Post-recession sales 'plagued by conservative property valuations'

Shifting legislation and a fast-changing, post-recession economic environment have introduced new challenges to trying to find a home loan.

This essential step, for first time buyers especially, has been made more complicated by an increased variation in the market value of property and the valuations made by lenders - usually banks.

All properties still undergo valuations by lenders, though flats and townhouses are increasingly being valued without visits, using information the valuers have on hand about complexes, said Marius Crook, Western Cape sales manager for mortgage originator ooba.

'Problems arise if, following a home inspection, a lender doesn't think that the property is worth the sale amount, leading to the rejection of the loan application, even if the buyer qualifies for the bond.'

Lew Geffen, chairman of Lew Geffen Sotheby's International Realty, believes the reason this is happening more frequently is because of the economic situation.

'Having emerged from the recession, markets have very quickly changed from having a surplus of supply to having a shortage of stock in the face of huge demand. This inevitably drives prices up... This is particularly evident in areas of high demand where prices are increasing even faster than the market average, which a recent Absa report puts at 11.9 percent for houses nationwide,' said Geffen.

The problem, said Crook, is that banks are building confidence more slowly than the market is, leading them to be much more cautious in their valuations as they try to minimise their risk.

'It's not a problem that should be around for too long, given South Africa's economic prospects, but it can throw a relatively large spanner in the works of a potential deal,' said Geffen.

If a loan is rejected, there are three possible outcomes. The easiest option is for the buyer to come up with the difference in cash, though this is obviously very difficult for first-time buyers, and it depends on how big the difference is between the bank's valuation and the requested loan.

The next option is for the seller to drop the price to the bank's valuation. Again, this depends on the amount, but it is an unattractive prospect for all but the most desperate of sellers.

Finally, the worst- case scenario is that the deal falls through and the property has to be remarketed. Sellers need to bear in mind that the next potential buyer will probably face the same problems.

Geffen said further complications arise in that there are notable variations between the banks themselves, with some being much more conservative than others.

'This muddies the waters for buyers and sellers as well as originators when choosing from multiple loan offers.

'As bank confidence grows, this problem should occur less frequently but will, for now, still provide occasional hiccups in areas experiencing particularly high growth.'

(Weekend Argus - Saturday Edition)

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