An inexact science

Formal valuations are often wrong and relying on them can lead to a loss of capital. On the other hand it is vital that lenders have an accurate understanding of the value of the security being offered.

The reason valuations are often wrong is because valuation fees are so low that valuers cannot afford to spend the time needed to do a proper job. When you add to this the fact that valuers are occasionally negligent you have a recipe for potential disaster.

The solution is to never completely rely on a valuation. Instead the successful private mortgage lender uses valuations as a starting point for their own due diligence on the value of the property.

Valuations typically use the comparative sales method. This means the valuer guestimates whether the subject property is inferior or superior to other properties that have recently been sold in the area. The problem is that often the valuer did not have time to visit all the comparable properties he relied on. The astute lender will therefore visit the comparable properties cited by the valuer, as well as others suggested by the local real estate agents, and make their own independent judgment.

Most valuers in Australia have exclusions in their professional indemnity insurance policies that specifically prohibit them from carrying out valuations for private mortgage investors. Accordingly most valuations a private investor receives from a broker will be addressed to a specific bank or banks. This means if the valuation is wrong the valuer cannot be sued by the lender. This makes it all the more important that private lenders do not blindly rely on valuations but rather they must do their own homework.

Lenders who are tempted to loan in areas where it is impractical for them to visit tend to come undone, sooner or later. They will want to blame the broker, the valuer, their solicitor, a real estate agent who they spoke to on the phone, but none of this will stick, either legally or morally. This is because if they lend against a property site-unseen they will have no-one to blame but themselves. It is no different to buying real estate site-unseen.

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Omicron utilises a star-based rating system and display metrics from every loan written through the platform. This ensures that brokers and lenders can be sure the counterparty they are dealing with has the track record of professionalism necessary for success.