A few weeks ago in the show, valuer Jonathan Millar, from JDMA Valuers, told us that there are 8 risk factors that will influence a valuer’s report to a bank when they value a property. Derek wants to know what they are so in today’s show Jonathan is back to tell us.
Kevin: A few weeks ago in the show, I had as our special guest, Jonathan Millar from JDMA Valuers. We were talking then about the banks, and during the interview, Jonathan mentioned that the banks have eight risk factors that they include in a report. I received an e-mail from Derek wanting to know what those eight were. We’re about to find out for you, Derek, because Jonathan is back on the line.
Jonathan: Hi, Kevin. How are you?
Kevin: Good. Can you help Derek? What are those eight factors?
Jonathan: Yes, no worries at all. There are eight risk ratings that they use to make their lending decision, and basically, they rate on a scale between one to five. It might be the one is equal to a low risk rating and obviously five is equivalent to a high risk rating.
The first risk rating that they want you to comment on as a valuer is referenced through to location or neighborhood. That just means that is it a sought-after area, is it a well-known suburb, or is it a suburb that’s a big distance from schooling and other things and therefore, it might be high risk rating?
We all get to understand there are some areas that tend to be preferred more than others and some become, obviously, a lot more marketable and possibly even easier to sell a house there. That’s one of the ones. If it’s in a non-sought-after area, obviously the risk rating could be higher.
The next one is relative to land. That would be including the zoning, and the title, and the access. Obviously, with zoning, a residential house can sometimes – once in a blue moon – be on a property that has an industrial zoning. Obviously, that may become less desirable because you might be near industrial property.
Access to the property is obviously very important. If it’s very narrow or, for some reason, it’s off a busy road, then obviously your risk rating can be a little bit higher. All these risk ratings are obviously, as I said, just to help them on how much of their lending they’re going to provide to that client.
The next one is relative to environmental issues. Obviously, that would be quite well known in the fact that if a property was to flood or had a high risk of flood, it may have a high risk rating, especially if the property has had some damage from flooding. Bush fire risk is probably the other most important one. The same could also being near power lines. Sometimes that is a slight concern for some but that one’s a bit debatable. We might leave that for another time.
The fourth one is improvement. Relative to improvements, obviously, if it’s a new home, brand-new and all the landscaping and secondary improvements have been done – such as the driveway, pool, or whatever else might be there – the risk rating might be a one. If the house has just been well maintained and is a few years old, possibly a two.
But if it’s part renovated and the kitchen or bathroom is missing, then obviously that house is much less marketable if the bank had to sell it within a few months’ time. Therefore, that risk rating would be a three or a four. Really, you’re just drawing the attention of that fact to the bank by that high risk rating.
Kevin: Got you.
Jonathan: Other things might be that yes, there is a wall missing or something strange and the person hasn’t told the bank about that. Obviously, that’s significantly going to impact on being able to sell that property.
Kevin: Of course, yes.
Jonathan: The fifth one is regarding recent market direction. This is a little bit tricky. They sometimes ask the valuer to look into what’s happening in the market into the near future, nearly. But it can be quite easy. At the moment, there are a lot of areas where the market is quite positive and therefore, recent market direction, properties are moving in more of a positive direction than, say, a declining market, so the rates would be a lot lower. That one is fairly straightforward.
The sixth one, market volatility. This is relative to has the market got a high likelihood of volatility. Your inner city unit market, once in a blue moon, might have a higher or above average risk rating, because if your unit has to be sold when, say, market conditions change, there all of a sudden, might be a lot of units available to sell in the city and therefore, you might not get your top price for that. That can just be a bit of a high risk rating in general for units.
Then we also have the seventh one being the local economy impact. This is relative really more so in areas such as mining towns where there might be a change in the likelihood of work at the mines, so therefore, if that obviously is spoken about in the market, it’s going to be a much higher risk and obviously properties may become harder to sell.
Lastly is market segment condition. I guess it’s where the selling period of a property or a particular segment of property… Say you might have a unique, very large house on a large property within the inner Brisbane area. It might take a bit longer to sell, and unless the market is really flying, it just might be a bit of a tougher one for the bank to sell within a reasonable timeframe.
They just like to know, for each different segment, what’s the likelihood of a reasonable selling period, which might be six weeks or if for some reason that property is quite unique, that it would need to extend beyond that, and obviously that, therefore, starts to impact on the decision-making of the bank in their lending process.
Kevin: I can see there, Jonathan, how a lot of those issues could be fairly subjective, I guess, from the valuer’s point of view and would, I imagine, therefore heavily influence the bank’s lending decisions.
Jonathan: Yes, certainly, and it might be that the credit risk area decides to lend out 75% instead of 80% just to obviously insure it from their side. But look, it is subjective. Really, the process is to highlight a significant risk to the bank, and if it’s just a moderate risk than it’s only a one or two risk rating and obviously, quite a few of those in a report is not going to be a big concern to the bank and there should be no issues in the lending process.
Kevin: Jonathan, great talking to you, mate. Jonathan Millar from JDMA Valuers. There you go, Derek, that is the answer to your question.
Thanks for your time, Jonathan.
Jonathan: No worries, Kevin. Thank you.