Custom builds vs bank valuations - Your experience?

Hey TimLavelle Welcome to the forum
The only thing that came out of last nights budget is housing prices are tipped to drop 20%+ over the next couple of years.
it should be clear that the banks are unwilling to start repossessing half complete/unfinished homes in an economic downturn.
I would be waiting for economic, supply and price certainty before you sign up.
When the prices drop, join the queue for the 1 million affordable houses promised? (humour)
'Aspirational' target of 1 million affordable rental homes unveiled in federal budget. Here's what the plan looks like
Cheers
Chris

Thanks both... we intend to live in this for at least 10 years once built, so it's definitely not a build and sale, but I am concerned that with the interest rates and how it's already added quite a lot than we were originally estimating for. Is it serviceable, yes but am looking to see if the norm is for valuators to always undervalue custom homes vs project homes.

Thanks again!

Thanks StructuralBIMGuy - When we think about next year, are we saying second half, once the rates have settled and inflation has come down? (I'm starting to consider this anyway)

is a common issue and actually stems from a person’s misunderstanding of the valuation process/methodology and purpose. Many owners also have an inflated view of what their build is worth because of what they’re paying for it. What do you think is more likely; a valuer who has valued tens of thousands of homes and has been doing it for years is wrong and all the second opinions are also wrong, or that you’re wrong, and your house is not worth what you think it is? Value of a home is not really the cost of the build or contract, it is what it can be on-sold for in the market that it occupies. I.e. a mansion in a low socio economic area is effectively worthless as the likelihood of someone buying it is exceptionally low.
The main reason a bank gets a valuation is to make sure that the money they lend you is covered in the event they need to foreclose on your house in a worst-case scenario. Your fundamentals (income/expenses, debt to income ratio, the fact you plan on residing there for a long term etc.) may be excellent but should something unexpected happen that leaves the bank holding the bag, they need to know that they can recover what they lent you in a reasonable time frame (usually inside of a month or two. The longer the bank holds a property trying to recoup costs above the market starts resulting in a loss for the bank. Banks, in aggregate, don’t lose. They know what they are doing.

Often what happens is people simply overcapitalise on a build. The fact that the home has all these amazing things in it that in your eyes increases the value beyond what the valuer has valued, just doesn’t matter. For example, you may build a custom home for 1.5M, but if the average price of the houses in the area of similar size and quality are selling for 1M, the fact that you have nicer finishes or a spa, marble floors or a grand alfresco doesn’t mean squat. The market dictates that the majority of the homes in the area of similar size and quality have been selling for 1M with X days on market.

Now “quality” is a bit subjective and isn’t based purely on features, architectural elements or finishes. It relates to connections, amenities close by, noise levels, school zones etc., whether your eon a main road, how far to the main road etc. Finishes or features can be changed, added, removed etc. So, say you install a 10k Japanese toilet that washes your butt for you, doesn’t mean your home is 10k more valuable on market.

There is a possibility that someone may absolutely fall in love with it and pay the 1.5M the bank needs to recover, but statistically the chances are low because the people buying in specific ranges generally don’t expand their searches to areas that are too far from their budget, and those looking in the area are usually driven by a budget that reflects the majority of that area. So your outlier of a home won’t get the traffic so to speak, to make a sale. There are lots of amazing homes on the market that sit there for years, not because the asking price is too high, but the price doesn’t reflect the local market.
There is also the aspect of what you’re being charged may be well beyond what is normal for what you are getting. The fact that you don’t think so, doesn’t make it true. Valuers have an exceptional data set to refer to and will know if you’re over-paying, if if you don’t think you are or think it can be justified. A valuer can’t really objectively qualify the quality of a finish on say a hypothetical yet to be built outdoor entertaining area that a builder is charging 250k for, but they can compare it to the 100’s that they have valued in the last couple of months that have come in at 100k for similar materials, size etc. So a delay between material costs/build really have nothing to do with it either. They see the movements in material costs daily and build in buffers when making assessments.

So now you’ve got the issue of what to do. Your options are stump up more capital, scale back your build, negotiate a better price with your builder (this is possible, my builder tried to sell me a 15k aircon unit for 32k, we got it down to 19k you just have to do some legwork and prove why the charge is unreasonable), or provide more assets as security to the bank (e.g. Cross collateralise - secure against additional equity in an existing investment/ personal property). This last scenario is exactly what I did, but recognise that is not an option for many people and introduces other risks – I.e. I can’t sell the other home until the value of the new one increases pas a certain point. It also means if something happens and I can’t pay, both houses may be disposed of b the bank to recoup funds.

In any case, just remember this is nothing to do with you, your intentions or your ability to pay over the term, it’s just a numbers game. If the key risks don’t stack up in the banks favour, they won’t take the risk. Sometimes its lineball and can be worked through, often the variation is so exceptionally large that you won’t get what you want without more skin in the game from yourself. Good luck with it, hope this has been insightful.

I have been working for three years on the design and planning process for a custom new build (mainly the timeframe is due to all the specialists being so, so busy). I have designed a very basic, 2-bed house, all Bunnings fixtures, nothing fancy at all. And yet the bank has just come back with a build valuation which is more than $250,000 below my builder's quote - for a basic 2-bed house! I'm pretty devastated because I'm probably unable to find another valuation that will plug that scale of gap, which means the whole build is suddenly no longer feasible. Has anyone else experienced this? I think its worse in Tas where builders and other building trades are in such short supply they are all putting their prices sky high. Even the big box builders can't build in Tas for what the bank is valuing at.