Two checks, two different jobs
When you buy a home in Australia, two separate processes run side by side. Your lender arranges a valuation to confirm the property is suitable security for the loan. You, as the buyer, arrange inspections to find out what condition the property is actually in. Here is how each one works and where buyers get caught out.
The lender valuation
A lender valuation is an independent assessment of what a property is worth, ordered by the lender and carried out by a certified practising valuer from its panel. It is not the same as a real estate agent’s price opinion. The valuer weighs land size, the dwelling, its condition, location and recent comparable sales, then reports a figure the lender uses to set the loan-to-value ratio (LVR) it will lend against. Lenders use three main types.
Desktop valuation
Nobody visits the property. The valuer relies on property data, sales records and the contract of sale. Desktop valuations are quick and are typically used where the deposit is larger and the property is a standard house or unit in an established suburb.
Kerbside valuation
Also called a drive-by. The valuer views the property from the street to confirm it exists, matches the records and shows no obvious external problems, but does not go inside.
Full valuation
The valuer inspects inside and out, measures, photographs and prepares a detailed report. Lenders usually require one for higher LVR loans, unusual or rural properties, new builds, construction loans and larger loan amounts. It takes longer because access has to be arranged through the agent or vendor.
The lender decides which type is ordered and whether the result is acceptable. A broker cannot change a valuation, although some lenders will review one if relevant comparable sales were missed.
What a valuation shortfall means
A shortfall happens when the valuation comes in below the price you have agreed to pay. Lenders generally base the loan on the lower of the purchase price and the valuation, so the gap has to come from somewhere.
Say you agree to pay $800,000 with a $160,000 deposit, planning to borrow 80 per cent. If the valuation comes back at $770,000, the lender will typically lend 80 per cent of $770,000, which is $616,000. You still owe the vendor $800,000, so you now need $184,000 of your own funds. If you cannot find the difference, the options usually include:
- Borrowing at a higher LVR, which may mean the lender requires lenders mortgage insurance.
- Asking the vendor to renegotiate, which is more realistic in a private treaty sale than after an auction.
- Applying with a different lender whose panel valuer may reach a different figure.
- Withdrawing under a finance clause, if your contract has one.
This is why a subject-to-finance clause matters. Auction purchases are unconditional and the deposit is paid on the day, so a shortfall after the hammer falls leaves far fewer options.
Building and pest inspections
A building and pest inspection is organised and paid for by the buyer, not the lender. A licensed building inspector checks the structure, roof, subfloor, plumbing and drainage, wet areas and signs of movement or water damage. A timber pest inspector looks for termites, borers and wood decay, and for conditions that invite them.
Moneysmart suggests ordering the inspection once your offer has been accepted and during the cooling-off period, or before auction day if you intend to bid. The report may give you grounds to renegotiate, ask the vendor to fix something before settlement, or walk away. It does not go to the lender and does not replace the valuation. Equally, a valuer is not a building inspector, and even a full valuation will not pick up concealed termite damage.
Strata reports
If you are buying an apartment, townhouse or villa, the building is almost always a strata scheme, known as a body corporate in Queensland or an owners corporation in Victoria. You own your lot and share ownership of common property such as lifts, gardens and the roof. A strata report, or strata search, is prepared by a specialist who reviews the scheme’s books, insurance and minutes. A thorough report tells you:
- The current levies, and whether any special levies are planned or have recently been struck.
- The balance of the administrative fund and the capital works fund (sinking fund).
- Building defects, insurance claims, disputes, fire safety or cladding issues recorded in the minutes.
- By-laws on pets, parking, renovations and short-term letting.
Lenders care about strata too. Some have policies on very small units, high-density towers and buildings with known defects, and a large special levy can change how the lender views the security.
How Oakwood Finance fits in
Oakwood Finance Pty Ltd arranges credit as Credit Representative 561236 of Finsure Finance & Insurance Pty Ltd, Australian Credit Licence 384704. Lenders assess and approve applications, order valuations and set their own policies. You can test deposit and price scenarios with our calculators, read more about buying your first home, or see how home and personal lending works.
If you are weighing up a purchase and want to talk through valuations, deposits or lender policy, book a consultation at https: