40 – Short Valuation

FruitIt’s just one problem after another with the finance application for the second investment property.

Most recently, the valuation ordered by the bank came back under the contract price (short), specifically citing a discrepancy between the construction price and comparable build costs of around $35k. Annoyingly, the replacement value (which might be used when nominating an insured amount, for example) is noted as being above the contract price.

Our mortgage broker asked me to take this up with Open Corp, who note several points when it comes to valuations:

  • No two valuers will value a property at the same price. The valuation comes down to the valuer’s experience, knowledge of the area, and subjective interpretation of comparable sales and the area’s price point. Of course, the valuer is attempting to (efficiently) compare houses on different streets, of different designs, built of different materials in different eras, and in a changing market—this isn’t apples and apples stuff.
  • The properties we buy from Open Corp are full turn-key house and land packages, constructed as investment properties (i.e. to house tenants). The internal finishes are of a high quality to attract tenants and because they’re often hard-wearing. The house is 100% complete and includes landscaping, fencing, washing line, letter box, etc. I previously questioned Michael Beresford from Open Corp on the cost difference between the standard house and land packages for sale on realestate.com.au and the properties in the same development being sold by Open Corp and he made the same point in the context of that conversation.

Open Corp supplied me with a valuation for a similar, smaller property in the same area which did come back at the contract price. As plan A, I asked Mortgage Choice to submit this alternate valuation to the bank, requesting it be substituted for the original. This would in part be a test of the mortgage broker’s relationship with the bank but would more likely come down to the individual personalities at the bank’s end—more subjectivity—and in conjunction with whatever risk algorithms they apply.

Perhaps not unsurprisingly, the bank was unwilling to accept the alternate valuation and our mortgage broker subsequently took up the matter with the original valuer and and their minder, Valex (the valuation panel through which valuations are ordered by lenders). I have no experience contesting a valuation but understand it’s often a difficult proposition. The finer points seem to hinge on the comparability of the ‘comparable sales’ cited in the valuation—in other words, suggesting our build is comparable but at the higher end of the spectrum. As anticipated, the valuer (Peter Jones from Lee Property) wouldn’t budge and was apparently quite direct with our mortgage broker on this point.

In the meantime, Mortgage Choice ordered an independent valuation through another lender, giving us the option to supply that valuation to the original lender or proceed with finance through the second lender. This valuation came back at the contract price but was also not accepted by the first bank. Interestingly, many of the comparable sales cited for this valuation were in the same development whereas the comparable sales in the original valuation were from further afield.

Our last option was to challenge the valuation with the bank directly but that was equally unsuccessful.

In order to secure any form of financing from this application, we made the decision to reduce the loan amount (aligning to the original valuation) with the difference contributed from our line of credit (at a slightly higher interest rate and with the added risk of the increased LOC balance being secured by our PPOR).

This would have done the trick if I had a current pay slip for the bank—which I don’t because I was unexpectedly stood down by the firm I was contracting for earlier in the year when their pipeline of work dried up. Of course the wife’s still on maternity leave and won’t be back to work for another few months and the bank won’t accept her signed contract in place of a pay slip. Of course this also makes applying for finance through another lender a tricky proposition.

What a saga.

Finance is due in four days, on Friday. Mortgage Choice have recommended we request a finance extension from the vendor until wifey is back to work. Open Corp have suggested this may be an option because the land titles haven’t yet registered—but will be dependent on a conversation with and the goodwill of the vendor.

If this plan works out, maybe enough time will have elapsed for the bank to order a new valuation. Ha!

I suppose a disclaimer is also worth posting: I'm just a guy, I'm not an accountant, lawyer, solicitor, tax agent, mortgage broker, banker, financial adviser, insurance agent, land developer, builder, government agent, or anything else so I disclaim your application of anything I write here is to be applied at your own risk. What I write may be incorrect and you are best to seek your own professional advice (tax, legal, financial, and otherwise) before entering into contracts or spending your money. Your situation is unique to you and what I write here reflects my experience only. This content is not professional advice and is not tailored to your situation. I'm learning too and expect to make many, many mistakes along the way.