Beware the value trap
Jodi and Shane, who had just bought a property at auction, had obtained a pre-approval already with the help of a broker, so the only outstanding conditions of the pre-approval were to supply a contract of sale and receive a satisfactory valuation of the property to determine its value. The valuation was ordered to confirm the buying price and the suitability of the security to the lender. Guess what? The valuation came in less than the sale price. In this instance the valuer was not convinced that Jodi and Shane had paid fair market value. This presented a dilemma to the borrowers, as they didn’t have any more cash than what they had already put aside to put into the property. This would also be a warning sign to the borrower, particularly if this property was an off-the-plan purchase from a property marketing company – it could be cause to pull out. In this instance, it was an established property, so the broker appealed the valuation, something a bank branch may not bother to think about doing. And disputing a valuation can sometimes work, but not often. Unfortunately, the loan was declined due to the low valuation and limitations placed on the loan-to-value ratio (LVR). So with a shortfall of $29,000, that was the end of the deal with that particular lender.
Welcome to the world of valuations, where nothing is clear cut. This is a situation where having a broker can help. In this instance, however, the broker was able to order an upfront valuation with another lender, who accepted the contract-of-sale price.
The borrowers were able to proceed with the deal, and it was done within two weeks. If the borrowers had gone directly to the bank, and the valuation didn’t stack up, they would have had to potentially go pleading to family or friends for more money, and that was something they did not want to do.
Keep in mind that if they did not settle, they would have been in breach of the contract: it was “unconditional” (not subject to finance) as the property was purchased at auction. They would have lost the deposit and may have been charged re-advertising costs if the property was placed back onto the market.