Recently we had a client whose lending manager said they needed a bank valuation to get unconditional finance approval but that they first needed to exchange contracts so that the valuation can come in at contract price. Hmmm, not ideal. On two counts – firstly, the bank places all the risk on the buyer and secondly, the lending manager gave no guidance in terms of their individual risk should the valuation not actually come in at contract price.
We come across this “chicken and egg” situation all the time and I believe a borrower has three options:
- Buy with a cooling off period. HOWEVER this is unlikely to be possible in a hot market, especially if you are trying to buy prior to auction. It also reduces your bargaining power.
- Order a valuation before you exchange contracts unconditionally. The RISK here is twofold – firstly, the property remains on the market while you wait for the valuation, which means it could get sold to another buyer and secondly, the valuation might come in lower than a reasonable price. It is important to remember that bank valuations are not often accurate in terms of what the market price might turn out to be.
- Exchange contracts unconditionally and then get a valuation. The RISK here is that the valuation comes in under your purchase price. How this would play out is that the bank won’t lend you as much as you were betting on. This risk is reduced if you have a big deposit and/or lots of equity in other property.
Only you can determine the level of risk you are prepared to take. There is a question you can ask your bank manager in order to help you work it out:
If I paid $900,000 (for example) and the bank valuation comes in at $800,000, how much money do I need to add in to top it up? What if the valuation came in at $750,000?
Then ask: What else do I need to know about the risk that the bank won’t lend me the money for this if I go ahead?
Once you know the answers to these questions you can understand your own level of exposure and will be able to decide when to order the bank valuation.
Published:- 27 October, 2016
Good Deeds buyers tips are intended to be of a general nature. Please contact us for advice that is specific to your individual circumstances. You may also need to get advice from other professionals such as an accountant, mortgage broker, financial planner or solicitor.