchallenged. Likely, too, the broker will have not inspected the property or be familiar with the location, so this unvetted figure will be passed to the lender.
Enter the valuer
This is the first occasion where a little science and objectivity is introduced into the equation. Checking title details, land sizes and most of all four or more comparables will create a picture that has substance. But hang on – don't lenders always instruct their valuers to go in conservative or value as a mortgagee sale? Over the years, I would have instructed literally thousands of valuations and most of those for second mortgage transactions. My general rule would be: give me a price that this property would sell for with a comprehensive marketing program in, say, 90 days.
So what does all this mean?
Well, a little bit of research over our last 50 transactions showed the following: 83 per cent of the valuations came in at around 90 per cent of the client's estimate of value (new purchases not included); 15 per cent at five per cent or less of the estimate; and the remaining two per cent either on the money or a fraction over.
So a couple of things to keep in mind:
• the borrower is pathologically driven to drive his property value estimate up
• if it's a borderline deal, the broker should take this factor into consideration and apply some degree of 'shading'
• valuers are not demons and deal killers
• a real estate agent's appraisal is probably only worth the paper it is written on