Key Points to Consider During Assessment
A home loan typically has an average repayment period of 30 years and is often the largest financial commitment a person makes in their lifetime.
Ideally, borrowers should carefully compare and evaluate factors such as interest rates, loan terms, early repayment options, and the details of group credit life insurance to choose the most suitable financial institution for their needs.
However, in reality, few borrowers conduct thorough research on loan terms and select a financial institution on their own. According to a survey on home loan users conducted by the Japan Housing Finance Agency, the most common way people learn about home loans is through information provided by housing developers and sales agents.
Therefore, real estate agents are expected to acquire accurate and in-depth knowledge of home loans to ensure they do not disadvantage their clients.
That said, the level of knowledge among sales representatives varies. In fact, according to a 2021 survey conducted by MFS on “Regrets in Choosing a Home Loan,” 62% of respondents took out a home loan with a financial institution recommended by a real estate company. However, 45.7% of them later reported regretting their choice.
The main reasons for their regret included:
- “I should have chosen a financial institution with a lower interest rate.”
- “I should have selected a different type of interest rate.”
- “I simply went along with what the real estate company recommended.”
To prevent such dissatisfaction, sales representatives must have a solid understanding of home loans, from basic principles to advanced knowledge. However, while they may be familiar with fundamental factors such as income, employer attributes, years of employment, existing debt, and repayment burden calculations, there is a challenge in whether they possess accurate knowledge of property collateral evaluation.
While home loan screening primarily focuses on personal creditworthiness, property collateral evaluation is also crucial. Even if a borrower has a high income, they may not receive loan approval for their desired amount if the collateral evaluation is deemed insufficient.
In recent years, rising costs of land, materials, and labor have kept new home prices high. Properties in highly convenient areas remain expensive, making them unaffordable for many people. As a result, demand for second-hand properties, especially renovated ones, has been increasing. However, it is uncertain whether financial institutions can provide appropriate collateral evaluations for older renovated properties.
In reality, when applying for a loan on an older renovated property, borrowers may be told by loan officers:
“Given the property’s age, it may be difficult to secure loan approval for the desired repayment period.”
In such cases, it is crucial to explain the difference between a renovation and a simple remodel, provide evidence of the specific construction work done, and demonstrate its impact. However, this is not always easy.
In particular, online banks that use AI-driven scoring systems may automatically reject applications based solely on the property’s age.
According to the Ministry of Land, Infrastructure, Transport, and Tourism’s “Survey Report on the Actual Conditions of Private Housing Loans,” more than half (58% as of 2023) of financial institutions conduct assessments using scoring methods. These automated scoring systems are rigid and do not take into account the details of renovation work.
However, providing loan officers with specific information that can be included in the credit approval documents can increase the chances of loan approval. Given this, it is essential for us to gain a deeper understanding of financial institutions’ screening criteria and make the best possible recommendations for our clients.
In this discussion, we will outline the basics of property collateral evaluation by financial institutions and explain the key property characteristics that should be considered during the assessment process.
How Important Is Collateral Evaluation?
Some real estate agents claim that “home loan approvals are primarily based on the borrower’s stable repayment ability over the loan term, so property collateral evaluation is not that important.” However, this is a misunderstanding.
While it is true that home loan screenings focus on assessing the borrower’s stable repayment ability—taking into account factors such as income, years of employment, debt-to-income ratio, family structure, and age at loan maturity—collateral evaluation is also a critical factor. Financial institutions consider the likelihood of recovering funds in the event of a loan default and verify whether the property has any legal issues.
The “Survey Report on the Actual Conditions of Private Housing Loans” by the Ministry of Land, Infrastructure, Transport, and Tourism also identifies collateral evaluation as a key factor in loan approval decisions.
However, the key issue is whether collateral evaluations are being conducted appropriately.
Financial institutions must ensure the soundness of their loan assets by conducting proper evaluations based on actual market prices while also considering the liquidity of each property. However, according to the “Status of Housing Loan Financing” report by the Japanese Bankers Association, there are challenges in assessing second-hand and renovated properties.
