Valuations for lending: as-is, as-if-complete and more

Why the valuation sets the loan

Almost every property lender sizes a loan against the value of its security. The number it uses is not the contract price, the agent's appraisal or a figure from a property website. It is the opinion in a formal valuation report prepared by a valuer the lender instructs.

That report feeds directly into the loan-to-value ratio, which in turn caps how much the lender will advance. A lower figure than expected can reduce the loan, change the pricing or add conditions, all after you may have already signed a contract to buy. The ratios lesson shows how value flows into LVR and loan-to-cost.

Who instructs, who pays and who relies on it

Most lenders keep a list of valuation firms they are prepared to use, often called a panel. A panel valuer receives the instruction from the lender, frequently through an online ordering platform, and addresses the finished report to the lender.

Some features of this arrangement surprise borrowers:

• You usually pay, but you are not the client. The fee is commonly charged to the borrower, yet the valuer's professional duty runs to the lender that relies on the report.
• You may not get a copy automatically. Some lenders share the report, some share a summary, and some share nothing. Ask before the order is placed.
• Contact with the valuer is limited. The valuer will typically arrange access with you or the agent, and may ask about recent works or leases. Trying to push for a figure is unwise and can lead the lender to discard the report.
• Each lender orders its own. Moving to another lender generally means another valuation and another fee.

Valuers are expected to form their own professional opinion without pressure from anyone involved. In some states they must also be registered with a state body, which you can check on the relevant register.

The bases of value

A single report can contain more than one figure, each answering a different question. Knowing which figure the lender is using is as important as the figure itself.

As-is value

The as-is value is the valuer's opinion of market value for the property in its current state on the date of inspection. For a standard purchase or refinance of an established home or commercial building, this is normally the only figure that matters.

As-if-complete value

The as-if-complete value is a hypothetical figure. It assumes that planned works, whether a renovation, a new dwelling or a full development, are finished according to the plans, specifications and building contract supplied to the valuer. Construction and refurbishment lenders usually record both this figure and the as-is value, because their security is worth far less halfway through a build than at the end. The construction finance page explains how lenders release funds against progress.

Forced sale value

A forced sale value estimates what the property might fetch if it had to be sold within a shortened marketing period, such as after a default. It is generally below market value. Not every report includes one, and the assumptions behind it differ between firms. Lenders that rely on it, often for specialised or hard-to-sell assets, may size the loan more cautiously as a result.

Gross realisation value

For a project with several units or lots, the gross realisation value is the total of the expected sale prices of every unit once complete. Development lenders compare their peak debt with this figure. Always ask whether a GRV is stated including GST and before selling costs, because a headline gross number can overstate what reaches the lender at the end. The GST margin scheme lesson covers how GST can reduce the proceeds of new residential sales.

How valuers reach a figure

Valuers use recognised methods and often cross-check one against another:

• Direct comparison with recent sales of similar properties, adjusted for differences in size, condition and location.
• Capitalisation of income for investment property, where net rent is converted to a value using a market yield.
• The hypothetical development method for sites, working back from the completed value through costs and profit to a land value.
• Summation, adding land value to the depreciated cost of improvements, sometimes used as a check.

An agent's appraisal is a marketing opinion and is not a substitute. Online automated estimates rely on data models, not inspections. A short-form desktop or kerbside assessment may be enough for a small, low-risk loan, but property finance lenders usually require a full inspection.

Commercial and specialised property

Valuing a shop, office, warehouse or rural holding involves more than counting comparable sales. For income-producing buildings, the valuer looks closely at the leases: who the tenants are, how long each lease has left to run, rent review terms and whether outgoings are recovered. A building with a long, secure lease to a reliable tenant is usually valued differently from the same building with short leases or vacancies, which is why lenders ask for a tenancy schedule and copies of leases.

Specialised assets such as childcare centres, service stations, hotels or farms may be valued partly on business performance, and fewer buyers exist for them. Lenders often apply more caution to these properties, sometimes by relying on a forced sale figure. The commercial property loans page covers how lenders assess income-producing security.

A worked description in words

Consider a hypothetical investor buying a run-down house to renovate and resell. The lender orders a report that gives an as-is value for the house today and an as-if-complete value based on the renovation scope and builder's quote. The initial advance is sized against the as-is figure. Later drawdowns for the renovation are measured against the cost to complete and the as-if-complete figure, with the valuer or a quantity surveyor checking progress before each payment.

If the investor changes the scope midway, the as-if-complete value may no longer hold, and the lender may want an updated report. Using the feasibility calculator before committing helps test whether the project still works if the completed value comes in under expectations.

When the valuation comes in low

A low figure is common enough that it is worth planning for. A measured response usually works better than a hurried one.

1. Read the report. Check land area, number of bedrooms, building condition, zoning, leases and any works the valuer may have missed.
2. Gather evidence. Collect recent sales of truly comparable properties, with addresses and dates, that the valuer did not use.
3. Ask the lender for a review. Requests normally go through the lender, which decides whether to ask the valuer to reconsider. A review can confirm the original figure.
4. Check your contract. If your purchase is subject to finance, note the deadline and talk to your conveyancer before it passes.
5. Rework the numbers. Options include adding more of your own funds, borrowing less, renegotiating the price, adding second-ranking funding or seeking another lender, which will order and charge for its own report.

The LVR and loan-to-cost calculator shows how a lower value changes the ratio for the same loan amount.

Common mistakes

• Signing an unconditional contract before the lender's valuation is known.
• Assuming a gross realisation value is what the project will return after tax and costs.
• Treating an as-if-complete value as if it applies from the first day of the loan.
• Letting a report go stale because settlement or drawdown was delayed.

What to ask

1. Which valuation firm will you instruct, and what will it cost me?
2. Will I receive a copy of the report?
3. Which basis of value will set the loan: as-is, as-if-complete, forced sale or GRV?
4. How long will the report remain current for your purposes?
5. How do I request a review if I think the figure is wrong?
6. If the value falls short, will you reduce the loan, change the pricing or decline?