Desktop Valuation: When a Lender Will Rely on One

A lender values property it holds as security for one reason: to know what it could recover if the loan had to be repaid from a sale. A desktop figure answers that question cheaply and quickly. It draws on what the records hold: recent sales nearby, the title, the land and floor area, council or planning records, the last sale price, and often aerial or listing images.

What it cannot see is the building itself. Condition, a leaking roof, an extension built without consent, a tenant in a flat that should not exist, ground contamination, a layout that no buyer wants: none of these reaches a database until someone reports it. The method assumes the property is typical of its street. Where it is, the assumption costs little. Where it is not, the figure can be confidently wrong.

Two different things travel under the name. A valuer's desktop is prepared and signed by a qualified valuer working from the evidence at a desk, who applies judgment to the sales and reports a value. An automated valuation model, or AVM, is a statistical estimate generated from a sales database, usually returned with a confidence measure that a lender's policy may require to be high before the figure is accepted. Above both sit the methods that add sight of the property:

Which method a loan gets is set by the lender's own valuation policy in each market. In Australia, APRA's guide to lending secured by residential property calls a full on-site valuation good practice but treats desk-top, kerb-side and automated methods as acceptable in the appropriate context, says the need for specialist valuation rises as collateral risk rises or cover falls, and treats recalculating the LVR on a contemporary valuation at a top-up as sound practice. In the UK, the PRA said in a 2020 Q&A, written when lockdowns stopped inspections, that the valuation requirement in the capital rules does not itself require a physical inspection, so desktop and drive-by valuations may be used where appropriate.

A refrigeration contractor, constructed for this page like every figure in it, has an overdraft secured by a general security agreement over the company and an all-monies mortgage over its director's house, which also secures the director's US$250,000 home loan with the same bank. The bank's policy in this example accepts an AVM for an increase if total lending against the house stays at or under 60% of value and the model's confidence is high; above that, it orders a full valuation and lends up to 80%. Both levels are the example's, not a market norm.

Year one, the overdraft limit rises to US$400,000. The AVM returns US$1,150,000 with high confidence. Year three, the contractor asks for US$700,000 to carry a large contract. The AVM now says US$1,180,000, but the request breaches the desktop limit, so a valuer visits. The garage has been converted into a let flat without building consent, and the roof is near the end of its life. The valuer gives no value to the unconsented flat and reports US$1,020,000.

The AVM was not wrong about a typical house on that street. It was blind to this one. On the full figure, the year-one lending was 63.7% (650,000 ÷ 1,020,000): above the example's desktop limit, but inside the 80% the bank would have lent on a full valuation. That gap between the policy's two levels is what let a desktop carry the smaller request: an error of this size did not change the decision. At US$700,000 it does. The bank can offer US$566,000 against the house, ask for other security, or look again at how much of the contract the overdraft should carry.

The difference is not only the visit. A full valuation is instructed by the lender from its panel, addressed to it, and states its assumptions, the condition found and any matters the lender should know, so the lender can rely on it and, if it is negligent, has someone to hold to account. A valuer's desktop shares the reliance but not the sight. An AVM report is a data product, and what a lender may do with it is set by its contract with the provider.

Nor is a desktop the same as indexing. Revaluing a whole book by a house price index is portfolio monitoring: it moves every property by the area's average and tells the lender nothing about any one house. And a desktop does not change the basis of value: it estimates market value, from which a lender may still work down to a forced-sale value for its own reading.

DEFINED IN ONE PARAGRAPH → · LVR, SECURITY AND COLLATERAL → · THE VALUATION RELIANCE LETTER →

In business lending, desktop figures appear most often on residential security behind a company's borrowing, such as a director's house or a third-party mortgage from a relative, and in the annual review of a file whose security has not changed. Commercial, rural and development property is usually valued in full, because the building, the income it earns or the work still to be done is what the lender is relying on.

When a desktop number reaches a credit paper, the reader asks four things: which method produced it, how old it is, what confidence the model or valuer attached, and whether anything about the property is unusual. The last question is the one the method cannot answer for itself. Where the house is the second way out of a weak business, the file is worth the cost of a visit.

WHAT YOUR BANK HOLDS AS SECURITY → · THIRD-PARTY MORTGAGES →