Last month, Ah Ming finally saved enough for the down payment and was ready to buy his first property. The owner listed it at 6 million, and after a round of negotiations, both parties agreed on 5.8 million. Ah Ming happily signed the preliminary agreement, paid the deposit, and eagerly anticipated getting a mortgage. However, when the bank's appraisal report came out, the property was only valued at 5.2 million! The difference of 600,000 immediately caused the down payment to jump from the original 1.16 million (20%) to 1.76 million. Ah Ming was stunned: "Why was it undervalued? Was I cheated?"
This scene is not uncommon in the Hong Kong property market. When a property is undervalued, it not only affects the mortgage ratio but can also potentially cause the entire transaction to fall through. As a veteran in the real estate industry with 15 years of experience, I have seen too many buyers suffer losses because they did not understand the valuation mechanism. Today, let's delve into why some units are 'undervalued' and how to avoid these pitfalls.
How Bank Appraisals Work: Basic Concepts You Need to Know
Valuation Does Not Equal Market Price
Many first-time homebuyers think that the transaction price equals the true value of the property. But in the eyes of banks, the appraisal is based on considerations of "risk management." Banks will commission independent surveyors to reference recent transaction records of similar properties in the same area and then consider factors such as the property's condition, age of the building, and orientation to arrive at a "conservative" valuation.
:::tip Expert Tips Bank appraisals are usually 5-10% more conservative than the market price, which is normal. But if the gap exceeds 15%, special attention is needed. :::
Three Major Reference Indicators for Valuation
When conducting property appraisals, banks mainly refer to the following three indicators:
Recent Transaction Records: The transaction prices of the same estate or nearby estates in the past 3-6 months. If transactions in the area are sparse, banks will be more conservative.
Property Quality: Age of the building, floor level, orientation, view, renovation condition, etc. For example, in the same residential estate, a high-floor sea view unit will be valued 10-15% higher than a low-floor mountain view unit.
Market Trends: If the real estate market is in a downturn cycle, banks will reserve a larger safety margin, and valuations will naturally be more conservative.
How much can appraisals differ between different banks?
This is a crucial point that many people overlook: valuations from different banks can vary by 5-10%! This is because each bank uses different surveyor firms and references different databases. Therefore, before applying for a mortgage, it is recommended to inquire about valuations from 3-4 banks at the same time and choose the one with the highest valuation.
:::highlight Insider Tip Large banks (such as HSBC, Bank of China, and Hang Seng) have more comprehensive valuation databases, so their valuations are usually more accurate. However, small and medium-sized banks sometimes provide more aggressive valuations in order to attract customers. :::
5 Common Reasons for 'Underestimating the Price'
Reason 1: The transaction price is far higher than the market price (commonly known as 'price lifting')
This is the most common situation. Some property owners or agents, in order to create the illusion of "appreciation," deliberately report a higher transaction price. For example, the actual transaction price might be 5 million, but it is registered as 5.5 million at the Land Registry. When the bank checks the records and finds that the recent transaction prices for similar units are only 4.8-5 million, it naturally will not appraise based on 5.5 million.
Real Case: In 2023, a unit in a housing estate in Tseung Kwan O had an asking price of 6.5 million HKD and was eventually sold for a 'sky-high' 6.8 million HKD. The buyer was thrilled, thinking they had snagged a bargain, only to find that the bank appraised it at just 6 million HKD. It was later discovered that the seller was actually a relative of the buyer, and the transaction was essentially 'hand-to-hand,' intended solely to create a record of a high sale price.
Reason 2: The property has 'major flaws'
Some properties have inherent structural problems that can seriously affect their valuation:
- Haunted house: Units where unnatural deaths have occurred may have an appraisal value 20-30% lower.
- Illegal construction: Rooftop extensions, windowsill expansions, etc.; banks will require owners to remove them before approving a mortgage.
- Subdivided flat: A unit divided into multiple rooms for rental purposes, considered an illegal alteration.
- Seawater sand building: Older properties that, if tested and found to contain seawater sand, will have a significantly reduced appraisal value.
:::warning Guide to Avoiding Pitfalls Before buying a property, you must do thorough homework; checking records and inspecting the building are both essential. If you find any 'major flaws' in the property, even if the owner is willing to lower the price, you should think carefully before proceeding. :::
Reason 3: Less Popular Housing Estates with Sparse Transactions
Bank appraisals need to refer to recent transaction records. If there have been very few transactions in the past 3-6 months in that estate or area, the bank will lack reference data, and the appraisal will naturally be more conservative. This situation is particularly common in remote areas of the New Territories or in standalone old buildings.
Data Reference: According to data from the Rating and Valuation Department, in 2023 about 15% of housing estates in Hong Kong had fewer than 5 transactions per quarter. The risk of under-valuation in these estates is 2-3 times higher than that of mainstream estates.
Reason 4: The 'Lag Effect' of the Downward Cycle in the Real Estate Market
When the property market starts to decline, banks' valuations react faster than the market price. For example, in a certain area, property prices have dropped by 5% over the past three months, but owners still insist on selling at the price from three months ago. At this point, the bank's valuation has already reflected the latest market conditions, and naturally, it will be 'under-valued'.
Reason 5: Special Transaction Terms
Some sales contracts include special clauses, such as "furniture and appliances included," "parking space included," or "renovations included." These "additional values" are not included in the bank's appraisal but will be reflected in the transaction price. As a result, the transaction price may appear very high, but the bank's appraisal does not include these "gifts."
