When applying for a commercial mortgage loan in Australia, a property valuation is a basic component of the process. The valuation provides the lender with an independent and clear understanding of the property’s worth, helping them assess the risks associated with the loan.
Bottomline: the valuation is a key factor in making sure the loan amount is in keeping with the lenders credit policies.
Why is a Valuation Necessary?
A valuation serves several key purposes for both the borrower and the lender:
- Risk assessment: Lenders use valuations to assess the risk associated with the loan. A property with a high market value and good income potential is generally considered a lower risk investment.
- Loan-to-value ratio (LVR): The LVR is the ratio of the loan amount to the property’s value. Lenders often have maximum LVR limits, and a valuation helps determine the maximum loan amount that can be approved.
- Security for the lender: The property itself serves as collateral for the loan. A valuation confirms that the property’s value is sufficient to secure the loan.
- Investment decision: For borrowers, a valuation can provide valuable insights into the property’s investment potential and help them make informed decisions.
Types of Valuations
There are two main types of valuations: short-form and long-form. While short-form valuations are typically used for residential properties, commercial property loans usually require what’s called a long-form valuation.
What is a Long-Form Valuation?
A long-form valuation is a more comprehensive analysis of the property and the report includes detailed information about the property, such as:
- Physical description and condition: Assessing the property’s structural integrity, maintenance requirements, and overall state of repair, along with it’s potential uses and zoning.
- Location: Evaluating the property’s proximity to amenities, transportation hubs, and potential future developments.
- Market analysis: Examining the current and projected market trends for similar commercial properties in the area. The valuer will also take into consideration the potential uses and any industry trends associated that could impact either or both its value and it’s income.
- Income potential: Assessing the property’s rental income, occupancy rates, and potential for future income growth.
- Comparable sales analysis: Comparing the property’s value to recent sales of similar properties in the same market.
Long-form valuations are generally more detailed and time-consuming than shorter valuation methods, providing lenders with a more in-depth understanding of the property’s value.
Choosing and Paying for a Valuer?
It’s a common misconception that the lender pays for the property valuation of property, which is often the case with residential properties and particularly the larger banks. However, the reality with properties that are considered commercial is that the borrower is responsible for the cost of the valuation.
It’s important to note that while the borrower pays for the valuation, the lender is the one that ‘instructs’ the valuer and in a lot of cases, ‘owns’ the report. At best if the lender has put the valuation to tender, the borrower is given the ‘quote(s)’ received to choose which valuation firm they’d prefer.
The lender instructs the valuer, that way they know that the valuation is conducted by a qualified professional, who is independent of the borrower. This approach helps to maintain the integrity of the valuation process and protects the interests of both the borrower and the lender.
By understanding the importance of long-form valuations and the associated costs, you can better prepare for the commercial mortgage loan application process and increase your chances of securing the financing you need.
Conclusion
The valuation is a critical part of the process of the commercial property loan application because it provides lenders with a comprehensive assessment of the property’s value, helping them to work out the appropriate loan amount and terms. The borrower is typically responsible for paying the cost of the valuation, the expense is considered to be part of the costs associated with finance.
Next Steps
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