Browse Forums Building A New House Re: Home valuations on new house/land builds 4Oct 24, 2017 10:42 am rum_home Never built before, but I'm trying to get my head around the situation where a bank values the house/land build lower than the actual cost/quote to build. How is that possible? I understand if you 'overpay' for a titled land in a new area, that might have a direct value based on your purchase price. But how can a new build of a home, by a mass builder, ever be valued lower than the quoted cost for that build? While a starting point for valuation would be land cost+build cost, a valuer will temper this with surrounding historical sales data, in particular to determine if there is 'overcapitalisation'. The valuer will generally look at that historical data to justify a 'cap' on the total value, regardless of actual build cost. The larger your budget, and the lower the average sale price in your area is, the greater the likelihood of you hitting this cap . For example, you might have plans for a house that'll cost $1m just to build, but if it's in an area where the average sale price is much lower, then the valuer might look at it and say "nice house, but the suburb is a complete ghetto with existing properties only selling for $200K, there's no way this one will sell for more than $500K even though it's a really nice house on its own". Note that once a bank valuation comes in low, that's pretty much it for you with that lender. You can ask for an appeal, but that's basically saying to the valuer "you didn't do your job well, do it again and do it better" - not surprisingly, success rates are low. You can request a second valuation (from a different valuer), but most lenders will only take the lowest of any recent valuations - so doing this won't improve your situation and may make it worse. However, there is still a lot of subjectivity involved, so if you go with a different lender (and a different valuer) you might get a significantly different result. For our build, our bank valuation came in significantly under expectations (we had allowed for a contingency, but everyone involved was surprised at how low that valuation came in) - again, due to recent sales vs cost of build (there's been a few new builds going up in our area, but none of them have sold yet, so the local sales data is only of much older, cheaper stock). We went to a different lender; they selected the same valuer (who, naturally, were only ever going to repeat their original valuation). We went to a third lender; they selected a different valuer, and that valuation came in surprisingly OVER what we were expecting. Needless to say, we ended up going with the third lender! So, having options with your financing can help mitigate the risk of having a low valuation. If you think you're at risk of this, use a mortgage broker (as we did); they'll be able to do the runaround between lenders (if needed), and they can also arrange valuations much more readily (and cheaply) than you can. Re: Home valuations on new house/land builds 5Oct 24, 2017 6:15 pm Thanks all for the feedback, much appreciated. Building in a new estate area can be an issue I guess, there just isn't any sales data to go on. Other than surrounding suburbs, which when dealing with the city fringes makes matters even more complicated I would guess. North Melbourne area, Wollert. I guess the amount of the loan in regards to the total price will be the biggest impact on lender? With current build I'm looking to borrow less then 70% of the loan. A bank, even if under valued, if they can cover their liabilities wont care? But I can do a re-evaluation after the finalization, which will benefit the investment long term? Re: Home valuations on new house/land builds 6Oct 24, 2017 7:58 pm A mortgage broker will be able to give you better and more personalised advice (and it won't cost you anything), but assuming that the bank's happy that you can service the amount, anything under 80% shouldn't be a worry for a suburban Melbourne property (it can be a different story with unusual or remote properties) - sounds like you've got quite a margin built in there! Basically, your income (servicing ability) will determine how much the lender will lend you in theory, the valuation will determine how much the bank will lend you for that specific property. The lower of those two will determine how much you can actually borrow, but it tends to be a yes/no kind of thing - once you meet both criteria, you're in, and that's all they care about most of the time. Some lenders might provide you an extra discount off the headline rate (on top of what you'd get anyway) for a lower LVR, but I don't imagine it'd be much in the grand scheme of things. Re: Home valuations on new house/land builds 7Oct 25, 2017 7:22 am I have engaged a mortgage broker, and I'll have to raise this question to them. Though I think with the sub 80% lending requirement I'm hoping no issues will be forthcoming. But I can now see that building an expensive house in a 'cheap' area can have a negative impact on the end value of the home. It's interesting how real-estate is like that, where no other assets with a RRP are automatically undervalued from that RRP price point. I have work colleagues that have paid high on titled land in new areas, that have impacted on their valuations and can see that. I guess the fact I've brought an untitled land and it's gone up considerably since that initial purchase with recorded sales will benefit that total valuation for the likes of me. Re: Home valuations on new house/land builds 8Oct 25, 2017 8:19 am The new releases of untitled and at now selling for almost $100k more than our cost price but our land was still only valued at cost price which we placed deposit on in May 16. Our broker advised this would be the case. he advised if we buy land first then wait 3 months to finance the house construction, the land would then be valued at market rate not cost price. Re: Home valuations on new house/land builds 10Nov 24, 2019 10:47 am