:::tip Expert Opinion If the sales contract includes terms like 'furniture included,' it is advisable to list the value of the furniture separately to avoid affecting the bank's valuation. For example, if the transaction price is 6 million, and 200,000 is the value of the furniture, the actual property price is 5.8 million. :::
What to Do When the Appraisal Is Too Low? 4 Practical Response Strategies
Strategy 1: Get appraisals from several banks
This is the simplest and most direct method. Valuations from different banks can vary by 5-10%, so by comparing several banks, there is always one that provides a higher valuation. Nowadays, many mortgage referral companies offer free valuation services, allowing you to inquire with multiple banks at once.
Practical Advice: Prepare the property address, floor, and unit number, and inquire about the valuation from at least 4-5 banks. Remember to make the inquiries at the same time, because the property market changes quickly, and the valuation may already be different if a week passes.
Strategy 2: Provide More Proof of Transactions
If you think the bank's valuation is too conservative, you can proactively provide more transaction evidence, such as:
- Recent transaction records of the same estate (can be obtained from real estate websites or agencies)
- Comparison of transaction prices of nearby estates
- Special advantages of the property (such as rare sea view, high floor, large unit, etc.)
Some banks will accept these supplementary materials and readjust the valuation. But be aware, this method is not 100% effective, and the final decision still rests with the bank.
Strategy 3: Increase the Down Payment or Find a Guarantor
If the appraisal is really insufficient and you are very eager to buy this unit, you can consider increasing the down payment. For example, if you originally planned to take out an 80% mortgage (20% down payment), you could change to a 60% mortgage (40% down payment) to reduce the bank's risk.
Another method is to find a financially stable guarantor, such as a parent or spouse. With a guarantor, the bank is more willing to approve the mortgage, and even if the appraisal is insufficient, it can be handled flexibly.
:::success Success case I have a client who bought a unit for 5.5 million, but the bank only valued it at 5 million. He originally only prepared a 1.1 million down payment (20%), but in the end decided to borrow 500,000 from his parents to make up a 1.6 million down payment (about 30%) and successfully got onto the property ladder. Although the down payment increased, the mortgage payments are lower than rent, so in the long run, it's still cost-effective. :::
Strategy 4: Renegotiate with the Owner
If the gap in the valuation is too large and you cannot increase the down payment, the last resort is to renegotiate the price with the owner. After all, the transaction is not complete, and both parties would incur losses. The owner might have to relist the property, and you would have to look for another property. If the owner is eager to cash out, they are usually willing to reduce the price.
Negotiation Skills: Do not immediately ask the owner to reduce the price to the bank appraisal value. You can first propose a 'mutual concession' plan, for example, a transaction price of 5.8 million with a bank appraisal of 5.2 million, leaving a gap of 600,000. You can suggest that both parties share half of the difference, reducing the price by 300,000 to 5.5 million. This way, it is easier for the owner to accept.
How to Avoid 'Underestimating the Value'? 3 Major Preventive Measures Before Buying a Home
Precaution 1: Get an appraisal before buying a property
Many people only realize that the valuation is insufficient after signing a provisional agreement, by which time they are in a difficult situation. A smart approach is to inquire about the valuation from the bank before signing the provisional agreement. Currently, most banks offer online valuation services, and you just need to enter the property address to get the result in a few minutes.
If the appraisal is too far from the owner's asking price, you should carefully consider whether it is worth buying. Remember, an insufficient appraisal is not your problem, but an objective reflection of the market.
Precaution 2: Choose Mainstream Housing Estates with Active Transactions
If you are a first-time homebuyer, it is recommended to choose mainstream housing estates with higher transaction volumes. The valuations of these estates are relatively stable, and banks are more willing to approve high-percentage mortgages. For example, Taikoo Shing on Hong Kong Island, Whampoa Garden in Kowloon, and City One Shatin in the New Territories are all 'blue-chip estates' with active transactions.
Data Support: According to statistics from Midland Realty, among the 20 residential estates with the highest transaction volumes in 2023, cases with underestimated valuations accounted for only 3%. In contrast, in estates with sparse transactions, the proportion of underestimated valuations was as high as 18%.
Precaution 3: Avoid 'High-Risk' Properties
Some properties are naturally prone to being 'underestimated in value,' so you need to pay special attention before buying a property:
- Old buildings over 50 years old: Banks will worry about structural safety, and valuations will be more conservative.
- Village houses or Ding houses: Low transaction volume, insufficient reference data for valuation.
- Industrial buildings or shops: Banks are stricter in valuing non-residential properties.
- Housing estates with negative equity: For estates that have experienced a large amount of negative equity, banks will be particularly cautious.
If you really like these 'high-risk' properties, remember to set aside a larger down payment in case the valuation falls short.
Summary: Do your homework and avoid appraisal traps
"Underestimating property prices" is a common phenomenon in the Hong Kong real estate market, but as long as you understand the underlying reasons and take adequate preventive measures, you can greatly reduce the risk. Remember the following key points:
- Bank valuations are based on risk management and are usually more conservative than market prices
- Valuations from different banks can vary by 5-10%, so it's good to check with several banks for comparison
- Get a valuation before buying a property to avoid discovering issues after signing the contract
- Choose mainstream residential estates with active transactions, as valuations are more stable
- If the valuation is insufficient, you can increase the down payment, find a guarantor, or renegotiate the price
Buying property is a major event in life, so never overlook the valuation issue because of a momentary impulse. As a seasoned professional who has been in the real estate industry for many years, I have seen too many people lose their deposits due to insufficient valuations, and even have to give up their desired units. I hope this article can help you avoid these pitfalls and successfully get on the property ladder!
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