If you are buying a property with a mortgage, it is likely that the lender will instruct a Surveyor to conduct a Valuation. This process is to verify to the lender that the property is indeed worth the agreed asking price – therefore justifying the lending risk they are taking in lending you the money.
This is a very commonplace practice and the majority of the time, goes by swimmingly (aside from the fee that the buyer probably has to pay – something that often comes as an unwelcome surprise!). But what happens when the Valuation that comes back doesn’t match up to the sale price that has been agreed?
The phrase “down-valuation” is widely used in the property industry to describe the situation where the Valuation is less than the agreed purchase price.
However, the term “down-value” is somewhat misleading – the mortgage lender’s Surveyor sets out to establish the accurate Market Value of a property, not to decide whether a property “values up or down”.
The problem when the Valuation doesn’t match the agreed purchase price is that the lender will only supply the relevant funds up to the price their Valuation Report has provided. Therefore, without access to additional funds, the buyer may not be able to complete the purchase at the agreed price.
It’s accepted that this circumstance will arise from time to time, although there have been reports of it happening more frequently over the past 18 months to 2 years. According to some statistics, the number of “down-valuations” occurring is on the increase – with up to one in five properties being purchased with a mortgage currently being subject to a “down-valuation”.
To understand why this may be, it’s important to understand the property valuation process. As part of producing a property Valuation Report, a RICS Registered Valuer will look at recent comparative sale price data in an area.
Due to the housing market having not been as active over the past 12 – 18 months as it was in the years running up to the Brexit vote, there is less transaction data for Valuers to examine.
A Surveyor can only base his Valuation on the comparable evidence available, and he would need a very good reason to value a property at a level higher than the comparables suggest.
Without a wealth of recent house sale data at their disposal, Valuers are having to rely on older sale prices, which may not be reflective of how the market has moved in an area.
Another reason cited for the increase in down-valuations is vendors and estate agents being slow to adapt to a dip in the market. Whilst we would all like to achieve the maximum price for our property, it is important to be realistic about what a house is worth in the current market conditions. House prices can go down as well as up!
Another point to make is that large lenders, such as banks and building societies, will often instruct the services of a national surveying company. The individual conducting the Valuation may not therefore be local to the area, and may therefore lack the insight on the demand for properties in a particular area. Proximity to schools and local amenities, as well as the prestige associated with certain roads may all push up the price buyers are willing to pay. Where there is a high demand for certain types of property yet a lack of supply – such as larger family houses in close proximity to schools – this again can drastically increase prices in an area. These are all nuances that a local surveyor would be able to factor into a Valuation Report, but a national surveyor may miss.
The first step most people take is to try and renegotiate the sale price in line with the Valuation that has been given. Where there is a large disparity between the Valuation and the agreed price, perhaps amounting to tens of thousands of pounds, this can be particularly difficult. As mentioned above, vendors are often not keen on accepting a reduction in sale price and some will simply refuse to budge, which can lead to sales falling through. Where a vendor has a property lined up that they want to move to, there may be a deal that can be reached.
If you consider the Valuation that comes back from your lender’s Surveyor to be incorrect, you may try to lodge an appeal with the lender. Appeals are unfortunately not common, and simply disagreeing with the Valuation is usually not grounds enough to successfully appeal.
Another option is to approach an alternative lender. The lender will most probably go through the same process of instructing a Valuation, which may or may not result in a more favourable Valuation. Although this can work, it adds significantly to the length of time involved, which can prompt some vendors to put the house back on the market. There is also the likelihood that the second Surveyor will arrive at the same Valuation!
Lastly, you could try to source additional means of funding to meet the gap. However, this needs to be considered very carefully. If a property has been “down-valued”, it effectively means the price you have agreed may be more than what the property is really worth. You may be willing to accept this in order to own the property of your dreams, taking the risk that if you decide to sell the property at a later stage, you may find yourself in a position of negative equity.
All in all, having a property down-valued is not a great position to find yourself in – whether you are the vendor or the buyer. As discussed above, there are several routes to take should you find yourself in this position. To discuss these in the context of your own individual circumstances with one of our RICS Registered Valuers and Chartered Surveyors, please get in touch.