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An indicative value is an estimation (or guesstimation) of value on a property based purely on information that can be gathered about the property and the market in which it operates in.
They can also be requested by real estate investors who are evaluating the market value of a property they are intending to buy or sell.
Appraisers can have a wealth of information on their fingertips (provided they are in the office) and can often provide a credible indicative value within minutes of receiving information regarding a house, apartment, building, etc.
When a banker for example, calls a valuation company to get indicative value, information provided include things such as:
- Property address
- Square footage
- Freehold or leasehold with remaining years
- Type of property
Sometimes in order to nudge a valuer to provide a certain level of value, they might also mention the buying price.
This is so that the valuer knows that is the “target” value. The reason for this is for LTV as mentioned previously.
With the information provided by a banker, the valuer merges the information with market information to generate an estimated value.
These market information could include variables like:
- Recent transaction prices in the neighborhood
- Property appreciation and depreciation trends
- Master plans
- Demand and supply
With this indicative value, a banker would be able to proceed with processing of a home loan application based on it.
This helps to determine maximum LTV.
The final value which is generated after a proper appraisal is usually the same as the indicative valuation.
Sometimes an investor can refuse to accept a low level of indicative value even though it does not affect the loan amount he is seeking.
For example, a property investor might be seeking a 40% loan on a $1m property. But the indicative value is only $900,000. While this does not affect the amount of financing the investor would be able to obtain, a lower value listed in the official closing documents can have material repercussions in the future.
This could be that a potential buyer refuses to pay a good price for the property as it was valued at just $900,000 before. Or that a cash out refinancing application is not able to reach a high equity loan quantum as the previous valuation was too low.
For regular home buyers, indicative value seldom causes such stress as they are only viewed as a variable that affects their home purchase for self-occupancy.
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