algernon rum_home Never built before, but I'm trying to get my head around the situation where a bank values the house/land build lower than the actual cost/quote to build. How is that possible? I understand if you 'overpay' for a titled land in a new area, that might have a direct value based on your purchase price. But how can a new build of a home, by a mass builder, ever be valued lower than the quoted cost for that build? While a starting point for valuation would be land cost+build cost, a valuer will temper this with surrounding historical sales data, in particular to determine if there is 'overcapitalisation'. The valuer will generally look at that historical data to justify a 'cap' on the total value, regardless of actual build cost. The larger your budget, and the lower the average sale price in your area is, the greater the likelihood of you hitting this cap . For example, you might have plans for a house that'll cost $1m just to build, but if it's in an area where the average sale price is much lower, then the valuer might look at it and say "nice house, but the suburb is a complete ghetto with existing properties only selling for $200K, there's no way this one will sell for more than $500K even though it's a really nice house on its own". Note that once a bank valuation comes in low, that's pretty much it for you with that lender. You can ask for an appeal, but that's basically saying to the valuer "you didn't do your job well, do it again and do it better" - not surprisingly, success rates are low. You can request a second valuation (from a different valuer), but most lenders will only take the lowest of any recent valuations - so doing this won't improve your situation and may make it worse. However, there is still a lot of subjectivity involved, so if you go with a different lender (and a different valuer) you might get a significantly different result. For our build, our bank valuation came in significantly under expectations (we had allowed for a contingency, but everyone involved was surprised at how low that valuation came in) - again, due to recent sales vs cost of build (there's been a few new builds going up in our area, but none of them have sold yet, so the local sales data is only of much older, cheaper stock). We went to a different lender; they selected the same valuer (who, naturally, were only ever going to repeat their original valuation). We went to a third lender; they selected a different valuer, and that valuation came in surprisingly OVER what we were expecting. Needless to say, we ended up going with the third lender! So, having options with your financing can help mitigate the risk of having a low valuation. If you think you're at risk of this, use a mortgage broker (as we did); they'll be able to do the runaround between lenders (if needed), and they can also arrange valuations much more readily (and cheaply) than you can. Hi I read your post on home valuation. I am in the same situation at the moment where the lenders(CBA,ANZ) have given us a significantly low valuation (about 400K less) You mentioned in your post that got a very good valuation with third lender . I would really appreciate if you could please tell me who was the lender that you got the loan from so that I may also try them. Thank you for your help Re: Home valuations on new house/land builds 11Nov 25, 2019 7:12 pm skn Hi I read your post on home valuation. I am in the same situation at the moment where the lenders(CBA,ANZ) have given us a significantly low valuation (about 400K less) You mentioned in your post that got a very good valuation with third lender . I would really appreciate if you could please tell me who was the lender that you got the loan from so that I may also try them. Thank you for your help Me providing the lender won't help you (SGB for the record, though) - because it's not the LENDER that determines the value, its the VALUER. The banks don't do valuations on their own - they contract an external valuer to do it for them. Each bank typically has a 'panel' of valuers, and will choose one at random for each valuation. Once they have a valuation done, though, that's pretty much it for that bank in practice (refer my original post for the details on why). If a bank orders a valuation and it's too low for you, then that's practically the end of the road for you with that bank. Try another bank, who'll put in a separate valuation order through their panel. Sometimes (as with our second try) you luck out and they'll randomly select the same valuer that you had for the first job, which will just give you the same valuation, even with the different lender. What you effectively have to do is keep going until you get a bank who selects a valuer who gives you the result you need. Doing this, though, does have its downsides: firstly, you're most likely going to end up with a mortgage that isn't otherwise the best deal for you (instead it's your second, third, etc. choice) - note, though, that this might be a worthwhile tradeoff if it actually gets you across the line. The second downside is that at some point in the process the bank will do a credit inquiry about your history - these inquiries get logged by the credit bureaus, and too many inquiries in a short period of time will in iteself lower your credit score (and hence affect the interest rate you might be offered, or even block your ability to get a mortgage at all). So it's a bit of a balancing act. That being said, a $400K undervaluation sounds like a lot. Unless you're talking multi-millions, it's extremely unlikely that you're going to get *that* much variation between valuers (ours was under $200K and both we and our broker considered that an extremely good win). My suggestion would be to try a non-mainstream lender (i.e. not one of the big four or their subsidiaries) for your next attempt - but if you strike out a third time, then realisitically you've most likely already got the answer you're always going to get. 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