The Difference Between An Appraisal And A Valuation

The Difference Between An Appraisal And A Valuation

21 February 2023

If you are buying or selling real estate, you’ve no doubt heard the terms ‘valuation’ and ‘appraisal’, and there’s a very good chance you assumed they meant the same thing. But these terms have two very different meanings and for a number of reasons, it is important to differentiate between the two.

WHAT IS AN APPRAISAL?

A “market appraisal” is a legally non-binding estimate of value from a licensed real estate professional, normally a real estate agent. It is generally based on what is known as a Comparative Market Analysis (CMA in industry vernacular), which is a compilation of sales data of comparable properties which have sold within the past six months within a 5km radius of the subject property. The CMA will contain a minimum of 3 comparable sales (although sometimes more), with which the agent will use to formulate and substantiate their estimate of potential value, which is often provided in the form of a likely selling range.

Female Realtor In Hallway Carrying Out Valuation

These appraisal estimates are given for a number of reasons, such as when you are putting your house up for sale or refinancing your existing home loan using your property’s current value as collateral for the purchase of another property. The important thing to note about an agent’s market appraisal is that while it is a useful tool in gauging your property’s current value, it is not a legal and binding document and, especially when provided in an exclusively verbal format, carries no weight in a legal sense.

WHAT IS A VALUATION?

In comparison the an agent’s appraisal, a valuation is a sworn estimate of a property’s value from a registered property valuer. It represents a more thorough and technical approach to determining what a home might be worth, and takes into account recent comparable sales, the unimproved value of the land, the replacement cost of the dwelling, depreciation, risk factors for future resale potential and more. What’s more, it is a legal document and errors or mistakes on the part of the valuer can be costly in terms of legal liability.

In general terms, there are two kinds of valuation report – An independent valuation and a bank valuation. An independent valuation is a valuation report compiled by an independent and accredited third-party valuation company who have no vested interest in the property. It is meant to be completely unbiased and this type of report is generally required by banks and other lending institutions before approving a buyer’s finance to purchase a property. It is also used as a legal instrument in mortgagee repossessions, divorce settlements and deceased estates.

In contrast, a bank valuation is an internal valuation conducted by a bank or lender, when processing an application for finance which has a low loan to value ratio. This means that the borrower is only applying to borrow a small percentage of the actual value of the property, which represents a far lower risk exposure for the lender. Such loans are normally not subject to Lenders Mortgage Insurance (LMI) and are therefore not subjected to the same sort of scrutiny as a loan application to borrow, say 95% of a property’s purchase price. Loans of less than 80% of the property’s purchase price are normally not subject to LMI, and often in these cases the lender will conduct their own internal valuation rather than engage a third party independent valuer.

As always, if you have questions around buying and selling please feel free to reach out.

Til next time, ciao ☺️

 

Disclaimer: The information is this article is for general information only, it is not intended and should not be considered as either legal or financial advice. The information contained herein should not be relied upon solely and all parties are encouraged to obtain their own independent advice before making any financial decision.
Lee Knutsen

Article by Lee Knutsen

Co-founder & Managing Director of House, Lee Knutsen first entered the real estate industry in 2006 as a residential sales specialist. After more than a decade as a sales agent…

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