oc | Thursday 20th February

To some “Bank Vals” are important, to others not so!

What would a Bank Valuation Be? - 36 Were St, Quoted around $2m, Passed In $1,975,000, Reserve $2,200,000

Upper end home values in general and Bayside in particular are being “raked over the coals” by the banks at the moment – not to put too fine a point on things.

Directives implied or specific have come from the banking bosses that the , an in particular Bayside, is a little “fruity” for now and not the place to make a courageous lending decision should you want long term employment at ANZ, Westpac, NAB or Commonwealth.

This is a positive and sensible thing for banks to do in light of the information (or lack of) that they have. They are acting prudently, which is good for all of us and means a higher chance of a softer landing for most of us. However the banks’ new found “Top End conservativeness” can, at times, also negatively impact your chance to buy.

Why are banks doing this?

1) Sales at the Top End ($5M+) have slowed dramatically.

2) Sales that are happening, are shrouded in secrecy (there ain’t that many to hide though)

3) Sale Prices are falling well below 2010 even 2007 expectations on a number of properties except the lower end family home market (eg $1m to $2m)

4) Banks are wanting greater margins of safety at the Top End as they feel we could be in for a long term, flat or down market in this price segment.

Bankers’ conversations at the Top End coalface!

Borrowing Nothing: Sure Fred, will get that deposit organized for you, but just a friendly note that the market is tough down Bayside way, be careful on price.

Borrowing less than 50%: Sure Fred, good luck on Saturday, yes we can cover you, but have you thought about getting a valuation, the market has weakened a bit in recent times.

Borrowing either side of 70%: Fred happy to help, but will need to get a valuation before we can absolutely guarantee the loan.

Borrowing 80+%: Fred great day, good to hear from you, if you got a valuation, took out some mortgage insurance and sold one of your thereby covering about all of what we are lending to you, then we may consider helping you out, but no guarantees?

So you need a valuation – you as a buyer need to know what’s what with valuations!

A Valuer’s Mindset: The hold most bankers have over valuers is similar to the hold Coles or Woolworths have over their suppliers – it’s all powerful, as the banks provide a significant proportion of the valuer’s income. This is not anything sinister – its business – its life. They want and need to keep their big customers happy just like all of us in business do.

What a Bank Valuation is: An opinion on for the bank if they have to sell the home within the next 3 months and therefore what they will lend you money against.

However valuers, like any real estate professional need to read and “predict” the market, eg what will happen in the next 3 months and this can affect their opinions.

Valuers, like any real estate professional need to “estimate” comparable values where there are gaps in information. Right now with almost nothing happening at the Top End, there are a lot of  “information gaps”.

Please note we consider valuers are better trained and often, but not always, have higher “valuation” ethics than many agents we run into. On the other hand, valuers are not dealmakers, their skill and role isn’t in putting a deal together.

What a Bank Valuation is not: It is not an opinion on what you “should ever only” pay to buy the home. Just as Council Valuation is not a “should always pay above” buy figure. Just as an Selling Agent Figure is not a “must always pay” buy figure.  Just as Pest and Building Report estimates are not “must deduct” figures. Bank Valuations, like all opinions are useful guides.

How Valuation Opinions Reflect the Market: Lets look at a $3m Bayside home in 2010 to 2012.

In 2012 this is how some parts of the market work in practice and how bankers and valuers play their conduit role – it’s like climbing down a ladder.

In 2010 Mr Valuer gives you a bank valuation of $3,200,000 on your dream $3m home as there are plenty of sales to choose from. Mr Valuer is a positive guy, his master, Mr Banker, says they would really like to lend to this guy and so Mr Valuer assesses value at $3,200,000 and please there is absolutely nothing untoward here – we as would do exactly the same in 2010 – there were wider margins on the upside (or else you didn’t buy). And so the deal goes through – and another sale happens at $3,400,000 – because it was a hot auction and in 2010 you always paid a little bit more than the valuation, right!

In 2012 Mr Valuer could give a sworn or bank valuation on the same at $2,600,000. There has been only a few sales in recent times and most have been on lower value per sqm rates than 2010 – in fact there has been so few sales that Mr Valuer is actually nervous and really looking at the efficacy of his work. He remembers Flash Harry the valuer in his office is facing another huge PI lawsuit over his valuation and he doesn’t need the court time. Plus his master Mr Banker who gave him the job hasn’t said anything specific, but there is an understanding that the “value” needs to be right as the client is borrowing a bit and we wouldn’t want to do the wrong thing by the client that saw him go under and put Mr Banker in the frame for poor lending practice. Mr Valuer is not paid on the deal, he is paid on the job – Mr Valuer doesn’t value to buy, he values to “bank sell in 3 months” – big difference in this market!

And so that $3,400,000 in 2010 on what was really a $3m home gets a valuation that could have been $2,800,000 (or less than 10% drop) in 2012 but is sworn in writing at $2,600,000 (just to be safe).

The deal isn’t done as buyer and seller are too far apart. But the ripple effect starts

The Banker: sees the difference in values and puts that in his or her memory bank when next lending and also checks out the 2010 $3,400,000 owner to see if his file needs review – maybe his LVR’s are pushing out. Mr Banker ponders $3,400,000 divided by $2,600,000 and works through that’s not a less than 10% drop, that’s a “market drop” of 25%. Hold On this is serious.

