Bank valuations can derail your application for a bond on a house

ALTHOUGH it is true that South Africans who hope to buy homes – or are simply investing in residential property – tend to have a better understanding of how t he banks’ loan criteria work when they apply for a bond, they are often surprised by the banks’ valuation procedures and the figures they arrive at, says Mike van Alphen, national manager of Rawson Finance, the Rawson Property Group’s bond origination division.

“It is generally accepted that bank valuers are very carefully trained and work to internationally accredited criteria, but this doesn’t mean they will all come up with the same valuations. Neither does it mean that they will agree with the valuations of estate agents with many years of experience operating in a particular market.”

He says the objective of bank valuations is to assess whether the property is worth the price being paid for it so that if borrowers default on their bond payments the bank will be able to recover the full value of the money outstanding by selling the property.

“To arrive at an accurate valuation, the bank valuer will probably do a comparative market analysis, comparing the home price with that of other similar properties sold recently in the area.

“This is where a problem for the seller can lie, because when doing the valuation the bank may ignore the home’s certain undefinable assets such as a magnificent view or proximity to a certain school. Such valuations may also ignore the highly relevant fact that the home has been very carefully maintained and in an as-new condition – while those ‘similar homes’ sold recently may have been in a very poor condition.

“Often the similar homes will have serious defects which the valuer will recognise but insist, by means of a cash retention clause, they be fixed before the bond is registered.

“To enquiring buyers, however, such defects may completely rule out the property or will, in their view, give it a far lower value.”

Van Alphen says that sometimes a buyer, frustrated by a low bank value on the home he hopes to buy, will remind the bank that the insurance value is far higher than their value.

However, the bank is likely to point out that the insurance value is based on a replacement cost, which is usually higher than the current market value.

“Where banks supposedly undervalue a home, it may be possible for the bond originator to get them to change their minds by quoting their own, and the agent’s comparative market analyses.

“Alternatively a bond originator and an agent working together may be able to persuade the seller to put right the defects that the bank valuer believes are l owering t he home’s value. This tactic has resulted in many a bond eventually being granted and the sale taking place,” he says.

“Bond applicants need to realise that they must not give up. Bond originators do all we can to keep negotiations open and to reach a solution that will be satisfactory to the bank, the seller and the buyer.”