8 Valuation Risk Factors Lenders Use

February 21, 2017 Sam Saggers

While your personal situation; savings, credit, income, etc. play a part in a lender’s decision, there is another type of risk factor that banks concern themselves with; valuation risks.

Lenders rate each factor on a scale from one to five, then make their finance decision based on both your personal situation and  valuation details of the investment property you’re asking them to lend on.

1. Location

Is the property in a highly desired location? Is it close or far away from amenities?

Obviously the closer a property is to key amenities such as employment, transportation and education, the better the rating the suburb will receive.

2. Environmental

Properties in flooding and bush-fire zones will of course rate as a higher risk compared to properties in different suburbs.

In some cases, properties that are near power lines could pose some concern, however no consensus has been reached about their impact, so it may not even be a concern for your lender.

3. Improvements

Newer homes will typically rate better than older homes, however if a home shows sign of good maintenance and any improvements are finished to a good standard, it can still attain a good rating.

4. Land size

Issues such as zoning, title and access can impact the marketability of a property.

Lenders will want to ensure that each of these factors are satisfactory and that no outstanding problems can arise that will impact their investment.

land size

5. Volatility

Lenders want to know whether or not a suburb could be subject to market volatility.

6. Market

Lenders will often ask valuers about what’s going on in the market and where it appears to be headed.

Bottom line, they want to know if they can expect a reduction in value in the next two to three years.

7. Local economic conditions

Locations where there are very few employers and/or where the employers are in a high turnover industry (e.g. mining) will rate as more of a risk than areas where there are a number of employers in a diverse range of industries.

mining town

8. Market sector

Where does your property lie in terms of saleability?

Lenders want to know that your investment property can be sold (and they can recoup their costs) in a reasonable amount of time should it become necessary.

How to avoid buying a high risk property

So if you’re trying to choose an investment property, how do you avoid buying one that lenders would consider a high risk?

Buy a property that:

  • Is in a quiet location (avoid main roads)
  • Appeals to the majority of the area demographic
  • Is affordable for the majority of the area demographic to buy
  • Has been well maintained
  • Is close to amenities

While there are no guarantees, if you know what valuers look for you’ll be able to choose properties that will return lower risk ratings and that won’t get knocked back by lenders.

If you’re interested in investing in property, register to attend our next Property Investor Night.

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