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When banks refuse to lend you, or lends you less than what you wanted, what does that mean?

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A banker friend said something which jolted me the other day. He said that many people say banks are not lending but the truth is, the borrowers must also play their part lah. If banks take too high risks, then what will happen to their shareholders? What about their employees? Please do not try to guess which banker friend. I only have around 78 banker friends ok. (maybe more) I share this in a story format and perhaps we see whether it makes sense yeah.

We do have people saying that the banks are not really lending or that they are too stringent. Actually, the banks are also saying that they are not to be blamed because they are still lending. Anyway, if banks do not lend, then what else do you want the banks to do? If they do not lend, their staffs would be worried… would the banks still need so many of them if they are not lending money at all…? Okay, for the question of why must the banks lend ever higher to buyers?

Assuming there are 4 units up for sale in a certain location. Median price is RM500,000 for similar units.

Seller 1 sells his unit at RM500,000 and the buyer asked for 90 percent loan at RM450,000. Bank approved.

Seller 2 has some minor renovations and wanted RM520,000.  Buyer likes it, applied for 90 percent loan at RM468,000. Valuer agrees with the value of RM520,000 due to renovation. Bank approved.

Seller 3’s unit is not well maintained but he wants RM500,000.  Buyer thinks it’s ok and applied for 90 percent loan. Bank’s valuer thinks it’s ok. Bank approved because the median price in the area is RM500,000 anyway.

Seller 4 has EXTENSIVE renovation costing RM100,000. He wants RM550,000. Buyer think it’s value for money! RM500,000 is for units without renovation. This one extensive renovation, yet just priced at RM550,000. He applies for 90 percent loan. Bank approved but only for 85 percent loan. Buyer aborted the deal. Seller is furious that bank did not approve the loan even though valuation showed that the home is worth RM550,000.

If you are the bank, would you also approve the buyer for Seller 4’s unit? At 90% loan for RM550,000? Means buyer only needs to fork out RM55,000? Or you think the bank was right in offering a 85% loan which meant that the buyer needs to fork out RM82,500 instead? By the way, even for the same property, every valuer would have their own expert opinion on the property value.

As for the banks, they may feel that want to err on the side of caution. If it’s RM550,000 valuation at 90% loan, the bank will be lending out RM495,000. If the buyer defaults in the future, the bank will have to put up the property for sale under auction. Do we realistically think that the bank would be able to sell that property at the original price of RM550,000?

I am a licensed auctioneer and not a valuer. I can safely tell you the answer is ‘highly unlikely.’ This is why the banks would definitely try to manage their risks. As for the buyer, it’s good to note that when banks do this, it could actually benefit you as well. Else, you may be paying too much for the property from the banks eyes. That is not good for you nor the bank. Okay, the seller may have to take a cut but please understand that the money we pour into renovation does not mean the valuation of the property goes up by the same number. Happy understanding. (Yes, I bought a bank stock just recently.)

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Next suggested article:   Banks’ profit is a good indicator of the market health too

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