When you’re looking for a new home, you can encounter a lot of different pricing options.

A house might be listed with an asking price, or an agent might be looking for offers over a certain amount. The property might be going to auction, or it might be “by negotiation”.

So how do you know what a property is really worth?

You might have heard the saying that a property is only worth what a buyer is willing to pay.

That idea is a little simplistic, but it reflects a truth of the housing market – it doesn’t matter what a vendor thinks their house is worth, it’s up to a buyer to decide what they’re prepared to pay.

There are also people whose job it is to help provide a sense of what a property is worth. Valuers up and down the country spend their working days assessing properties and estimating what they should be expected to sell for.

Here’s what you need to know about a property’s value, and why it matters.

When is a valuation required?

A valuation by a registered valuer is sometimes required as part of the purchasing process, but not always.

Banks may require a registered valuation when a buyer has a deposit that’s less than 20 percent, or when it’s a private sale.

When a valuation isn’t required for the lending, banks often use a desktop valuation service to get an idea of whether the purchase price being negotiated is about right.

As a buyer, you can still choose to get a valuation done or you can use websites such as OneRoof or Homes.co.nz to get a sense of the value. These tools aren’t scientific and won’t always reflect the unique characteristics of a home, but they can give you a useful ballpark figure.

Why does the value matter?

The value matters to the bank because it’s an indication of what you might be able to resell the property for if you needed to.

That is important because the bank has an interest in the house as security in case you don’t repay the loan. If it’s unlikely to sell for as much as you borrowed, that could create a problem.

How can it affect lending and borrowing power?

The value also matters because banks have to work with loan-to-value rules, which restrict how much lending they can offer to borrowers with less than 20 percent deposit (for owner-occupiers) and 30 percent for investors.

When assessing an application, the bank will typically use the lower figure –  the purchase price or the valuation – to determine the property’s value as part of the lending calculation.

If you need to borrow more than 80 percent of that amount, you might need to pay an extra fee or margin. You may also find that you cannot access the lowest interest rates or get pre-approval for the lending.

What happens if the valuation is different from what you expected?

If you’ve made an offer on a house at a certain price and your valuation comes in lower, you might wonder what to do.

Banks assess your lending on whichever is lower – the valuation or the purchase price. In cases where the valuation comes in lower, you and your adviser may need to tweak your plans.

Some buyers choose to negotiate with the vendor to see if they will accept the lower valuation amount as the new purchase price. Another option may be to apply for an increase in the amount being borrowed, depending on your circumstances and the lender’s criteria.

If you’re not sure how to approach this, your SHARE adviser will be able to help you.

And what about council valuations?

Councils set rates according to the value of each property. Those that are higher in value, in theory, will pay more of the rates burden.

That means, every so often, councils must determine what each property is worth.

This reflects their value at a point in time, but there is often such a delay in releasing the valuations that they are out of date by the time they are shared.

Council valuations might give buyers a very general idea of what properties might have been worth at the time of the assessment, but they generally aren’t a guide to rely on. They are designed for councils to use for rating purposes, not to give an indication of market value.

Once you own your home, you don’t usually need to have further valuations done for lending purposes, although you may need to in some situations if you’re applying for another loan. A big increase could also be a sign that you might be in a position to negotiate away any low-equity premiums you’re paying.

Do you have questions?

If you’re thinking about buying a home and want an expert on your side, get in touch with the team at SHARE. We can answer any questions you may have about the process.

Disclaimer: Please note that the content provided in this article is intended as an overview and as general information only. While care is taken to ensure accuracy and reliability, the information provided is subject to continuous change and may not reflect current developments or address your situation. Before making any decisions based on the information provided in this article, please use your discretion and seek independent guidance.