Here's the thing: Did you know that there are two potential values for your property?
Unfortunately, many homeowners don't understand the difference between a market value and a bank value but it's vitally important that they do.
In fact, sometimes when a homeowner wants to draw on some of the equity in their property, they get a shock when the bank valuation is lower than the market value that they had calculated in their head.
So, why does this happen?
How can two "values" be so different for the same property?
This article will outline why market values and bank values are not necessarily the same thing so you don't get a shock the next time you go to refinance.
Market value is essentially the price that the market is prepared to pay for your home.
A more formal way of putting it is: “The highest estimated price that a buyer would pay and a seller would accept for an item in an open and competitive market.”
The main thing to understand about market value is that it generally relies on emotions to drive up the price.
A great example of this is at auctions where buyers often get carried away with the competitive environment and end up paying much more than their budget to "win" the property.
Likewise when a market is hot, then buyers can have FOMO (or Fear Of Missing Out) and end up paying too much for property.
It's impossible to say what a property will sell for on any given day, but by researching comparable sales, homeowners can get an idea of what the market value may be.
So, where market value can be impacted by human emotion, a bank valuation is purely a numbers game.
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That is, a professional valuer, will complete a valuation on the property without any emotion whatsoever.
The valuer will physically assess your home as well as comparable sales to arrive at a value which he or she believes the property would sell for at that moment in time.
The main point here is that a bank value is generally always lower than market value because of its objectivity, lack of emotion, and tendency to be conservative.
Of course, this can be annoying to anyone wanting to refinance to access equity or for buyers who have to come up with a bigger deposit because banks will only lend a percentage (loan to value ratio) of the bank valuation not the market value.
One of the most common reasons for homeowners to get a bank valuation is when they've completed renovations on their home and perhaps want to access the increased equity to buy another property.
Of course, cosmetic or structural improvements to a property are likely to increase its market or bank value – as long as they're done well of course
But there are other attributes to look for in a home that can have a positive impact on it price.
These include such things as:
- General location and council zoning
- Overall size and number of rooms
- Vehicle access to the property
- Building structure and condition.
Of course, these attributes are ones that you should look out for during your initial research as they will usually always have a favourable effect on the future price of the property.
During the ownership of your property – whether it's a home or an investment property – there are also many other ways that you can increase its value.
- Upkeep and maintenance
- The use of space – such as open plan living to create the illusion of space
- Update appliances – air conditioning, kitchen appliances, etc.
- Consider a new coat of paint or new flooring
- Update the kitchen or bathroom for a fresh new look.
So, while we might just have to accept that market and bank values are often different, that doesn't necessarily mean that you can't have a positive influence on both of them.