Who decides what it's worth?

The same house in four different parts of the country for four different prices. But why, and how much should you pay to live in it?

So Your house, today, is worth pounds 68,000 - at least according to your estate agent. Have you ever wondered where that figure comes from? In an effort to understand better, we compared the value of the same house in four different locations, analysing not only what it would cost to buy but also what it would cost to build, including the price of the land.

Our house was designed to be average: three bedrooms, a bathroom, kitchen and living-room - 1,000 square feet in all - and a small garden. The locations in which we placed it were chosen to be similar. The criteria were that they should be in major cities, the sort of area that young families with an average income would choose and could afford to buy: Crouch End in north London, Prestwich in Manchester, Montpelier in Bristol and Broomhill in the West End of Glasgow.

In terms of price, our research backed up what we expected to find. It is true, for example, that it is difficult to generalise about price. Our quotes within any one area varied by as much as pounds 40,000 (see feature below for more on this). Equally predictably, the London property was the most expensive, nearly three times as much as the same house in Manchester or Bristol.

The results became more interesting when we looked at the cost of building our house. Whatever else determines price, it became clear that it bears little relation to the real cost of the house; the cost of the bricks and mortar, the windows, the tiles on the roof, the wiring, the plumbing etc.

It costs more to build in London, but not so much more that it accounts for the high market value of the property once built. This is largely accounted for by land values. Land is rare in all these areas but where a plot did come up for sale it was priced so that when commercial building costs were added, the finished property would cost virtually its market price.

Quotes to build the whole house were roughly the same in all areas except London, where it costs about 33 per cent more (remember: the finished house costs 200 per cent more). This difference became more distinct when we broke down the various elements and particularly when labour was quoted per hour. Electricians in London, for example, universally quoted pounds 45 plus VAT per hour, yet we weren't quoted more than pounds 15 plus VAT per hour by any electrician outside London and the lowest quote, in Bristol, was for less than pounds 10. Quotes for the entire job were, however, much closer.

Where the value of the bricks and mortar does become relevant is in buildings insurance. If you have a survey, an "insured value" figure is included. This equates to the amount it would cost to rebuild if the property was razed to the ground, and doesn't include the value of the land. For this reason, it is usually less than the purchase price, but not always. If you live in a thatched period cottage in a national park and have an obligation to rebuild in style, the insured value would be considerably more. In which case, of course, you would be living in a property worth a lot more than you paid for it - but not really because it wouldn't fetch any more on the market.

Confused? Then read on.

Research by George Wright

When the surveyor says it should cost less

BY ELIZABETH HEATHCOTE

You've found the house of your dreams and you can afford it, just. You offer the asking price because it's becoming a sellers' market and you know there are other people interested. The vendor says "yes". Yippee! You dash to the building society to fix up a mortgage. You're accepted in principal. Hurrah! You subscribe to Elle Decoration and start planning Saturday excursions to Habitat and Ikea.

And then it happens. The lender gets the surveyor's report back and your dreams crumble around you.

The building society is apologetic but firm. There's nothing wrong with the property as such, it's just that, well, it's not worth what you're paying for it. In fact it's worth pounds 10,000 less. Yes, you can still buy it if you really really want to knowing this, but you'll have to increase your deposit. By pounds 10,000.

You can't do that, you're out of cash. So you sit at home and grind your teeth and wonder why. How could this happen? What is value if it's not related to demand? Isn't that the fundamental rule of economics? If you are prepared to pay pounds 60,000 for this house and other people are, too, then it's worth pounds 60,000, isn't it? So how can the building society say it's not?

"You've got to look at who's valuing, and why and for whom," says George Hunter of Hunter and Co, a solicitors and estate agents in Glasgow. "A valuer who is the representative of the lender is concerned with something different to an estate agent. An estate agent is telling the client, the vendor, what they might achieve and maybe they do achieve it. But the valuer is acting for the lender. His concern is what happens if the property is repossessed and has to be sold on a forced-sale basis. He has to be more cautious."

Well perhaps that's right, but it doesn't explain why valuations of the same property by different surveyors can vary, which they can.

