Why your valuation came in low, and what you can do about it

House prices fell 4.7% in the September quarter, the steepest quarterly fall on record, and prices fell in every capital city. This article explains why valuations come in low, how that affects business and investment lending, and what investors, developers and business owners can do.

How valuers work

A lender's valuation is an independent professional assessment of what the property would sell for in current market conditions. It isn't the price paid, the agent's estimate or the property's peak value.

Valuers mainly rely on recent comparable sales, which are similar properties that have sold recently nearby. In a falling market, several things push valuations down:

• Fewer sales: auction volumes have roughly halved from last year, so there are fewer recent comparable sales to rely on.
• Lag: if prices are falling, valuers may adjust older sales downward to reflect today's market.
• Caution: valuers are professionally accountable for their figures and tend to be conservative when the market is uncertain.
• Buyer power: properties are taking longer to sell, buyers have more room to negotiate, and sellers are having to be more realistic about price.

"As is" versus "as if complete"

For construction and development projects, there are two figures to understand:

• the "as if complete" value is what the finished project should be worth
• the "as is" value is what the property is worth today, in its current state.

Lenders use both, but the "as is" value often limits how much can be lent early in a project. A half-finished building is worth much less than a finished one.

How a low valuation affects your loan

Lenders set loan amounts as a percentage of the property's value, known as the LVR. If the valuation is lower, the maximum loan falls.

The same applies to refinances and equity releases. A business owner hoping to release equity from commercial premises or an investment property may find less is available than expected.

The example is illustrative only and does not represent any lender's criteria. For more on falling values and LVRs, see Home values have fallen for six months: what it means for valuations, LVRs and refinancing.

What you can do

1. Ask questions before you challenge

Ask which comparable sales were used. If the valuer missed relevant recent sales or features of the property, such as a strong lease, recent works or development potential, your broker may be able to request a review. Reviews aren't guaranteed to change the outcome.

2. Contribute more equity

The simplest fix is often extra cash to cover the gap.

3. Use additional security

Some lenders can take security over another property to support the loan, which reduces the LVR on the transaction.

4. Consider a different structure

Depending on the situation, a second mortgage, a short-term facility or bridging finance may help bridge a temporary gap. These products carry their own costs and risks. See First mortgage vs second mortgage.

5. Renegotiate if the contract allows

If your contract is still conditional on finance or valuation, you may be able to renegotiate the price. Auction purchases are usually unconditional, which is why planning before you bid matters. See Victoria's new auction rules.

For brokers

• Set expectations early: valuations in a falling market may not match purchase prices or owners' expectations.
• Order valuations as early as practical, especially for refinances and equity releases.
• Build a buffer into your clients' plans, rather than relying on a valuation hitting a particular number.

The Funding Door view

A low valuation isn't the end of a deal. It's a signal to adjust the structure. Investors and business owners who plan for conservative valuations, keep a cash buffer and work with lenders early are much better placed to complete their transactions.