When you start to get embroiled in the daily hum-drum of buying or investing in property, you can’t avoid the glut of property jargon.
Veteran home buyers/investors would be right at home with them but for a first-timer, it can get confusing.
Now, we could go through every single jargon but that would be like overloading your brain with nonsensical words before you are ready for them.
With that in mind, we’re going to teach you what can be considered the most important word to a new buyer – valuation.
So, What Is That?
When you buy or sell, the ‘market value’ is the estimated amount of the property that you and the owner (or vice versa) have agreed upon.
The valuation, however, is done by a firm recognized by the bank you’re taking a loan from.
This takes into account the recently transacted prices from the government’s Valuations and Property Services Department (JPPH).
Valuation firms are registered with the Malaysian Board of Valuers, Appraisers and Estate Agents (BOVAEA).
They’re allowed to conduct valuations of properties based on ‘market evidence’. Some larger banks also have their own in-house valuation units.
It is important to understand that the bank will only loan you 90% of the amount based on the valuation, not the agreed price between seller and buyer.
For example; both parties agree on RM600,000 and the buyer makes an earnest deposit to secure the home. This means with a 90% loan, the seller need only come up with RM60,000.
Here’s A Common Sample Scenario
However, upon visiting a bank for a 90% loan, the actual valuation is found to be RM500,000 so the bank will only cover RM450,000.
As the seller will now have to pay the larger difference established by the negotiated price since the bank’s loan won’t cover it, he can choose to bear it or walk away from the sale.
Doing so will forfeit his deposit as the letter of intent would have already been signed. This situation is certainly not unique and is far more common than it should be.
Ideally, all of this can be avoided if both parties allow for the property to undergo official valuations by the bank before deciding on a price.
You can see here where a property valuation comes into the bank’s loan application process:
- Step 1: The buyer applies for a property loan at their bank of choice
- Step 2: The bank instructs their trusted valuation expert to conduct a valuation of the property
- Step 3: The valuer checks recently transacted values of surrounding properties using information available at JPPH
- Step 4: The valuer conducts a physical inspection of the property
- Step 5: The valuer produces a valuation report for the bank, based on the information obtained in step 3 and 4
- Step 6: The bank approves your loan for 90% of the value reported by the valuer, subject to your financial status
Why Valuations Can Be Different From Market Price
In Malaysia, valuation firms generally make their valuations based on a combination of JPPH data and other relevant factors.
The most common reason for discrepancies between the formal property valuation and the market selling price (the price that the buyer and seller has agreed upon) is the time lag between JPPH data and real time prices.
As the property transaction process can take months to complete, and JPPH needs time to process the information, there can be a three- to six-month lag on this data.
This can result in a significant difference in values, especially in ‘hot areas’ where properties change hands regularly or during suddenly volatile (upwards or downwards) market conditions.
Other factors can affect property valuations too. This includes the following:
- Renovations: Remember that not all types of renovations can have a positive effect on the property value. Generally, only major renovations like permitted extensions, new flooring, plaster ceilings, built-ins, grilles, and alarm or auto-gate systems can help push the value of the property up.
- Location: Things that count towards a ‘good location’ include connectivity to major highways and public transport, and proximity to important facilities like schools, hospitals, shopping and dining, and recreation centres. ‘Bad locations’ also matter; if the property is too near to power stations, electricity lines or sewerage processing plants, this may negatively affect its value.
- Feng shui: A lot of times, feng shui principles are based on quite logical reasoning, which can in turn affect property valuations. For example, properties facing T-junctions and those facing the west are often considered to have ‘bad’ feng shui. Practically speaking, houses at T-junctions are at higher risk of accidents, and those facing the west tend to heat up quickly due to direct afternoon sunlight.
The important thing to note here is that every bank would have their own trusted valuation experts and would most likely provide a varying degree of prices.
Therefore, by ‘shopping’ around, both the seller and buyer are likely to find a valuation they can mutually agree on.
A Common Mistake That People Make
While you can mention that other banks have quoted you a certain amount if it’s higher, be careful not to overly challenge or argue with the bank.
Ultimately, the bank is not obligated to help you and will simply withdraw their loan offer, leaving you with fewer options.
The point of all this is to avoid putting yourself – whether you are seller or buyer – into a situation where negotiating a price is like gambling. There’s a 50/50 chance of the valuation being lower or higher.
Eliminate this variable and swallow your pride by having the valuation done first, after which, if need be, use the mutually accepted valuation as a launching pad for a negotiated amount.
This way at least, both of you will start on equal and fair ground!