The Mystery of “Down” Valuations
It’s no secret that the last two years, since the first lockdown ended in June 2020, has seen the most astounding growth in the property market, across many sectors. Admittedly there is some hesitancy with the office and retail sectors, but residential and industrial properties have been in short supply.
As a valuer I keep hearing the expression “down valuation” in the press and social media, so I’m going to look at this subject and explain what it means.
What is a Down Valuation?
In simple terms a down valuation is where a lender’s valuer provides a valuation figure that is less than the agreed purchase price, or for a re-mortgage, lower than the borrower’s expectations of value.
Having done this job for more years than I care to remember, it’s still surprising that people think it’s more straightforward than it is. Perhaps it’s worth explaining why differences occur.
Estate Agents’ Valuations
When an estate agent provides a “valuation”, it’s not really a valuation, it’s a market appraisal. The agent has no duty to be correct and their aim is to secure an instruction and (hopefully) achieve as high a price as possible for the vendor. There is no obligation for values provided to be supported by any evidence or to consider all the nuances that actually give rise to a property’s value.
In fairness to estate agents, a good one should have a rounded property knowledge and be able to explain their figures. However, there is no requirement for agents to be experienced, qualified or regulated. In our local area a new agent has recently set up with the breath taking USP of no previous experience (bringing know-how from other business sectors, apparently!).
Lenders’ Valuers
The situation for valuers is somewhat different. To do a secured lending valuation there is a requirement for the valuer to be a Chartered Surveyor and a Registered Valuer. Most lenders require a minimum level of sector experience (e.g. five years). Valuers must do at least 20 hours a year of CPD (continuing professional development) and, crucially, must carry professional indemnity (PI) insurance.
RICS Red Book
A valuation for secured lending has to meet the requirements of the RICS (Royal Institution of Chartered Surveyors) Red Book. This sets out the protocols that a valuer must follow in providing a valuation. If a valuer fails to meet those requirements, then it is possible that their PI cover will not meet any claim.
The Red Book requires valuers to have evidence to support their valuation figures and there should be a methodology as to how the valuer arrived at their figure. In the case of short form (tick box) valuations the methodology may not be within the report, but it should be on the valuer’s file. There must be a clear connection between the evidence and the valuation.
Inspections and Information
The valuer will need to undertake an inspection of the property and take measurements of all rooms and outbuildings. If the inspection is limited in some way (e.g. rooms are locked) then the valuer needs to declare this in their report and it may impact on value. A valuation inspection is not a detailed survey; the valuer will not be doing intrusive investigations and will not move furniture or carpets. The valuer should take photographs – some lenders require a minimum number of photographs to be include in their reports. Besides the lenders’ requirements, photographs are essential to the valuer when writing up their report back at the office.
As for information, much is now available on line, such as planning consents, energy performance certificates (EPCs) and flood risk maps. However, there may well be other documents that are not available such as lease and tenancies and access agreements. The valuer will need to see all relevant paperwork.
Leases
Where a property is subject to a lease the valuer needs to take account of this. If a property is being sold with vacant possession, they may need to consider how (and when) the tenant will be vacating. If a property is being sold as an investment, then the terms of the lease are relevant to the valuation. The term (i.e. length of lease), rent, rent review clauses and repairing obligations are just a few of the factors that impact value. For commercial leases there is no standard, each lease needs to be reviewed independently.
Often home written leases are poorly drafted. We have recently seen shops let on Assured Shorthold Agreements (which are for houses) and any properties let on “licences” when they are clearly not. We also see leases between related parties where the terms are not truly commercial and may not stand up to the market place.
If the terms of the lease are weak then the valuation will be lower than if terms were improved.
Planning Consent
It is a basic requirement that property has the appropriate planning consent and the valuer should confirm this. All to often we are told that extensions, or even entire buildings, are “permitted development”. Quite often this is not the case. Part of the Oakwood business is dealing with farm valuations and there are frequently buildings or land let where there is no planning (and often no leases – see above!).
Evidence
The valuer will obtain evidence from a variety of sources. Most subscribe to online databases (such as CoStar), but they will also contact local sales agents to get up to date information.
The most acceptable data is completed sales transactions as we know that these have involved a willing seller, a willing buyer and often a willing lender. Sales agreed can inform the valuer as to market trends, but we place less reliance on these as they may fall through (perhaps for reason noted above). It’s the same with asking prices; we can use these to gauge trends but cannot fully rely on them.
Evidence has to be as up to date as possible, no more than 12 months old is ideal, but sometimes will be longed simply because of a shortage of sales, especially for unusual properties.
We have had borrowers provide us with “evidence” that consists of press reports and also sales from several years ago – remember that the pandemic changed the property market substantially so dated sales are often not helpful.
And finally
The valuer is not out to catch borrowers out, but their duty is to the lender. They need to understand the true extent of the property in the event of it being repossessed – does it represent good value. Lenders need to know the issues they face and the valuer has a duty to report them honestly.
It is perhaps also worth commenting on sustainability, which is becoming a hot topic with lenders. Many lenders now set criteria for minimum EPC bands as part of their own carbon footprint. Where a property has a very low EPC, and especially where moving it higher would be difficult, then lenders may actually decline lending, or set more onerous terms.
If you are borrowing money and require a valuation then I suggest you take these basic steps:
Make sure the valuer has full access to the property
Ensure that leases are all properly drafted and completed
Understand the correct planning situation
Provide the valuer with relevant documents
Be realistic about evidence and values
If you think the valuer has made a mistake then get it checked out – they may not be able to talk to you directly for contractual reasons, but the bank should raise queries on your behalf. In particular check they have not missed part of the property and have fully understood the extent of what is being valued – with substantial properties or those with complex titles occasionally parts can be missed. The valuer should be able to provide details of the evidence they have used (if not already in the report) and an analysis leading to value.
We live in uncertain times as the property market adjusts to a post pandemic landscape – working from home, housing shortage, online retailing, decline in town centres, move away from office working – so values may not be what property owners have in mind.
