Common Mistakes With Commercial Property Valuations

A commercial property valuation can change how much a lender will let you borrow. Getting ready for it matters just as much as picking the loan.

At TM Finance Group, we often sit down with local business owners who are surprised by a valuation figure. Many of them are looking at a shed, a shopfront or a small industrial unit in or around Trafalgar. This article walks through the mistakes that catch people out, so you can plan with confidence.

What Is a Commercial Property Valuation and Why Does It Matter?

A commercial property valuation is an independent opinion of what a property is worth, and lenders use it to decide how much they will lend against it. Your loan amount is usually calculated as a percentage of the lower of the valuation and the purchase price, known as the commercial LVR.

If the valuation comes in lower than the purchase price, you may need to cover the gap with extra cash or reduce the amount you borrow. Each lender sets its own maximum LVR, and it often varies with the type of property and your deposit. Commercial lending is generally more conservative than home lending, so it pays to ask early.

Mistake One: Assuming the Purchase Price Is the Valuation

The price you agree to pay and the figure a valuer arrives at can be different, and the lender will lend against the lower of the two. A valuer looks at things like comparable sales, the lease in place, the condition of the building and how easily it could be re-let or sold.

Consider a business owner in a regional town who agrees to buy a small warehouse and plans to borrow at a set LVR. The valuer comes back below the contract price. Because the loan is calculated on the valuation, the owner faces a shortfall they had not budgeted for. In a scenario like this, a broker can compare lenders with different LVR limits and valuation approaches, and the owner can also ask the agent whether the price can be revisited. The owner tops up the deposit from business savings, proceeds with a lender suited to the property type, and settles without a last-minute scramble. The lesson is to hold some buffer in your deposit.

Mistake Two: Ignoring How the Property Type and Lease Affect Value

The type of property and the strength of its lease can move a valuation more than most owners expect. A warehouse, an office building, a retail shop and vacant commercial land are each treated differently by lenders, and so are owner-occupied and investment properties.

A tenant on a long lease with a reliable track record can support a stronger valuation than a vacant or short-lease property. If you plan to occupy the building yourself, the lender will look closely at your business income. Our business loans and commercial loans pages explain how we approach these different scenarios.

The trade-off is that specialised buildings can be harder to value and may attract lower lending limits, because fewer buyers exist if the lender ever needs to sell.

Can You Use Your Home as Security Instead?

Yes, some lenders will accept residential property as extra security for a commercial loan, which can sometimes reduce the cash deposit you need. It depends on the lender and on your overall position.

The main risk is that your home is then tied to your business debt. If the business struggles, both properties are exposed. It also means the home may need its own valuation. Before taking this path, think about how comfortable you are with that risk and talk it through with your broker and accountant. If you are weighing up how much you can borrow overall, our borrowing capacity page is a good starting point.

Mistake Three: Choosing a Loan Before Understanding the Structure

Picking a loan on the headline rate alone can leave you with a structure that does not suit the property or your cash flow. Loan structure covers the term, whether the rate is variable or fixed, repayment type and any extra features.

As an example, take a business owner borrowing an illustrative $800,000 at 6.75% p.a. over 25 years, with the balance of the purchase price and costs funded from their own deposit. Principal and interest repayments at that illustrative rate would be roughly $5,527 a month. The same loan at interest-only would be about $4,500 a month, but the balance does not reduce during that period, and repayments rise when principal and interest begin.

In this example the owner chooses principal and interest, because the lower interest-only repayment would have meant carrying the full debt for longer. They use a lender that allows extra repayments, which gives them room to pay down faster when business is strong. The result is steady repayments and a falling balance. Rates and features differ by lender and deposit size, so your own numbers will vary. A loan health check can show whether an existing structure still fits.

How Can You Prepare Before the Valuer Visits?

You can prepare by giving the valuer a clear picture of the property and keeping the building in good order. Valuers form their view from what they can see and what is documented.

Gather lease agreements, rental history, outgoings, and records of any upgrades or maintenance. Tidy the site, fix visible issues and make sure access is straightforward. If the property has been improved since it was last sold, a summary of what was done and when can help the valuer understand it.

It is also worth asking your broker which valuer the lender will use and how the valuation is ordered, as this can vary between lenders. Keep in mind that preparation can support a fair result, but it cannot lift a valuation above what the market evidence supports.

Mistake Four: Forgetting About Refinancing and Future Valuations

A valuation is not a one-off event, because your lender may ask for a new one when you refinance, top up or change the structure. If values have softened, you may have less room than you expected.

That is why we suggest keeping some headroom in your loan and reviewing your arrangements from time to time. If you are thinking about moving lenders, our refinancing page outlines how that process works. Refinancing can carry costs such as exit fees, discharge fees and valuation fees, so it should be compared carefully against any benefit.

If you are in Trafalgar and would like a local conversation, our mortgage broker in Trafalgar page tells you how we support the area. Call one of our team or book an appointment at a time that works for you, and we will help you plan your commercial property purchase with clear eyes.

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