Purchasing Property - How banks go about property valuations

The main reason why banks value a property before granting finance is so that they can be assured that if the buyer defaults on their repayments, they have sufficient value in the property to recover the loan if they are forced to repossess and sell the property. 

The bank's job is to do a property valuation to check whether the present market value of the property covers the amount that you want to borrow. Once you have applied for a home loan the bank will send a representative to value the property.

Banks and other valuers use different tools to do a market related price valuation, one of which will be a Comparative Market Analysis (CMA). This helps set a realistic value for the home by comparing it to similar properties in the area that have recently sold.  

If a property has obvious defects, but the valuer feels that the valuation can be achieved if these are fixed, he may take cognisance of such defects by calculating what it would cost to repair them and insert a retention clause stipulating that specialised repairs have to be carried out before the Bond can be registered. 

Municipal valuations can also be useful guidelines, although these days they can be as much as 20% higher than the market value in order for the municipalities to increase their rates and taxes. Insurance value could be another guideline but this will probably be high because, in today's market, building a new home is 20 to 30% more expensive than buying an existing home.


Keep in mind that bank valuations are very important when it comes to applying for finance. You will find that a lot of the time the buyer will make a much higher offer than what the bank is prepared to grant. In such an instance your bond originator might be able to persuade the bank that the valuation is not market related or get the buyer and seller to rectify the defects in order to achieve a higher valuation.