The Valuer: He sees the deal didn’t go through and he gets more “confirmation” the market is not in good shape and so he or she had better keep values “conservative”. His thoughts spiral downwards as less and less deals except the emergency ones happen – in fact a few good deals are happening, but the blinkers are on and the “bad” deals get the focus.

The Owner: Hears his house has been valued at $2,600,000 when he thought his “special” home was $3,600,000 (up a modest bit to cover costs on 2010) and all of a sudden he hunkers down very nervous about his “lost” million dollar equity. He takes his home off the market and tells the family we’re not moving.

The 2012 Buyer: Sees the difference between the valuation on 2012 and the buy price of 2010 and becomes “firm” his family is only going to buy if the price is right – no he means really right.

Market Repercussions:

1) Top End Markets continue to fall in price as money dries up

2) Top End Markets continue to slow in activity as bankers, valuers but more importantly owners and buyers become less flexible in their views.

3) This less flexible attitude really starts to strangle the market like an imported weed around a native tree and it continues until – well, ……until the game changes.

4) For the first time in a decade we and other buying professionals are including finance clauses in many of our private sale negotiations.

But Valuations are simply opinions and even the Bankers opinions can vary dramatically

The Paradox of Market Valuations – Auctions versus Private Sales

Most Banks will take the auction price as market value. They do for two reasons

1) An auction is supposed to be market value by the legal definition – willing informed buyer and willing informed seller.

2) They could never really lend at auction if they didn’t – as there is no finance clauses or cooling off allowed

But in reality in 2012 only 1 in 4 auctions are under the hammer and only 1 in 2 have more than one bidder – so are all auction homes really “market” value?

If you are buying 1,000 sqm of land in Brighton plus a home at auction and you pay $3,300,000 then most times the banks accept the “auction valuation” – even if you were the only bidder and the agents vendor bid $3,000,000 then passed it into you and worked you up to $3,300,000.

However in a Private Sale it can be different and more banks are insisting on buying pending bank valuation.

But this process is lacking in consistency because that 1,000 sqm in Brighton plus a home with a “Private Sale” asking price of $3,000,000 and not an “Auction Price” can be get a valuation of $2,800,000 or even less because the valuer is ….. well, doing his job.

The point of the above example. A bankers opinion is not a set in stone, cast iron truth. It is an opinion, granted hard to change and most important to the bank, but nonetheless it’s not the ONLY opinion and it’s not INFALLIBLE unless you are beholden to the bank.

Ahead and Behind in the Markets.

Bankers and Valuers have to reflect the market,  but they also consciously or subconsciously have to “predict ” the market just like  any other real estate professional. In a rising market – they have to keep up, even be ahead of and value aggressively or else they don’t meet lending targets and are out of a job. As an aside this puts even more money into rising property markets.

In a falling market, they have to slow down – they have to value and lend conservatively or else they will be sued as valuers or they will out of a job as bankers if their bad debt ratio is too high. This is right now taking money from the property markets.

So where are we in dealings in 2012?

At the Top End, the real estate game has changed for borrowers and slowly the wider community is recognizing this.

Banks are no longer “rubber stamping” everything – especially as you move up the food chain, price wise.

Valuations are no longer just strategic negotiation ploys, they are facts of life for many buyers these days.

Sellers need to understand this.

On the other hand valuations are nothing more than professional opinions and they are important, variable and sometimes inconsistent just like agents. They are not however, as important as the Highest Other Bidder, the Vendors and of course yours.

Buyers need to understand this.

Valuers, Bankers, Agents don’t buy homes – do – however Banks and Valuations are now heavily involved. Both need to recognize this if  “borderline”  deals are to be done, rather than fall over during a cooling off or finance period.

We have a book full of “non deals over $5m” we have “negotiated” this year where bank valuations have been the start and finish point – meaning buyers offer the bank valuation but sellers don’t take the offer.

On one hand we feel at James Buyer Advocates, professionally bound to advise buyers to understand the banks position before committing to purchase but on the other hand professionally bound to advise that on high quality, unique and special Top End homes “bank vals” are simply not “cutting the mustard” with sellers.

So while we politely decline to deal with unrealistic sellers who have 2010 prices in their mind, we also sometimes need to remind buyers that bank valuations are very important to banks, but less important to others and quite possibly if both the seller and buyer want to do a deal at the Top End the answer lies somewhere in between the 2010 sellers dream price and the buyer’s 2012 bank valuation.

Footnote: At no time are we suggesting you buy a home above the bank valuation, without written bank permission, when you are on a high Loan to Value Ratios. We also recommend that in this market you get all finance approvals in writing BEFORE you sign a contract. At no time are we suggesting bankers or valuers are acting inappropriately en masse right now, in fact to the contrary, their prudential policies have kept and are keeping us from being like much of America. At all times in this market at the Top End, where borrowing money is an important consideration, we recommend you get a second professional opinion from an experienced in the area, bank recognised, registered valuer. However, if your only opinion is from a bank valuer, understand what it is and what it isn’t, and maybe get a second opinion on that one as well.

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