The curse of 'down valuation' emerges

You've agreed a price but your lender's surveyor says the property is worth less, leaving you to make up the difference. Alessia Horwich reports

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."

Independent Partners; Do you need financial advice on your investments, pension or insurance? Book a free consultation with an independent Financial Adviser at VouchedFor.co.uk

Life and Style
Powdered colors are displayed for sale at a market ahead of the Holi festival in Bhopal, India
techHere's what you need to know about the riotous occasion
Arts and Entertainment
Larry David and Rosie Perez in ‘Fish in the Dark’
theatreReview: Had Fish in the Dark been penned by a civilian it would have barely got a reading, let alone £10m advance sales
News
Details of the self-cleaning coating were published last night in the journal Science
science
News
Approved Food sell products past their sell-by dates at discounted prices
i100
News
Life-changing: Simone de Beauvoir in 1947, two years before she wrote 'The Second Sex', credited as the starting point of second wave feminism
peopleHer seminal feminist polemic, The Second Sex, has been published in short-form to mark International Women's Day
Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Recruitment Genius: Evening Administrator

    £8 per hour: Recruitment Genius: This Pension Specialist was established early...

    Guru Careers: Executive Assistant / PA

    £30 - 35k + Bonus & Benefits: Guru Careers: We are seeking an Executive Assist...

    Ashdown Group: Graduate Application Support Analyst

    £25000 - £30000 per annum + benefits: Ashdown Group: A global leader operating...

    Reach Volunteering: External Finance Trustee Needed!

    Voluntary post, reasonable expenses reimbursed: Reach Volunteering: Would you ...

    Day In a Page

    Homeless Veterans campaign: Donations hit record-breaking £1m target after £300,000 gift from Lloyds Bank

    Homeless Veterans campaign

    Donations hit record-breaking £1m target after huge gift from Lloyds Bank
    Flight MH370 a year on: Lost without a trace – but the search goes on

    Lost without a trace

    But, a year on, the search continues for Flight MH370
    Germany's spymasters left red-faced after thieves break into brand new secret service HQ and steal taps

    Germany's spy HQ springs a leak

    Thieves break into new €1.5bn complex... to steal taps
    International Women's Day 2015: Celebrating the whirlwind wit of Simone de Beauvoir

    Whirlwind wit of Simone de Beauvoir

    Simone de Beauvoir's seminal feminist polemic, 'The Second Sex', has been published in short-form for International Women's Day
    Mark Zuckerberg’s hiring policy might suit him – but it wouldn’t work for me

    Mark Zuckerberg’s hiring policy might suit him – but it wouldn’t work for me

    Why would I want to employ someone I’d be happy to have as my boss, asks Simon Kelner
    Confessions of a planespotter: With three Britons under arrest in the UAE, the perils have never been more apparent

    Confessions of a planespotter

    With three Britons under arrest in the UAE, the perils have never been more apparent. Sam Masters explains the appeal
    Russia's gulag museum 'makes no mention' of Stalin's atrocities

    Russia's gulag museum

    Ministry of Culture-run site 'makes no mention' of Stalin's atrocities
    The big fresh food con: Alarming truth behind the chocolate muffin that won't decay

    The big fresh food con

    Joanna Blythman reveals the alarming truth behind the chocolate muffin that won't decay
    Virginia Ironside was my landlady: What is it like to live with an agony aunt on call 24/7?

    Virginia Ironside was my landlady

    Tim Willis reveals what it's like to live with an agony aunt on call 24/7
    Paris Fashion Week 2015: The wit and wisdom of Manish Arora's exercise in high camp

    Paris Fashion Week 2015

    The wit and wisdom of Manish Arora's exercise in high camp
    8 best workout DVDs

    8 best workout DVDs

    If your 'New Year new you' regime hasn’t lasted beyond February, why not try working out from home?
    Paul Scholes column: I don't believe Jonny Evans was spitting at Papiss Cissé. It was a reflex. But what the Newcastle striker did next was horrible

    Paul Scholes column

    I don't believe Evans was spitting at Cissé. It was a reflex. But what the Newcastle striker did next was horrible
    Miguel Layun interview: From the Azteca to Vicarage Road with a million followers

    From the Azteca to Vicarage Road with a million followers

    Miguel Layun is a star in Mexico where he was criticised for leaving to join Watford. But he says he sees the bigger picture
    Frank Warren column: Amir Khan ready to meet winner of Floyd Mayweather v Manny Pacquiao

    Khan ready to meet winner of Mayweather v Pacquiao

    The Bolton fighter is unlikely to take on Kell Brook with two superstar opponents on the horizon, says Frank Warren
    War with Isis: Iraq's government fights to win back Tikrit from militants - but then what?

    Baghdad fights to win back Tikrit from Isis – but then what?

    Patrick Cockburn reports from Kirkuk on a conflict which sectarianism has made intractable