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
Sunday 22 November 2009
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."
- 2 Tunisia hotel attack: Locals form 'human shield' to protect hotel from gunman Seifeddine Rezgui
- 3 Russian officials ban yoga because it's too much like a religious cult
- 4 German ethics council calls for incest between siblings to be legalised by Government
- 5 Ginger Pride festival to take place next summer, organisers say 'time of bullying gingers is over'
The moment a Queen's Guard soldier lost it and drew his gun at annoying tourist
Greece crisis: The wider lesson is that it’s time to abandon this failed experiment in currencies
'I wish the BBC would stop calling it Islamic State' – David Cameron unleashes frustration at broadcaster
Greece crisis: IMF was pushed around by Angela Merkel and Nicholas Sarkozy – and now it is being humiliated
Pentagon accuses Russia of 'playing with fire' over nuclear threats towards Nato
They are neither a 'state' nor 'Islamic': Why we shouldn't call them Isis, Isil or IS
iJobs Money & Business
£20000 - £25000 per annum + OTE £45K: SThree: SThree were established in 1986....
£40000 - £60000 per annum: Recruitment Genius: A Compliance Manager is require...
£22500 - £27000 per annum + OTE £45K: SThree: Since our inception in 1986, STh...
Negotiable: Recruitment Genius: This extremely successful and well-established...
Day In a Page
Close to the market town of Eye, this four-bedroom detached home offers a double-height living room which takes the place of the original, 19th-century, chapel nave.
Dating back to the 19th century, this four-bedroom home needs modernising. Spanning three storeys, the red-brick house has a fireplace, a small terrace and a cellar.
Just outside of Cambridge, this single-storey home offers three double bedrooms, a living room with vaulted timber ceiling and ladder steps that lead to a mezzanine study area.
This six-bedroom Georgian home is on three floors with open fireplaces, a two oven Aga, an annexe, and cottage gardens with outbuildings and a car barn.
A former coach house, Glebe Farm Stable is now a three-bedroom cottage with a double car barn, an attached office, kennels and an outbuilding that's currently used as a gym.
Located beside an impressive Victorian viaduct, this four-bedroom home has an open-plan living area that is glazed on two sides, with skylights and high ceilings.
A former furniture workshop, this three-bedroom home has high ceilings and painted brick walls, in a village setting only fifteen miles from the coast.
This five-bedroom stone townhouse features a pine staircase and an Inglenuk fireplace, double doors from the lounge give access to an enclosed courtyard.
This five-bedroom, detached home blends traditional and modern design; the sleek kitchen features a gas hob and oven set within an exposed chimney breast.
Moored in Chelsea's Cheyne Walk, this houseboat offers two double bedrooms and a teak deck that's ideal for al-fresco dining.
Surrounded by woodland, this five-bedroom manor house has plenty of outdoor storage space in the form of three converted loose boxes, two smaller outhouses and a woodstore.
This six-bedroom home is set amongst three acres of grounds. Currently a large family home, Clift Hill has potential to make a B&B or countryside retreat, subject to change of use permissions.
This Grade II-listed three-bedroom home is situated on a private road, just a short walk from the sandy beaches of Frinton-on-Sea.
Less than five miles from Malmesbury, this four-bedroom cottage comes with equestrian facilities and gardens that extend to approximately three acres.
Spanning three storeys, this late-Victorian five-bedroom farmhouse is a spacious family home with a modern interior and B&B potential.
With an original church arch, this triplex one-bedroom church conversion has a light, spacious, feel and comes with a secure off-street parking space.
This recently-refurbished three-bedroom home has bi-folding doors that lead out to a decked seating area - ideal for alfresco dining this summer.
Well-located for coastal walks and popular restaurants, this detached four-bedroom home offers views over farmland, to the Solent, the Purbecks and Bournemouth.
If you love high ceilings, school conversions like this one are bang on the money. This two-bedroom flat is minutes from Burgess Park and the foodie haven at Borough Market.
