When purchasing property, understanding how banks value properties can make a huge difference in your ability to grow your portfolio.
Oftentimes different banks may value the same property at different amounts, and you can use this to your advantage.
This is how it works.
When you’re buying a property, the bank you choose to finance the purchase will conduct a valuation to determine the property’s value. This valuation is crucial because it influences how much the bank is willing to lend you.
But the thing is that not all banks value properties the same way. One bank might value your property based on the purchase price, while another might use a different method and come up with a substantially different figure.
Full valuations involve a physical Inspection, but the bank might use what’s called an Automated Valuation Model (AVM) using data analytics and algorithms.
This type of valuation is based on publicly available data, such as the size of the land, number of bedrooms and bathrooms, and recent comparable sales in the area. Unlike a full valuation, there is no physical inspection, and it’s primarily data-driven. Because of this, it may not account for the specific condition of the property (e.g., whether it’s renovated or run-down).
For example, suppose you purchase a property with Bank 1, which values the property at the purchase price—$1.5 million. You’ve done your homework and know that the property is an old, run-down house on a large block in a desirable area, so you suspect there’s more value to be unlocked.
Once the purchase is complete, you go to Bank 2 for a second opinion. This time, Bank 2 uses an AVM. Because the AVM uses recent sales data of similar properties in the area and does not account for the property’s condition, it might value the property at $2.1 million—a $600,000 increase from Bank 1’s valuation.
You can then take out 80% of this new valuation, which is $1.68 million. Since your original loan was based on the $1.5 million valuation, the bank would lend you an additional $480,000. This means you could recover all your initial deposit and costs ($380,000) and still have $100,000 left over.
Essentially, you are now playing with “house money.” You’ve pulled out your initial investment and more, allowing you to reinvest or use the funds elsewhere.
This is also why our Accelerator Strategy, is so powerful. It also relies on understanding which properties are likely to get higher automated valuations.
For example, buying an unrenovated property that’s undervalued but in a good location, and then using an AVM that doesn’t account for the property’s condition, can result in a much higher valuation than the purchase price.
By strategically choosing properties that will perform well in AVMs, you can quickly build equity and then use it to keep growing your portfolio.
Engaging a trusted buyers advocate through Henderson’s buyers advocacy service is your best chance at navigating the competitive real estate market.