"Valuation is an art not a science, that's the key point," says Richard Deeprose, operations director of Ekins, the surveying arm of Woolwich Property Services. "There is no mathematical equation. You can't just say, well there's X-thousand square feet here with a retail price of Y so that's worth Z. There are too many variables.

"You can have two properties next door to each other which are identical in every way except one looks over a park and one a gasworks, and the price is going to be different. Every property is unique.

"Even the legal system recognises this. Courts will accept a variation in valuation from different quotes of between 5 and 10 per cent."

But there must be some rules. What about area?

"It is much more specific than that," says Mr Deeprose. "There is almost a price for every road. You can't generalise more than that."

Despite these difficulties, "comparable evidence" does form the basis of valuations. Assuming, of course, that the property is structurally sound, a surveyor will judge its value by looking at how much other properties nearby, preferably in the same road and condition, have sold for recently. If none have been sold, the surveyor will have to cast the net a little wider and use his or her judgement and knowledge of the local market to fill in the gaps. In Scotland this historical price information is collated and made available to agents and surveyors, but in England and Wales it is protected. Much of a surveyor's knowledge has to come by word of mouth, from contact with local estate agents.

It is ironic, considering the discrepancies, that an estate agent reaches a valuation in much the same way and using the same information as a surveyor. When an estate agent values a property higher than a surveyor it is because they build on the historic information with a more optimistic eye.

Put crudely, if a property sold two months ago for pounds 80,000 and a similar one is for sale today, an estate agent will assess how quickly the market is rising and suggest a price accordingly, say pounds 86,000. For the cautious surveyor, however, the comparable evidence - the value of a similar house only two months ago - is pounds 80,000. This is his proof. If something goes wrong, this is what he'll fall back on and show to the lender. Thus, if he isn't convinced of the rise in the market, he will stick close to this figure. Only when this second house sells for pounds 86,000, according to the surveyor, will the comparable evidence and thus the value rise.

"In a rapidly rising market it can be very difficult for the valuer," says Mr Deeprose. "They mustn't forward guess the market in the way an estate agent can because it may fall short."

Problems arise particularly if a surveyor from outside the area is appointed. Although they will seek comparable evidence from local estate agents, their experience of the market will be less than complete. Inevitably there will be a tendency to compare growth and value with an area they know better - where prices might be rising more slowly or not rising at all.

Whatever the reason for a discrepancy between the valuation and the price offered, it happens, and in some areas with increasing frequency. "It's a problem at the moment," says an estate agent in Islington, north London, where prices are going up fast. "It's a problem in a rising market."

So what do you do if it happens to you?

First, you should commission your own survey as a second opinion (theoretically you should always do this anyway). If that also comes in below the price you've offered then even before you think about raising extra funding, you have to make a judgement. Do you really want to buy a property that is valued at less than you are paying for it? If it is the house of your dreams and you are going to stay 20 years or so, does a few hundred, even a few thousand pounds really matter? And, in a rising market, you have to bear in mind that although the property may cost you pounds 5,000 more than a surveyor thinks it's worth today, it might be worth pounds 10,000 more in three months' time. If you back out now, that's how much you will have to pay to buy a similar house in the area. On the other hand, as anyone who bought in 1988/89 will tell you, if the market turns, this sort of thinking is a one-way ticket into negative equity.

If you definitely want to proceed, you could try negotiating with the surveyor. In truth this is unlikely to work - no surveyor is going to risk his professional credibility by changing a valuation in response to tearful pleas - but if you really believe you have a case, reasoned argument has, occasionally, been known to win the day.

If this fails, you could consider switching to a different lender. A second valuation is extremely unlikely to come in at the same level as the first and it may be higher, particularly if you suspect the reason the first came in low was because the surveyor came from outside the area.

A final alternative is to renegotiate with the vendor. You should definitely try this if the low valuation was the result of faults in the property. If not, a low valuation can still be a valuable tool in getting the price down, particularly in a depressed market. If prices are rising in your area, however, or if there are others interested, don't be surprised if you get a negative response.