Property valuations for business loans, explained

In property-secured lending, the valuation is the number everything else depends on. It sets the maximum loan through the loan-to-value ratio, and it can make or break an application. This entry explains the types of valuation, why they tend to come in cautiously and how to prepare.

Who orders the valuation, and why?

The lender does. It instructs a valuer — usually from an approved panel — to assess the property’s value for mortgage security purposes. The report is addressed to the lender and is written to answer one question: if the lender ever had to sell this property to recover the loan, what could it reasonably expect to realise?

That’s different from what an owner hopes the property is worth or what an agent thinks it might fetch in a strong campaign, which is why valuations often come in lower than expected.

What types of valuation are there?

Type	How it’s done	Typical use
Automated valuation (AVM)	Algorithm using sales data	Low LVR, standard residential
Desktop valuation	Valuer reviews data and records without visiting	Lower-risk residential lending
Kerbside (drive-by)	Valuer views the exterior	Some short-term and moderate-LVR loans
Full valuation	Valuer inspects inside and out and reports in detail	Higher LVRs, commercial, rural, unusual properties, larger loans

Lenders choose the type based on the loan size, the LVR and the property. A full valuation costs more and takes longer but may support a higher value, particularly where recent improvements aren’t visible in the data.

What does a valuer consider?

• recent comparable sales nearby;
• land size, zoning and any restrictions;
• condition, age and improvements;
• for commercial property, lease terms, tenant quality and rental income;
• market conditions and how quickly the property could be sold;
• risks such as flooding, bushfire or contamination.

For commercial properties, the lease can matter as much as the building. A long lease to a strong tenant usually supports a higher value than a vacant building.

Why do valuations come in low?

• Conservatism by design. The valuer is protecting the lender, not marketing the property.
• Limited comparables. Unusual properties with few recent similar sales are hard to value confidently.
• Invisible improvements. Desktop and automated valuations can miss renovations.
• Market shifts. Valuations reflect evidence, which lags a rising market.

How can you prepare for a valuation?

1. Give the valuer easy access and a contact who knows the property.
2. List improvements with dates and costs — renovations, new roofs, extensions, fit-outs.
3. Provide leases and rent details for commercial or tenanted property.
4. Suggest comparable sales you know of, with addresses and dates.
5. Tidy up. Condition matters, and first impressions do too.

If the valuation disappoints, options include restructuring the loan, adding security, splitting the need across products or waiting. A specialist can help you work out the best next step.

How does the valuation affect the loan?

It flows straight into the loan-to-value ratio. With the lender’s maximum LVR fixed, every dollar of valuation shortfall reduces the loan available. That’s why it’s worth estimating conservatively yourself before you plan around a number.

Residential vs commercial valuations

Residential valuations rely mainly on comparable sales. Commercial valuations add income: the valuer looks at the lease, the rent, the tenant’s strength and the remaining term, and may value the property on its income as well as on comparable sales. A vacant commercial building, or one with a short lease, is often valued more cautiously. That’s one reason commercial security can support different maximum LVRs from residential security.

Specialised properties — service stations, childcare centres, hotels, farms — may require valuers with specific expertise and take longer. If your security is unusual, a private first mortgage lender or a second mortgage lender familiar with that property type may be the better first call.

How often are properties revalued during a loan?

For short-term loans, usually not at all. For longer facilities, some lenders revalue periodically or when reviewing a facility, and a lower valuation can affect LVR-based covenants. If property values in your area are falling, it’s worth knowing whether your loan contract allows revaluation and what happens if the LVR rises above the agreed level.

Terms used in this entry

• Valuation — an expert opinion of market value. Glossary →
• Valuation shortfall — a lower-than-expected valuation that cuts the loan available. Glossary →
• Commercial security — a shop, office, warehouse or factory used as security. Glossary →
• Residential security — a home or unit used as security. Glossary →

Worked example (illustrative)

Illustrative only. A café owner plans a second-mortgage loan based on her belief that her home is worth $1.3m, citing a neighbour’s recent sale. The lender’s desktop valuation returns $1.15m, reducing her available loan significantly.

She provides the valuer with details of a $120,000 renovation completed last year and three recent sales of renovated homes nearby. The lender orders a full inspection, which comes in at $1.24m — not her figure, but enough to fund most of what she needed. She covers the rest through equipment finance on the café’s new coffee machines.

Want to know what your property could support?

A realistic view of your property’s value is the first step to the right loan. Enquiring takes about 60 seconds and there’s no credit check when you first enquire. We don’t broadcast your details — a real person reviews your property and plans and calls you. Please give your best estimate of the value and any existing loan accurately so we can match you with the right lender first time.

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