The following reasons have been cited for these difficulties:
- Proper evaluation of performance and maintenance
It is understood that the statutory useful life (22 years for wooden structures, 47 years for typical condominiums) can vary greatly depending on the quality, performance, and maintenance conditions at the time of construction. However, if specific judgment criteria are not provided, the evaluation tends to be conservative compared to new properties. - No clear pricing indicators for properties that have undergone renovations or remodeling
It is unclear to what extent investment in renovations or remodeling reflects actual market value. Additionally, the quality and performance can vary significantly depending on the scope of the work and the skills of the contractor, making it difficult to assess. There are also unscrupulous contractors in the industry, so the cost of the renovation doesn’t always guarantee improved quality.
Due to these challenges, although collateral evaluation is important, financial institutions tend to take a conservative approach when evaluating second-hand properties.
Many financial institutions use a formula of “useful life set by the bank minus years since construction” to determine the loan period.
However, it would not be reasonable to apply the loan period determined by this formula to a 25-year-old wooden house that has been renovated to meet ZEH standards for energy efficiency, has seismic performance exceeding that of a typical new property (seismic grade 2), and has received performance evaluations and purchased defect insurance.
This is because the value of the building is not solely determined by its age but is greatly influenced by its performance and maintenance condition.
To obtain an appropriate collateral evaluation, it is important to provide reliable evidence.
and managed. However, due to various challenges, this remains difficult in practice.
Therefore, real estate agents need to make efforts to ensure that financial institutions can conduct accurate collateral evaluations.
The key to achieving this is providing reliable evidence.
For long-term excellent homes, the building certificate serves as evidence; for ZEH homes, the BELS evaluation certificate; and for others, documents such as low-carbon building certification or performance improvement plan certification notices can serve as evidence.
Additionally, if renovation work has been done, it is crucial to provide details of the work, costs, before-and-after photos, inspection reports after the work is completed, performance evaluation reports, energy performance labels, and maintenance history information.
By providing publicly recognized evidence, the likelihood of an appropriate collateral evaluation increases.
This information also gives buyers peace of mind.
Traditionally, when receiving a request for property appraisal, real estate agents would first gather documents such as the property registry, land measurement diagrams, building plans, transaction examples, and information on existing properties in circulation. They would then visit the property to check the condition of the interior, equipment, and whether renovations had been made, and use the sales comparison approach to calculate the appraisal value. In other words, the concept of a “simplified appraisal” was not very common at that time.
However, today, using appraisal systems has become standard practice. By inputting necessary information, it is possible to quickly collect public land prices (publicly announced prices and street values), surrounding properties in circulation, and transaction examples, and logically calculate the appraisal value. If the input information is correct, there is little variation in the appraisal value, regardless of the system used.
However, appraisal systems do not reflect property-specific factors such as equipment replacements, renovation history, building grade at the time of construction, or differences in building techniques that affect quality and performance.
Therefore, to account for property characteristics, it is necessary to manually input additional information.
To properly evaluate these factors, specialized knowledge of long-term excellent housing certification systems or energy-efficient renovation work is indispensable.
In practice, exchanges like the following often occur between customers and real estate agents:
“A few years ago, a major insulation renovation was done, and a performance evaluation was received, so please reflect that in the appraisal value.”
“I will do my best, but even if a major renovation has been carried out, financial institutions are unlikely to significantly raise the collateral evaluation. The same goes for potential buyers, so unfortunately, it’s difficult to greatly increase the appraisal value.”
At first glance, the appraiser’s response seems valid, but is it really true? Due to the lack of established methods for appropriate evaluations, cases like this are not uncommon.
When financial institutions evaluate a property’s collateral value, they calculate the appraisal value by multiplying the property’s market price by the financial institution’s collateral evaluation ratio (usually around 70% of the market price, and around 60% in some areas). The exact collateral evaluation ratio varies by financial institution, but many institutions use systems that allow easy calculation of collateral evaluation, similar to the appraisal systems used by real estate agents.
When financial institutions evaluate the collateral value of a residential property, they do not visit the site to check the property. Therefore, differences in judgment criteria regarding the property’s unique market advantages (such as renovation quality and condition of equipment) lead to a gap between the appraisal value and the collateral evaluation. This gap is inevitable. To bridge this gap, it is essential to provide evidence that convinces the financial institution.
