Why banks, agents and the market value property differently

Owners contemplating selling can get quite different estimates for what their property is worth…depending on the source; That’s because lenders such as banks, real estate agents looking to secure the listing and “the market” all value property differently.

Since their positions and perspectives vary, different entities value property differently.

Banks value properties conservatively since they need to ensure there’s sufficient buffer in the value of the property to recover the debt should the property owner/ mortgage holder, defaults.

On the other hand, real-estate agents value properties on the higher side because they want to secure the listing and look favourable in the eyes of the property owner/vendor.

As a result, they will often suggest to the vendor that the property is worth more and then if necessary, manage the vendor’s expectations once they secure the listing.

Ultimately though, the market is the true indicator of a property’s worth, since it accurately reflects what a purchaser is prepared to pay for the property, regardless of other valuations put forward by a bank or agent.

House valuations may vary but the market is the true indicator of a property’s worth.

How a lender decides the value of a property

Independent valuers acting on behalf of lenders assess a property’s value while considering the lender’s risk exposure and the vendor’s ability to repay the loan.

To do this, they take into account a number of factors including:

  • The property itself including land size, its dimensions, the building’s orientation and zoning restrictions

  • The property’s position relative to adjacent properties, schools, public transport and other amenities

  • The location, age and condition of the property and recent sale prices of comparable homes in the area

  • General market conditions and economic risk factors, including interest rates and any announcements made by the Australian Prudential Regulation Authority (an independent statutory authority that supervises the banking sector)

How an agent decides the value of a property

Agents also base their price appraisals on factors such as land size, zoning restrictions, dimensions and orientation along with the property’s position relative to schools, public transport and other amenities.

However, agents also factor in a property’s “liveability” or how likely it is to evoke an emotional response in a potential buyer which if high, is likely to boost the price a vendor can get.

Likewise, agents take into account the sale prices that fellow agents have achieved for comparable properties in the area and the level of supply of similar properties and use the sale prices of comparable properties to value a home.

If it’s a seller’s market, with a limited supply of comparable properties in the area, this will likely boost an agent’s expectations of the sale price they will be able to get for the vendor however, if it’s a buyer’s market; with an abundant supply of comparable properties in the area, agents might be more conservative in their pricing expectations.

How potential buyers may value a property

The market ultimately values a property on the level of supply of a particular type of property in the area, versus the level of demand for the property in that area.

In a buyer’s market, prospective purchasers can set their maximum price and negotiate favourable terms such as extended settlement periods with vendors, since they are in a stronger bargaining position with limited market competition and as such, this is likely to deflate the expected value of a property.

In a seller’s market, robust market competition means vendors are in the stronger bargaining position, with the “fear of missing out” triggering a less rational prospective purchaser who is more likely to be motivated to pay more to secure a property which is likely to inflate the expected value of a property.

The fear of “missing out” triggers home buyers to pay more in a seller’s market.

While lenders, valuers and agents might differ in what they think a property is worth, the “market place” always gets it right. The “market’ is the final decision maker of the price, as it is set at whatever property seekers are willing to pay!

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