South Africans who decide to purchase a home in today’s economic climate are much savvier than the generation of homeowners before them.
They have a better understanding of how banks work when applying for a loan and they are well informed about the criteria that need to be met in order to qualify for a bond.
However, they are often surprised by the banks’ valuation procedure and the figures that they arrive at. This could completely throw the buyer off guard and even derail bond applications.
Market value
It is generally accepted that bank valuers are very carefully trained in order to approve a bond and that they follow a specific set of international accredited criteria.
Unfortunately, this does not mean that they will come up with the same valuations. It also does not mean that they will necessarily agree with the valuations that have been calculated or predicted by the real estate agent – even if they are a professional with years and years of experience in the real estate business.
It is not to say that banks follow their own made-up recipe or have their own special set of calculations. However, it is important to remember that the aim of bank valuations is to assess whether the property is worth the price that is being paid for it.
This is done so that, in the case of the borrower defaulting on his or her bond repayments, the bank is then able to recover the full value of the money that has been left outstanding by selling the home.
Analysis process
In order to arrive at an accurate valuation, the bank valuer will probably do a Comparative Market Analysis (CMA). During this process, they will compare the home price with the home price of houses that have been sold in the same area and those houses which are still on the market.
This may become a problem for the seller because during a valuation, certain aspects may be seen as undefinable such as the close proximity of a school. It might also ignore the fact that the house has been kept in immaculate condition and that it has been taken care of properly, while ‘similar homes’ may have been in very poor conditions.
Often the similar homes will have serious defects which the valuer will recognise but insist, by means of a cash retention clause, that they get fixed before the bond is registered. This often gives the property a lower value.
Difference in price
Sometimes the buyer might become frustrated with the low bank value of the home that he would like to buy and reminds the bank that the insurance value is far higher.
This will probably not impress the bank valuer because insurance value is usually based on a replacement cost and this is higher than the market value.
Where the bank valuer undervalues a home, it might be possible for the bond originator to get them to change their minds by quoting his own and the agent’s Comparative Market Analyses.
It ain’t over till…
Alternatively, if a bond originator and agent are working together, they may be able to persuade the seller to put right those defects that are lowering the house’s value, in the bank’s opinion. This tactic has resulted in many bonds eventually being granted and a sale going through.
The important thing for the potential buyer to note is that they must never give up. Bond originators try their best to keep negotiations open and reach an agreement that will satisfy all parties. They work in a sophisticated, rational society and bond originators are able to assist with these matters time and time again, making them popular in the real estate business.
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