Set within a church conversion in Bermondsey, this two-bedroom maisonette combines existing features, such as original arches and brickwork, with a contemporary finish.
In the pretty market town of Bungay, this grade II-listed Mill House is arranged over four floors, offering four bedrooms and three reception areas.
This four-bedroom Edwardian home offers a combination of original features and contemporary design after a renovation by the current owners.
This four-bedroom home offers a vaulted ceiling in a breakfast room that's ideal for summer entertaining with doors that open to the patio and garden.
On the market for the first time in more than 50 years, this six-bedroom home is a project with vast potential - spread over three floors of living space.
This five-bedroom home comes with a range of outbuildings including a large barn which could be converted into a self-contained granny-flat or rental.
Surrounded by rolling countryside, this four-bedroom barn conversion comes with a self-contained, one-bedroom annexe that could serve as an office or a holiday let.
Located near Harrogate town centre, this five-bedroom Victorian terrace is arranged over three storeys while a current study serves as an optional sixth bedroom.
A ground-floor flat in a country house, located a mile from Sway; this two-bedroom home would make an ideal weekend retreat on the edge of the New Forest.
On a popular residential lane in Caterham on the Hill, this four-bedroom family home offers a secluded garden and a convenient location for local schools and public transport.
Just a short walk from Westerham green, this three-bedroom cottage has a light kitchen with exposed brickwork and double doors that lead to a south-facing garden.
In a prime spot opposite the River Thames, this one-bedroom flat has an 18sq ft reception room with glass doors that open out to a private terrace.
Set in the hills above Llanwrda Village, west Wales, this 18th-century three-bedroom farmhouse has holiday-let potential from a separate barn conversion and annexe.
This charming end-of-terrace townhouse is arranged over three floors, with two double bedrooms and a private courtyard garden located at the rear of the property.
Located in the University area, this semi-detached five-bedroom home is arranged over three floors - there's even a rear garden and off-road parking too.
Only a few minutes' drive from the charming town of Marlow, this two-bedroom home sits on the private riverside estate of Harleyford.
This detached four-bedroom home in Middleyard is arranged over two floors, with features that include a wood-burning stove and bespoke oak staircase.
In a row of eight detached Georgian residences, this five-bedroom home offers views of The Sound, Mount Edgcumbe and Cornwall from its impressive veranda and full-length balcony.
If you love cooking for friends this two-bedroom flat - complete with views of the iconic Battersea Power Station and an open-plan kitchen/dining area - will go down a treat.
Located above Grasmere village, this five-bedroom home is arranged over three floors and offers countryside views across Grasmere Lake towards Silver Howe.
This four-bedroom detached home comes with a double carport, useful workshop, garden and two walkways that offer views of the adjacent countryside.
With space for an equestrian business, a greenhouse for growing your own veg, a wine store and a gym; this five-bedroom home has all the ingredients for a country retreat.
The decked roof terrace of this two-bedroom flat is perfect for summer drinks while large windows and ample storage space make for a light and spacious interior.
Set sail for this four-bedroom farmhouse in Cowes. With five acres of land and an indoor pool, this home oozes character. There is even potential to let a one-bedroom annexe.
Surrounded by approximately 15 acres of grounds, this six-bedroom grade II-listed home has been extensively refurbished yet retains many period features.
This four-bedroom home comes with a two-bedroom cottage and commercial office, with planning to extend, in a stunning courtyard setting.
In a pretty Norfolk village, this four-bedroom family home is surrounded by landscaped gardens, with even a self-contained annex for guests.
A few miles from the seaside at Perranporth, this four-bedroom farmhouse sits amongst nine acres of idyllic grounds - including a lake and two barns used as holiday lets.
This five-bedroom home is arranged over three floors of a converted Victorian hospital, offering spectacular views of the Pentland Hills - only three miles from the city centre.
This four-bedroom detached home comes with grounds that span to approximately 2.5 acres, as well as two large patio areas and a double garage.
This four-bedroom cottage is a Grade II-listed town house, well-located for the thriving market town of Nailsworth.