Off the plan valuation shortfall: what to do when the bank valuation comes in low

An off the plan valuation shortfall happens when the bank valuation at settlement comes in below the price you agreed in your off the plan contract, often years earlier. The bank lends against the lower figure, not your contract price, so you are left to fund the gap. It is one of the biggest risks of buying off the plan. This guide explains why a valuation shortfall happens, what it means for your finance and settlement, and the practical options to fix or avoid it.

For many buyers, the first sign of trouble is a phone call weeks before settlement. Understanding the risk before you sign is far better than discovering it late.

Key takeaways

• A valuation shortfall is the gap between your contract price and a lower bank valuation at settlement.
• The bank lends based on its own valuation, so a low figure means you must find more cash.
• Off the plan property is exposed because settlement can be years after the plan contract is signed.
• The worst case scenario is being unable to settle and losing your deposit.
• An independent valuation, a second opinion, and a finance clause all help you manage the risk.

What is an off the plan valuation shortfall?

When you buy off the plan, you sign a contract to buy a property that is not yet built, at a price set today. Settlement happens later, once construction is complete.

At settlement, your lender orders a bank valuation of the finished property. A shortfall arises when that valuation is lower than the contract price you locked in.

Because the bank lends against its own valuation rather than the purchase price, the shortfall becomes your problem to solve. The lender will not simply lend more to match your contract.

For home buyers, the sting is that the market value the bank uses is what it believes the apartment is worth today. If that figure sits below your contract price, the equity you expected to hold on day one shrinks, and your first job at settlement is finding the difference.

Why off the plan valuation shortfalls happen

Several forces push the bank valuation below the contract price on an off the plan purchase.

The gap between contract price and settlement

The core issue is time. You agree a contract price at exchange, but the valuation reflects the current market at settlement, which can be two or three years later.

If prices have not risen as expected, the value of the finished property may sit below what you agreed to pay. The contract price is fixed, but the market is not.

A softer market and oversupply of apartments

Markets move. If the market softens between contract and completion, similar properties sell for lower prices, and the valuer uses those recent sales.

Large developments add another problem. When many similar apartments settle at once, the supply can outweigh demand, and resale value and comparable sales both come under pressure.

Construction delays, build quality and sunset clauses

Off the plan property carries build risks that established property does not. Construction delays and supply chain disruptions can push settlement further out, into a different market.

Build quality also matters. If the finished apartment disappoints, or the development feels different to the marketing, the bank values what is actually there. Long delays can also trigger sunset clauses, which let either party exit the plan contract if it is not completed by a set date.

What a valuation shortfall means for your finance

A low valuation reshapes your whole finance position at the worst possible moment.

Reduced borrowing power and finance approval

Your finance approval is usually based on the property being worth the contract price. When the bank values it lower, your borrowing power falls with it.

Any earlier finance approval may only be a formal approval subject to valuation. A low valuation can unwind it, so the loan you counted on shrinks.

A larger deposit, LMI, or funding the gap

To settle, you must cover the difference between the loan and the contract price. That usually means a larger deposit, tipping in more cash, or paying lenders mortgage insurance if your loan to value ratio climbs too high.

None of these are what you planned for, and they arrive with little notice before settlement.

Settlement risk: the worst case scenario

The worst case scenario is being unable to settle at all. You are still legally bound by two contracts of sale terms to complete the purchase.

If you cannot fund the gap and cannot secure finance, you risk defaulting, losing your deposit, and being pursued for the developer's losses on resale. This is why a shortfall is a serious settlement risk, not just an inconvenience.

A worked example

Suppose you sign an off the plan contract at a contract price of $700,000, with a 10% deposit of $70,000 and plans to borrow the rest at an 80% loan to value ratio.

Two years later the apartment is complete, but the bank valuation comes in at $640,000. The bank will lend 80% of $640,000, which is $512,000, not 80% of your contract price.

To settle at $700,000 you now need $188,000 rather than the $140,000 you expected. The $48,000 gap is the valuation shortfall, and you must find it in cash or lose the deal.

What to do when the bank valuation comes in low

A shortfall is stressful, but it is rarely the end of the road. These are the practical options.

• Get an independent valuation for a second opinion. Order your own independent valuation. If it supports a higher figure than the bank valuation, you have evidence to push back.
• Dispute the valuation with evidence. Ask your lender to review the low valuation using recent sales of other similar properties, and any upgrades in the finished apartment.
• Try a different lender. Banks use different valuers and panels. A different lender may value the same property higher, restoring your borrowing power.
• Negotiate with the developer. In a soft market, some developers will negotiate rather than lose the sale, especially if other apartments are unsold.
• Fund the gap with more cash. If the property is right for you, covering the shortfall with extra cash or a guarantor can be worth it to complete the purchase.

Move quickly. The window between a low valuation and settlement is short, so start the moment the figure lands.

How to protect yourself when buying off the plan

The best defence is set up before you sign, not after.

Include a finance clause and do your due diligence

Where possible, make the contract subject to finance with a suitable finance clause, and understand exactly what your approval covers. Do your due diligence on the developer, the build quality and the development's track record.

Read the plan contract carefully, including the sunset clauses, so you know your rights if construction is delayed.

Check capital growth and comparable established property

Before committing, compare the off the plan price against established property and other similar properties in established suburbs nearby. If the plan property is priced well above comparable stock, the future market has to deliver strong capital growth just for the valuation to catch up.

A realistic view of capital growth, rather than the marketing, is your best guide to whether a shortfall is likely.

How Valato helps

Valato provides independent property valuations across Australia, including pre-settlement valuations for off the plan buyers. An independent figure gives you a clear, evidence-based read on what the finished property is really worth.

If your bank valuation comes in low, a Valato report gives you a credible second opinion to dispute it or take to another lender. Compare the valuation options or order a valuation before you settle. For a fuller comparison, see our guide to property valuation vs bank valuation.

The bottom line

An off the plan valuation shortfall is the gap between your fixed contract price and a lower bank valuation at settlement, and it is one of the real risks of buying off the plan. It can force a larger deposit, lenders mortgage insurance, or, at worst, a failed settlement. Know why it happens, build in a finance clause and due diligence before you sign, and get an independent valuation if the bank figure comes in low, and you can manage the risk rather than be caught out by it.

Frequently asked questions

General information only: This article is general in nature and does not take into account your individual circumstances. It should not be relied on as financial, tax or legal advice. Speak with a qualified professional before making decisions about a property purchase or finance.