Bank valuation vs market value – How much is your property worth?
- Haynes Wileman
- Sep 30, 2020
- 2 min read
Did you know 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 are shocked when the bank valuation comes in below the market value they had already assessed in their head.
So, why does this happen? How can two “values” be so different for the same property?
This article will outline why a market value and a bank value are not necessarily the same thing.
What is market value?
Market value is essentially the price that the property will trade for on the current market.
A more formal way of putting it is: “The estimated value 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 there’s an element of emotion, and sometimes ego, that can drive up the price.
A great example of this is at auctions where buyers can get carried away with the competitive environment and end up paying much more than their budget to ‘win’ the property.
This is particularly the case when they fall in love with a home and are willing to extend themselves in order to secure it.
Likewise, when a market is hot, then buyers can have FOMO (or Fear Of Missing Out) and end up paying too much for a property.
Part of the reason is they’re exhausted by the purchasing hunt, and sick of finding the right asset only to be gazumped by another buyer.
While it’s impossible to say exactly what a property will sell for on any given day, by researching comparable sales properly, most homeowners can get an idea of what the market value may be for their asset.
Why is a bank value different?
Where market value can be impacted by emotion, a bank valuation is purely a numbers game.
A professional valuer will complete a bank 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 valuer is also assessing your home ‘as is’ which means if there’s a minor state of disrepair, or low-quality presentation, they’ll factor that into their assessment.
The main point here is a bank value is often lower than market value because of its objectivity, lack of emotion, tendency to be conservative and ‘as of the moment and condition’ approach.
Of course, this can be annoying to anyone wanting to refinance and 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.
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