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Understanding the difference between a property’s market value and bank valuation

Understanding the distinction between bank valuations and market valuations is essential for property buyers as it can often be confusing. There are two different types of valuations that can determine the value of a property. Aa. property investor or homebuyer, important to grasp their differences.

To begin with, let’s explore what property valuations entail in general and when they might be necessary. A property valuation aims to determine the approximate value that the market attributes to your property and the potential selling price in an arm’s length transaction (where the parties involved do not have a pre-existing relationship). In essence, property valuations involve estimating the amount you could expect to receive from a property sale.

Property valuations serve various purposes beyond calculating the selling price of a home. For instance, a capital gains tax property valuation is required by the Australian Tax Office (ATO) to assess the capital gain made on the sale of an investment property. Two methods used to determine a property’s value are bank valuation and market valuation.

What is bank valuation?

A bank valuation is commonly requested by a bank or lender when applying for a home loan. The lender employs a bank valuation to establish the value of the property being purchased, which helps determine the loan amount they are willing to provide. This valuation is conducted by an impartial property valuer who considers the physical aspects of the property, along with a few comparable sales, to arrive at a value deemed reasonable for a potential sale. Bank valuations tend to be conservative, representing the lower end of the value spectrum, as lenders are primarily concerned with recovering the loan amount in the event of default and a quick sale of the property.

What is market value?

On the other hand, market value refers to the highest price a buyer is willing to pay and a seller is willing to accept for a property. A market valuation seeks to determine the fair market price and establish a reasonable selling price in an open and competitive property market. Unlike bank valuations that focus on physical aspects and the minimum recovery amount, market valuations utilize data from similar property sales in the area to determine a property’s potential value. Market value involves negotiation between the buyer and seller, introducing subjectivity and emotion into the valuation process. Consequently, market valuations are often higher than bank valuations as they reflect the seller’s desired price and the buyer’s willingness to pay.

To summarise the key differences between bank valuations and market valuations:

Bank Valuations:

  • Used by home loan lenders
  • Focus on resale value for loan recovery purposes
  • Conducted by an appointed property valuer
  • Tend to be conservative and lower in value
  • Emphasise physical assessment and a limited number of comparable sales

Market Valuations:

  • Used by sellers and potential home buyers
  • Consider market assessment for negotiation purposes
  • Conducted by a qualified and licensed property valuer of choice
  • Typically higher in value than bank valuations
  • Involve subjectivity, emotion, and negotiation between parties

It’s important to note that while a real estate agent can provide a general estimation of market value, only legally recognized and qualified valuers can offer official market valuations. If you need help understanding the concepts and terms involved in acquiring a property, do not hesitate to give us a call. We will help you navigate this journey.