When I say some property buyers sometimes want higher valuations, people look at me like I just claimed to raise a dinosaur in my bath-tub. It confuses people: The valuation determines the price of a house, so a higher valuation means the buyer pays more. But as it turns out, property buyers sometimes do find advantages in high valuations. And with some forethought, a savvy home owner might as well. In this article, I examine some situations when buyers might actively seek a heftier price tag…and just why it benefits them:
What’s a Valuation?
A valuation estimates of how much a piece of property is worth. The valuation comes through an appraiser (typically land surveyors and real estate firms), and is a major bargaining tool when deciding property prices.
When getting a home loan, the size of the loan is pegged to the valuation of the property. If valuations conflict, the bank will use the average of two or more valuations. Bankers do call appraisers to nag at them, and a co-operative banker (i.e. any banker within reach of your wallet) can grumble the valuation slightly up or down.
Under most circumstances, buyers want the valuation to be low, and sellers want it to be high. But there are exceptions, such as when…
1. The Buyer is Going to Bid High Anyway
Some buyers are sentiment driven, and refuse to acknowledge trivial details like reality. Others are property investors, who can smell hidden profit at 300 metres. Whatever the case, these buyers sometimes commit outrageous sums to select houses / condos.
This usually happens when they want to shut out other buyers. Rather than get into a bidding match, they’ll just make an insane offer that removes any competition. Alternatively, there’s some urgency in the purchase, and they need the seller to accede within a week or two.
Either method results in inflated prices, way beyond an average valuation.
Here’s the thing though: If the property ever goes on the resale market, the valuation helps to determine its resale value. And since the buyer is paying an inflated sum anyway, it makes sense to match the valuation to that inflated price. Or at the very least, to make the two as close as possible. This way, the buyer minimizes any loss from selling the property later.
To these buyers, the valuation isn’t a big deal. It’s a perk, but one that’s worth their time to ask for.
2. Valuation is Disregarded by Current Parties
Sometimes, sellers and buyers agree on a price separate from the valuation. This is typical when a seller has no holding power: The seller needs to get rid of the property fast, and will take whatever the buyer can afford. The actual value of the property is irrelevant.
It’s also common in situations when the buyer and seller are related; children buying from parents, for example, or buying a place from your uncle who’s upgrading. Families tend to work out “private” arrangements, and the prices involved are often below the property’s actual worth.
As with point 1, there is a resale market to consider. If you know you’re only paying $300,000 for a unit, regardless of the actual valuation, how can a valuation of $400,000 – $500,000 hurt you? It’s nothing but an advantage, since it helps you to re-sell the unit at a profit. In fact, the higher the valuation, the more money you’re making.
3. House Flipping
Some property investors have unnatural powers of mind control. They always aim for a high valuation, because they know they can bargain the seller down. Then they’ll re-sell the unit at the high valuation, and net a neat profit. It’s not exactly house flipping, but it comes close.
Typically, this involves telling a seller things like: “Yes, I’m paying you $100,000 less than I should, but I can start paying you in just one week”. Or the old favourite, which is: “The valuation is high, but is the appraiser the one buying?”
Obviously, this isn’t a smart move for anyone who isn’t an industry veteran. If you don’t know what you’re doing, you’ll be stuck facing the high valuation that you asked for.
Should I Ask For a Higher Valuation?
If you’re one of the buyers under point 1 or point 2, you may as well go for it. Pick up the phone, call your banker, and use those two magic words: maximum valuation.
But otherwise, do the maths. A higher valuation means a higher re-sale value, but it also means bigger repayments. If you’re already spending 35% or more of your income on loan repayments, you can’t afford anything higher. Worry about regular expenditures first, and resale value second.
You should also drop by sites like MoneySmart. The website will pick the best home loan rates for you, which will give you a better idea of what you can afford. And they have a mortgage specialist on hand, if you have any questions.