John Fitzgerald talks about Bank Valuation on Property and Loan Value Ratio
I’ve written more about bank valuations on property and value, and even banks over the last 20, 25 years, than just about any subject. And to be honest, it is the one thing that I have to coach people on and say, look, if you’re gonna build wealth using the principle of compound growth, you need leverage. And to get the maximum leverage, you have to recognise that you’re dealing with banks, and banks engage valuers. They don’t engage valuers on your behalf, they engage valuers on their behalf. And the banks are there to do one thing, protect their interests. In fact, I was interested to hear the head of one of the big banks recently at one of their AGMs talk about their priorities. Priority number one is to their shareholders. Priority number two is to their deposit holders, people with deposits, and priority number three is to their clients. Now, you’re the client in this regard. So they’re gonna limit their risk.
Now, what does that mean? It means that they’ll change their loan value ratios from time to time, and they will certainly change their instructions to their bank valuations. So some banks, they will say to their valuers, we want you to value on the basis of a fire sale, that is, if the property goes mortgagee in possession, we have to sell that and get our money within 90 days. So the valuer’s gonna value it, and then discount the valuation by 10%. And I said in seven steps in early editions to seven steps, I said, look, I always insist on getting a bank valuation, and I tell all of our clients to get a bank valuation. But I also said that if it’s within five or even 10%, I don’t sweat it too much. And I deal with all the main banks, or the main four banks, and I always have issues, number one, of getting valuations, and number two, very rarely do I get valuations at the market value. Because they value on the basis of mortgage security basis. That is, if they need to sell it. It’s different to market value.
We have to realise though that all we’re looking to do is get the best leverage we possibly can, whatever that is from the best bank we possibly can, remembering that it’s not just the one asset we wanna buy, it’s wanna use that to buy the next, the next, the next asset. It’s not about getting the highest valuation, it’s about getting the best loan value ratio. And you could see, some banks who say, yes, they lend 95%, but they do a really tough valuation and the real loan value ratio is probably only 70, 75%. And you get other banks who are happy to do 80, 85% of a real market value. So there’s where the numbers can be a little bit construed. I don’t worry or get too stressed about it, I just accept yes, that’s what happens. And guys, I’m the same as you, my bank values all of my property on a regular of every couple of years because I have commercial loans and residential loans, and guess what, I always have a disagreement with them over the valuations, and it’s always a compromise, and I’m never happy because they never use market value.
You know what my bank manager says to me? “John, you’re right. “We don’t value at market value. “We value you for mortgage security purposes.” And that’s the truth of valuations. How does it play today though? It plays today because we’ve got the lowest interest rates and the banks are now starting to get a little bit, I should say, conservative with their valuation. So they’re reducing their loan valuations, their loan value ratios, by giving tougher instructions to the bank. Don’t sweat that too much. Take the opportunity. The other point I’d say to you is, do your own homework and give that homework to the valuer. So if they go into a particular area, here’s another interesting fact. When they go into an older area, they’ll often value new houses at the same as older houses. So the valuers don’t see the difference between new and old. So they’re valuing one of our houses that might be new, or two, or three, or five years old, and comparing it to houses 30, 40 years old that, to me, would have zero value because of its maintenance et cetera, et cetera. Valuer doesn’t see the difference with that. You’ve gotta peel them back to the land value and then the improvements on top of the land, and get actual comparable land sales.
The valuers are people, and they’re happy to accept data, and I often give them the data, comparable land sales, and comparable house sales. And when we come down to comparable land sales, what is the comparable rate per square metre, and then what is the house worth per square metre. And if it’s 40 years old, the answer’s zero, to me, because essentially, the cost of upkeep, the cost of maintaining it, the house is worth zero or very very little.