Why an Appraised Value Isn’t the Same as a Valuation (And Why It Matters for Your Loan)

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No doubt real estate is a valuable asset, but actually understanding how much a property costs and is worth to you might be very different from what you know. The valuation price that is shared by the real estate contractor is not the real valuation amount. 

You might be thinking – How? They trick the buyer with two common misunderstood words, “appraisal” and “valuation.”  And this is very common across the Australian property market. The next question that arises is how to be aware of such duplicity.

Keep reading this article that breaks down the difference between appraisal and valuation and shares why appraisal is not similar to that of valuation price.  

Why a Real Estate Agent Appraisal is Just a Marketing Pitch

Real estate agents give you an appraised value. They base this on recent sales in the neighborhood and a heavy dose of optimism. Their goal is simple. They want to sell the property for the highest possible price for their vendor. Or they want to win a listing by presenting a seller with a massive number.

Appraisals lack legal effect. They are educated guesses presented in a glossy real estate listing. If an agent tells you a house is worth 1.2 million dollars, they are telling you what they hope someone will pay for it. They are selling the dream.

The last time I watched a client trust an agent’s appraisal blindly, it almost ruined them financially. They were eyeing a massive project. It was a classic knockdown rebuild Brisbane scenario. The agent hyped up the land value and quoted recent sales of fully finished luxury homes nearby. My client signed a contract for 1.4 million dollars. They thought they had a sure thing.

Then the bank sent in their guy.

Why the Bank Property Valuation is Cold Hard Reality

A valuation serves an entirely different purpose. A registered, independent valuer conducts it. These professionals do not work for you. They do not work for the vendor. They work to protect the bank’s money.

Do you think valuers care about the emotional appeal of a nice view or a freshly painted fence? They absolutely do not. They look at zoning, strict comparable sales from the last three months, and environmental risks. Their job is to figure out exactly what the big four banks could sell the property for if you default on your mortgage tomorrow. It is a pure risk assessment.

Getting a proper Brisbane property valuation right now acts as a massive wake up call for many buyers. The market shifts fast. The valuer acts as a strict judge. If the hard data does not support your purchase price, they will brutally chop the number down.

How a Bank Valuation Shortfall Kills Your Mortgage Approval

Here is where the math bites you. Banks lend against the valuation, not the purchase price.

Let’s say you agree to buy a house for 1 million dollars. You have a 200,000 dollar deposit. You need an 800,000 dollar loan. This gives you an 80% Loan to Value Ratio. The bank agrees to this LVR limit. Everything looks great.

Then the valuation comes back. The registered valuer says the property is only worth 900,000 dollars.

The bank still only lends you 80% of the value. But they use the 900,000 dollar figure. Now, your overall loan decreases to 720,000 dollars.

You suddenly have an 80,000 dollar imbalance. The bank will not bridge that gap. The vendor still expects their million bucks at settlement. You now have to magically find 80,000 dollars in cash just to settle the property. Oh, and you still have to pay thousands in state stamp duty.

If you cannot find the money, you lose your deposit and face legal action from the vendor. That is a terrifying position. I have seen grown adults cry in my office over this exact scenario. Last quarter alone, local lending data showed nearly 15% of all residential purchases faced a valuation shortfall. That equals thousands of Aussie buyers suddenly needing emergency cash.

How to Protect Your Deposit From a Low Property Valuation

You need to protect yourself before you sign anything. Stop treating an agent’s price guide as gospel. It functions merely as a starting point for negotiations.

• Use a finance clause. Always put a subject to the finance clause in your private treaty contract. This clause acts as your ultimate safety net. If the bank valuation comes in low and ruins your loan approval, you can crash the contract and get your deposit back.
• Beware the auction trap. If you buy at auction in Australia, the contract is without conditions. You cannot use a finance clause. You bid, you buy. If the valuation comes in short after an auction, you are legally on the hook for the difference. Never bid at auction without a massive cash buffer.
• Do your own homework. Look at sold prices on the major property portals. Ignore the listing prices. Agents list properties for what they want. The sold section tells you what the market actually dictates.

Let me add one more thing about valuers. People think they can argue with them. You can’t. If a valuer slaps a low number on a property, you can’t just call them up and yell about the expensive Italian tiles in the bathroom. They operate on strict guidelines. You can sometimes challenge a valuation if you find three better similar sales that they missed. Winning a valuation challenge requires a miracle. I tried it once in 2019. I compiled a perfect spreadsheet of local CoreLogic data. The bank reviewed it for exactly one week and then sent a one sentence email denying my request.

Don’t rely on changing their minds. Rely on strong contract clauses. Protect your deposit. Let the agent spin their stories, but keep your wallet shut until the bank gives the green light.

Conclusion  

Though there is a clear difference between the valuation and appraisal, eventually both are a great way to evaluate the real value of real estate land. However, the issue arises when the buyer misinterprets these words and gets cheated by the seller. 

Before buying and selling a house, it is very crucial for everyone to understand the significance of both. Furthermore, it is very essential to evaluate the prices precisely, use a reliable finance clause, and avoid auction traps to sell the land safely.