The mood of people in the property market as the year draws to a close can be best described as nervy. No one is quite sure if the uptick in prices seen in the past few months will continue into 2010.
Estate agents apart, probably the jumpiest over the prospects for the market are the lenders. After all, they have billions resting on the bet that price stability is here to stay and that a second catastrophic dip is not on the way.
One symptom of lender caution is called "down valuation", the conscious undervaluing of properties by surveyors in order to ensure that risk to the lenders is kept to a minimum. Unfortunately for buyers, down valuation has the potential to scupper their plans. This is because lenders use the valuation they get from the surveyor they employ to decide precisely how much they will lend. If this valuation is well below the agreed sale price, it can leave the would-be buyer with a massive financial hole to fill or see the sale and possibly whole chain collapse.
Surveyors are basing their valuations on the premise that the buyer would be forced to sell the property tomorrow – a distressed sale, in effect, and therefore a lower valuation. Lenders with repossession on the mind will refuse to lend more than their valuation, leaving the buyer to make up the difference.
There are several reasons why down valuations are stalling transactions now. "I don't think people realise how often lenders actually don't want to lend now," says Trevor Kent, a former president of the National Association of Estate Agents (NAEA) who now runs his own estate agency in Gerrards Cross, Buckinghamshire. "And any excuse they find not to lend they seem to like." Down valuing is another way for lenders to hold back funds and reduce the amount people are borrowing, while making a modest profit from valuation fees. "There are some lenders around who have little intention of lending to certain candidates at all and are pleased when the down valuation comes in. They then turn the borrower away and pocket the valuation fee," says Mr Kent.
Tense lenders make for tense surveyors, who are under pressure to make the correct valuation. If the price isn't right, and the buyer defaults leading to foreclosure and eventual repossession, lenders may take legal action against the surveyor. "It's all really down to fear," says Mr Kent. "The surveyors themselves are fearful because if they overvalue and there is subsequently a problem, they are then open to being sued by the lender." More than a handful of these cases and a surveyor could be looking at a rise in their professional indemnity insurance premiums. "Consequently, you can see the temptation for the surveyor to value as low down as they dare to reduce their responsibility in the future," says Mr Kent.
Valuation also depends on what data are used by the surveyor for comparative analysis. In a moving market, using figures for properties that have already been sold will result in a lower valuation than the more current asking prices. "Estate agents have to look ahead," says Gareth Smith, the president of the NAEA. "We have to value a property knowing that the sale will probably be agreed at some point in the future, so we try to project forward to what the market will be doing at that time. Surveyors work on historical data for comparable figures so they are looking back over their shoulders."
As well as stalling sales, or causing them to collapse all together, down valuation is costly. Where someone looking to buy can walk away to limit losses, options are limited to those remortgaging. "For remortgaging it can cause a real issue particularly as rates on products are so driven by loan to value (LTV)," says David Hollingworth, from mortgage broker London & Country. "Down valuation can push up your LTV which could mean that your product is no longer available. For other products, the tiers between LTV amounts are steep and your interest rate can jump significantly."
In some cases, the surveyor will not down value the property but will advise a lender not to lend on the property until certain issues are resolved. For example, if the property has a hole in the roof, the lender will issue only the full mortgage amount minus the cost of the repairs. The remaining amount will be retained until the repairs have been completed. "The borrower then has to find the shortfall in the loan first to purchase the property," says Mr Kent, "and they've also got to find the same amount again to do the work required in order to receive the retention."
Down valuation is also rife among new-build transactions where buyer incentives can skew valuation. "A brand new property will have better specifications than older properties," says David Dalby, the residential director at the Royal Institution of Chartered Surveyors, "but what a surveyor can't take into account is the new-build premium which consists of the builder incentives included and the lack of chain." Lenders will often request the surveyor to pinpoint market value, but on the basis that the property is second hand, stripping out the premium for new furnishings and ease of exchange. As a result, the value can turn out lower than the loan size the buyer is trying to secure.
"There is only one solution and that is an improving property market," says Mr Kent. "As soon as lenders decide their money is less at risk of deflation and buyer difficulties, then down valuations will happen less."
If you receive a valuation that is lower than you feel fair there is little you can do. Some banks do have procedures in place if you want to contest, but these are usually only for those wanting to remortgage. "It can be pretty tough to contest a valuation and this is only aggravated in a difficult market as it's a challenge to construct a case with examples of other sales that have gone through," says Mr Hollingworth. "Plus, there's no guarantee a new valuation will count in your favour."