It is important to proactively provide information that can raise the collateral evaluation. Especially when applying for a loan for investment properties, the quality and quantity of evidence provided can significantly impact the approval process.
Challenges Faced by Real Estate Agents
Currently, the new construction market is becoming increasingly polarized. High-priced properties with excellent facilities in convenient locations are seeing strong sales, while properties in areas far from major transportation hubs and with less-than-ideal living conditions are struggling to sell. Even after reducing prices, these properties continue to face slow sales.
As a result, the number of new housing starts in 2023 (Reiwa 5) decreased for the second consecutive year, with a total of 820,000 units. Breaking down the figures, while rental and condominium sales have remained stable, the significant decrease in detached houses has had a major impact on the overall numbers.
The reasons for this include the impact of rising material costs and labor costs, which have caused condominium prices to remain high, as well as the effects of population decline. According to estimates by the Ministry of Health, Labor, and Welfare, Japan’s total population is expected to fall below 90 million by 2070.
Given these circumstances, it is forecasted that the number of new housing starts will continue to decrease. On the other hand, the number of transactions in the existing housing market is expected to increase. One reason for this is that repeated legal reforms have gradually alleviated consumer concerns during the purchase of existing homes.
However, there are still many challenges when it comes to the transparency of transactions. One of these challenges is the proper evaluation of properties.
For example, when real estate appraisers evaluate properties, they follow the “Price Investigation Guidelines” and the “Real Estate Appraisal Standards.” According to the “Real Estate Appraisal Standards,” it is recognized that individual factors significantly impact the price, which is why the observation cost method has been re-evaluated.
On the other hand, while real estate agents use the sales comparison approach to evaluate properties, it is necessary to reassess whether they are properly reflecting the property’s advantages based on factors such as the building grade, the equipment used, and the maintenance condition.
There may be an argument that “buyers will make decisions based on the price after comparing similar properties nearby, so if the property is appraised too highly, it won’t sell.” However, as the existing home market grows, in order to achieve more transparent transactions across the industry, real estate agents need to conduct proper property evaluations and have the knowledge to accurately explain the property’s features.
This also includes the role of providing the necessary evidence for financial institutions to conduct proper collateral assessments.
By preparing evidence that can convince both the customer and the financial institution, and by having the knowledge to explain it in detail, real estate agents can clarify the unique evaluation criteria for each property and enable more transparent transactions. This will contribute to the activation of transactions in the existing home market across the industry, as well as improve their company’s sales.
Summary
Providing good properties at a lower price is one of the most reliable sales methods. If a property is priced lower compared to similar properties in the area, the price itself becomes an advantage and its appeal increases, making it easier to sell without much effort. However, real estate mediation is about bridging the gap between the seller and the buyer, much like a matchmaker.
It is strictly prohibited to favor one party while neglecting the other.
For example, if a custom-built home with top-level specifications such as an insulation grade of 7 and seismic grade of 3, and certified as a long-term excellent home, is appraised the same as a general property based solely on the number of years since construction, the agent may be criticized by the client as “an unknowledgeable salesperson.”
In that case, even if the agent says, “Financial institutions and potential buyers cannot appropriately assess the value of the property, so it cannot be reflected in the price,” the client may respond, “Isn’t it your job to convince them?”
Indeed, financial institutions must strictly assess collateral in order to ensure recovery chances in the event of a default. However, due to the sluggish new construction market, many banks want to increase their lending for existing properties, and they also want to properly conduct individual evaluations based on differences in performance and other factors.
However, if the necessary information is not provided, they cannot assess the property. One loan officer lamented, “If you tell me verbally that renovation work was done, I need specifics about which contractor did what work, and how the performance, durability, and other factors were improved as a result. Without this concrete evidence, I cannot make a judgment.”
Real estate agents need to prepare evidence to ensure that financial institutions can conduct proper collateral assessments, and they must acquire the knowledge to accurately explain this to clients.
Original Article: 【物件担保評価の基本と築年数の影響】査定時に考慮したいポイント
For additional information or any questions please contact us here
Email: info@remax-apex.com