When you’re purchasing a resale property however – be it landed, a condo, or a flat – the valuation may not match the price. This can affect your ability to get a sufficient loan amount, and interfere with your purchase. Here’s how the valuations work, and the impact they could have:
1. Valuations impact the amount of available financing
If you’re buying a resale property, there are potentially two different prices: the seller’s asking price, and the actual valuation of the property. The two do not always match (e.g. the seller may want $1.4 million for their condo, but the valuation may place it at $1.35 million).
Now it’s important to remember that, whether your lender is HDB or the bank, your loan quantum (the maximum amount you can borrow) is based on the lower of the asking price or valuation.
So take the above situation, where the seller is asking for $1.4 million but the valuation is $1.35 million. A bank loan can finance up to 75 per cent of the property price or valuation, whichever is lower, so your maximum loan would be $1,012,500, and not $1.05 million.
The difference between the seller’s asking price and the valuation – $37,500 in this case – would have to be paid for in cash. As such, having a valuation that’s lower than the asking price results in a bigger cash outlay.
2. You may need extra time to find the right valuation
But because each lender uses a different valuation firm, and each company has different methods, different results are possible. Some buyers may find that bank A gives their intended condo purchase a valuation of $1.5 million, while bank B gives it a valuation of $1.25 million, and so on.
This can add extra time to your purchase, as you need to approach different lenders. It’s an especially common issue with older properties, as banks will want fresh valuations for condos or landed properties that haven’t had one in 20 or 30 years. As such, it is one additional concern when trying to buy an older property.
3. A sufficient valuation may come at the cost of a higher interest rate
It may seem like getting the highest valuation is always best, but that’s not the case. There may be a situation in which the bank accepting the higher valuation may also have a much higher interest rate:
Say the resale condo you want is priced at $1.4 million. The valuation from bank A is $1.38 million, whereas the valuation from bank B is $1.35 million.
However, bank A charges an interest rate of two per cent per annum, whereas bank B charges a rate of 1.4 per cent per annum.
The maximum loan quantum, using bank A, is $1.035 million. This means an initial cash outlay is at least $365,000.
The maximum loan quantum using bank B is $1.0125 million. This means a higher initial cash outlay, of $387,500.
With bank B, you have to pay $22,500 more at the start.
However, given the two per cent interest rate of bank A, you would pay around $281,000 in interest at the end of a 25-year loan. Given the 1.4 per cent rate of bank B, you would pay just around $188,000 in interest at the end of the same loan period; a difference of about $93,000.
In these cases, you may be caught between the benefits of a higher property valuation (which means a lower cash outlay), versus the impact of a more expensive loan in the long term. This is not an easy decision, as you need to weigh up your cash flow issues against the risk of lower capital gain. Do contact me on Facebook if you need help working this out.
4. An unusually low valuation is a red flag, and may save you from a bad purchase
There are some situations where the property valuation acts as a red flag, and should cause you to rethink your purchase. For example, say the valuation comes back $50,000 lower than the price you expected to pay; you may have missed some kind of important defect in the unit.
There may be a host of expensive maintenance issues that aren’t immediately visible (e.g. leaks from the upstairs units damaging the false ceiling, or having to redo the plumbing in the kitchen. This can be temporarily hidden during a viewing, and may not be apparent until later).
5. A high valuation means paying higher stamp duties
Stamp duties, such as the Buyers Stamp Duty or Additional Buyers Stamp Duty, are based on the higher of your property price or value.
For example, say your property price is $1 million, and its valuation is $1.1 million. You need to pay ABSD of 12 per cent. The amount will be 12 per cent of $1.1 million, or $132,000.
So while a higher valuation is usually desirable (as it means a lower cash outlay), it does have drawbacks as well.
Ultimately, the valuation does more good than bad for most buyers
Some buyers loathe the valuation process, as it interferes with their loan amount. However, I think that overall the valuation does more good, as it provides a realistic basis on which to negotiate.
Sometimes, seeing the third-party valuation is enough to make sellers lower their asking price, to something more in-line with the market.
Just remember that you don’t need to accept the first valuation that comes along. You can approach different bank, that will accept a higher or lower valuation (just keep an eye on the interest rate for the home loan).
You can follow me on RonChongProperty.sg for more details on building your wealth through property, and on the latest news of various developments.
Ron Chong is a leading property agent with Orange Tee & Tie, and had a previous background in construction and Interior Design. His background gives him a wider breadth of experience in dealing with Singapore properties, and he aims to provide practical, actionable advice to buyers and sellers today. Like him on Facebook for the latest news and updates.