Same sh!t, different bank!

I have copied verbatim below a note I posted on my Ning-based renovation site back in June 2007, I should have gone back and finished the story, but never did, so instead I’ll bring the sorry tale up to date here:

The story below describes an issue with Westpac, where they massively undervalued our home at the point of trying to secure a construction loan, the impact of that undervaluation was that we had to largely self fund the development and, given we had committed ourselves to a second home (our current home), we had to sell at the earliest opportunity.

The outcome from that debacle is an interesting one, let’s call it the Westpac Conundrum for now; the house was valued by Westpac at $1.21m post renovation, and no matter how must we protested we were unable to have that number lifted (we needed the value to be >$1.35 and our local McGrath agents agreed that was reasonable). And yet 3 months after the valuation was conducted, on the cusp of a declining market, and without the entire works even having been completed (the loft extension and 4th Bedroom were never added), the house was sold for $1.45m!

Fast forward to August 2009 and we find ourselves in an eerily similar position, but this time let’s call it the ANZ Debacle. In July 2008 our home was valued at $1.32m, since then we have spend $125k on reasonable and necessary renovations, as well as some quite stylish additions. As August approaches and our renovation plans are approved by Hunters Hill council we approach the bank through our Loan Market broker about finance. In total this next wave of additions will cost ~$550k, which, if sensible, (no gold taps! The living areas are more than doubled, beds go from 3 to 5 and baths from 2 to 3 as well as a pool and 80sqm of decking being added) you’d think would see the property being worth around $1.99m (1.32m + .125 + .55) before accounting for the impact on the property market of the GFC, so let’s for arguments sake account for a hefty 15% drop off in that 12 month period (in fact the number is thought to be more like 8% in 2 years), that would mean the property being worth $1.69m post renovation. In fact, the valuer came back with $1.44m, suggesting that we would have added 110k of value to our home after spending $675k on it once the GFC had been taken into account. So, what do we do now? We’re back where we were almost exactly two years ago, is this a coincidence and a broader issue around banks undervaluing to mitigate risk?  Our broker says “let’s try the CBA” really????

My core question is this, are banks obligated to provide a REASONABLE valuation/appraisal of your property? Or, are the justified in providing lowball values to ensure lowest risk?

Of course I get that Banks are doing it tough and need to mitigate risk, but isn’t that what LTV is for or is LTV too impactful on the retail business?

Original story, published June 27th 2007.

Being at the mercy of a stranger is hard, but when that stranger is an ‘independent’ property valuer things just don’t seem to go my way!

First, please put yourself in my shoes; we sunk most of our spare cash into the purchase of a new house, meaning that the bulk of our $300k+ renovation would have to funded by some other means. Now, given that our current home has become our current investment, it stands to reason that we are making renovation choices which ensure we make a profit, not a huge profit, but a few thousand dollars to compensate for all the heartache that comes with renovating your primary residence… But hang on, does that slim margin then offer enough security to the bank to convince them to extend my facility to cover the build? It should, right? Well, it seems not… See, we fully leveraged our new place to make sure that we maximised the slim pickings to be had from negative gearing (3% of capital as rent anyone? sounds like another blog post) So we effectively have a 90% loan on the new place, offset by a 75% loan on the existing place, balancing the overall loan at an already scary 85% LTV ratio (the bank wavered High LTV insurance). Meaning that in order to get $$$’s for the renovations, the valuer needs to asses the incremental dollars added to the property post-renovation at at least 85% of the outlay, just to get the bare minimum needed to cover all but 15% of the work… My problem is, though, that he has NO incentive to give the bank a fair market assesment of my property… Why?

Well, let’s first of all position ourselves firmly in the Bank’s size 10’s for a moment… For them, it seems to me that it’s all about interest arbitrage and managing risk, therefore, in addition to the 15% ‘equity’ they hold, should they need to reposes my property, it is in their best interest to err of the side of caution when deciding what 100% of my home’s value should be… And what’s the easiest way to do that?

Quick trip to the mind of a Valuer (or, to be more accurate, the Board room of a Firm of Valuers)… I just can’t see why Valuers would be motivated to value accurately. The banks would walk away from Sydney Valuation Company & Sons at the first whiff of a risky overvaluation, but if the reverse is true? As long as the undervaluation is within reason, and doesn’t mean that the Banks aren’t able to maximise lending capability at a reasonable risk profile, I can’t see them calling a nationwide Valuation Partner into line just because they consistently undervalue, if fact, my guess is that it would be actively encouraged. And down where I exist, down at the branch level, I have no chance!

No, Valuers have only one master, and that master offers no incentive to get close to the true market value of your home. Remortgages bring new risk to banks but they have their trustee valuer as their safety net, protecting them from overexposure to a non-scientific market by providing dependably low valuations – sometimes at the expense of their very own customers.

Unfortunately, I have no useful advice, other than to lobby your bank with evidence supporting your view of your property’s valuation and threaten to vote with your feet should they not agree to listen… It didn’t work for this blogger, but it may just work for you!

Happy to listen to any advice you may have though!

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