In the current market conditions, banks are even more cautious and less inclined to take any more risk than neccesary due to the slump in the Ringgit and the volatility in global markets after Donald Trump’s victory in the US presidential election. I believe that these conditions will continue to affect retail housing and commercial loan applications until 2018.
Even if prospective buyers and commercial loan/finance applicants overcome the hurdle of creditworthiness set by the banks, they may not get the full amount of loan/financing they expected to cover the purchase of the property. The role of valuers has become even more important as they can make or break the loan/ financingapplications.
Banks are entitled to grant loans up to 90% of the property value based on the valuation report issued by the valuer. Valuers are put under tremendous pressure by their employers (in this scenario, banks and property owners) to issue a favorable valuation of the property. However, some valuers are put on the spot based on the reasons below:-
1. Professional indemnity
The role of a valuer is to take instructions from his/her employer and provide a written value as to the capital or rental value on any given basis in respect of an interest in property, with or without any assumptions or qualification.
Valuers are professionals that are bound by standards set by the Malaysian Board of Valuers, Appraisers and Estate Agents and they are required to conduct valuations based on best practices and to act in a manner consonant with the dignity of the profession.
However, each time a valuer issues a valuation report, they are subject to the risk that the valuation of the property given may be MORE than the value of the property in accordance to the Board’s Standard (for the purpose of this article, market value basis of valuation and valuation for financing purposes).
In other words, the employers are entitled to bring the valuer to court for professional negligence in the event that the valuer has overvalued the property and the bank is unable to recover the same upon default by the borrower /finance customer. This may result in the valuer providing a less favorable valuation of the property.
Normally, most banks have their own panel of valuers. All valuations require the exercise of the valuer’s judgment and the valuer has to conduct adequate and relevant research, and perform competent analyses before drawing informed and supportable judgments on the valuation of the property.
In the absence of estimate on market evidence, comparable market data and the nature of the property, the valuer’s judgment is the deciding factor.
The issue arises whereby a different valuer which is appointed by the property owner (or prospective purchaser) valuing the same property may come up with a different and higher valuation even after following the Board’s standard for the same property. If there is a variation of less than 10%, this would be acceptable.
However, the variation in the valuation may differ up to 20-30% and the banks may exercise its discretion to grant loans based on their own panel of valuers and not based on the valuation given by the external valuer. This may result in prospective purchasers getting a lower than expected loan/financing from the bank notwithstanding the creditworthiness.
3. Sales data not up to date
Valuers obtain the most recent transacted sales priced from Jabatan Penilaian Dan Perkhidmatan Harta (JPPH) and make the neccesary adjustments based on the condition of the property and value added from renovation (if any).
JPPH only updates its sale transactions data every three to six months. The valuers have to rely on the sale transaction data which is not up to date with the latest market value. This would also play a factor in a less favorable valuation by the valuer.
4. Change in market conditions
The changes in the market condition may have an impact on the property sector considering the decrease in buyers, economic slowdown and oversupply with the reluctance of the bank to issue loan/finance.
The aforesaid factors affect the current and expected future market condition. This gives rise to erratic market data and the valuers are required to provide realistic level of the market from available erratic data.
All these factors may lead to the breaking of the deal between the property owners and prospective purchasers. Imagine the scenario involving the purchase of a RM1,000,000 property, and the buyer is now required to pay up an additional 10% equivalent of RM100,000 because of an unfavorable valuation.
The prospective purchaser may decide not to proceed with the deal or be put off completely due to the requirement to come up with an additional 10-20% of the purchase price which they might not be prepared to do so initially when they made the deal.
OVERCOMING THE ABOVE
In order to overcome the challenging factors, prospective buyers and property owners must cooperate with each other and with the bank in order to get the maximum value of the loan/financing by taking the following methods:-
i. REQUESTING A SECOND AND EVEN A THIRD OPINION FROM A DIFFERENT VALUER FROM THE BANK’S PANEL.
Most banks have more than a few valuers in their own panel and the prospective buyers and property owners may request for a second or third opinion from a different valuer from the bank’s panel (with undertaking to pay the valuation fees).
If the bank allows for the use of an external valuer, the prospective buyers and property owners should cooperate to share the cost in order to get a more favorable valuation. The second or third opinion may make or break the deal and the bank should also inform of the aforesaid option to loan/finance applicants.
ii. REVALUATION OF THE PROPERTY BY PROPERTY OWNERS
Property owners should do their homework first and appoint their own valuer or rely on the latest valuation report (if any) from the bank if the property is still under finance by the bank. With the valuation report, the property owner can then price the property attractively, but not too far below the market rate to get the best deal for prospective purchasers.
The property owner can then request the prospective purchaser to approach the same bankers who would most likely accept the valuation report and be agreeable to finance the purchase based on more favorable conditions to the prospective purchasers.
This article was first published in the iProperty.com Malaysia December 2016 Magazine. Get your copy from selected news stands or view the magazine online for free at www.iproperty.com.my/magazine.Better yet, order a discounted subscription by putting in your details in the form below!