The loan amount approved by a bank is based on the bank’s valuation of the property, not the purchase price of the property by the owner.

If the bank evaluates the property value to be lower than the purchase price, the valuation will be underestimated and the loan amount will be lower than expected. The owner may have to raise money to make up the difference

Spacious lists 5 major factors affecting property valuation and teaches you 6 ways to avoid banks undervaluing your property.

Jump to: Causes of Property Underestimation | How to Avoid Property Underestimation | Investing Undervalued Properties | FAQ

5 Causes of Property Underestimation

1. Market Downturn

The most obvious reason for underestimation is the overall market downturn, with new valuations lower than the original ones. This situation is most common during mortgage refinancing.

When the owner wants to refinance the property to another bank, the new lending bank will evaluate the property and calculate the loan amount based on the valuation.

If the market is low during refinancing, the property value cannot keep up with the purchase price, and the loan amount will decrease.

For example, if the unit value drops from HKD$6 million to $5 million, and the borrower applies for an 80% mortgage, the new loan amount will decrease by HKD$800,000.

However, if the borrower refinances while interest rates are low to save on interest expenses, the impact of the property valuation underestimation should be limited.

2. Using Stage Payment Plans

Buyers of new properties can choose to pay immediately or pay during the construction period. The former means starting mortgage payments immediately after purchasing the new property, and the latter ( a.k.a. stage payment) means paying the down payment when purchasing the property and then starting the mortgage payments when the property is completed.

The risk of using stage payment is that the construction period can last up to 30 months, and during this period, the housing market may fluctuate, and the value may be adjusted when the property is completed.

This may result in your property undervalued by the bank and the buyer may have to pay more money to make up for the price difference.

However, unless the construction period is very long and the housing market fluctuates greatly, the bank will generally cooperate with the valuation, and the difference will not be too great.

3. Non-Mainstream Property

One of the factors determining property value is the transaction prices of similar properties. If the property does not belong to the majority of residential apartments in the market, normally it will have fewer transactions for reference.

For residence such as a village house, mansion, or villa, the bank’s valuation will tend to be cautious, easily leading to underestimation.

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4. Less Favourable Property

In addition to considering the prices of similar units, the bank will also evaluate the quality of the property itself. If the unit has structural problems, blocked views, or outdated equipment, the bank will lower the valuation.

5. Property with Encumbrance

If the property has defective title, unauthorised structures, or if the owner has debt issues, the bank may lower the property valuation or even refuse to approve the mortgage.

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6 Ways to Avoid Property Underestimation

If the bank’s valuation is underestimated, the owner has to prepare enough budget to fill the gap between the expected and actual loan amount.

If the purchase fails, the down payment will be forfeited, causing a great loss to the owner’s budget. To avoid underestimation, the owner can take the following precautionary measures:

1. Do a Land Search Before Purchase

Carefully check the land register of the property before applying for a mortgage. Find out if any hidden problems (such as illegal construction or title defect) exist, as they may negatively affect the bank’s valuation.

2. Get Property Valuation from Multiple Banks

Each bank may have different standards for evaluating properties. The owner can get property valuations from multiple banks and find the one with the highest valuation.

3. Request the Bank’s Mortgage Specialist to Raise the Valuation

The bank’s property valuation is usually done by several surveying companies. Each surveyor has its own specialties. Some are good at evaluating village houses and old-style buildings, while others are good at mansions or foreign houses.

As valuations from multiple surveyors may be different, if the property buyer happens to have a familiar mortgage specialist, he may ask the mortgage specialist to help and try to make the bank choose a higher valuation.

4. Request the Mortgage Referral Company to Raise the Valuation

If it’s the first time buying a property, and the buyer doesn’t have a familiar bank mortgage specialist, then the buyer can choose to use a mortgage referral company.

The buyer can ask the intermediary to coordinate with the bank and try to raise the valuation as much as possible.

5. Permission to Inspect Property

If the property is a tong lau or village house, the owner shall allow for property inspection. The bank’s valuation may be more relaxed.

6. Get Property Valuation amid Good Market Sentiment

In general, the valuation validity lasts 3 months. It’s wise to do property valuation amid a rising housing market and complete the mortgage approval process within the valuation period. In that case, the owner doesn’t have to worry about market fluctuations, which may cause under valuation.

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Investing Undervalued Properties

Undervalued properties can be a headache for both first-time buyers and current property owners.

However, for investors and self-use buyers, buying a property lower than the market value can be an attractive opportunity. They may see the undervalued property as a “bargain”.

If the property’s value is already high, the actual cost (plus stamp duty, legal fees, agent commissions) of purchasing the property may be higher than the market value, which would reduce the potential profit when reselling the property. Therefore, these buyers may actively seek out properties that are undervalued as a way to invest.

The last thing to keep in mind is that online valuation services provided by banks is slightly different from actual one. Online valuation is generally from one surveying company, while actual valuation is conducted by multiple ones.

Despite this, if you come across a property that you like, it’s a good idea to do an online valuation beforehand to prepare for negotiation and mortgage budgeting. You can find properties for sale on Spacious across the city.

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