How to get the best property valuation
Guest post by Damien Fogg MRICS, property blogger, podcaster & active property investor.
Over to Damien:
Happy New Year The Property Voice readers!
It’s the start of a new year and inevitably thoughts go to our goals, hopes and dreams for the year, but one challenge that virtually all property investors will at some point come up against is a property valuation marked down by a surveyor on one of their properties.
This could be when you’re looking to buy a property and you’ve already agreed what you thought was a good price, or when refinancing a property in your portfolio, or perhaps when you are selling a property on and the other side produce a property valuation lower than you had hoped.
So let’s take a quick look at what can be done to give yourself the best chance of getting the property valuation you are hoping for.
First off – who are surveyors and why are they ruining your plans?
Surveyors, or members of the Royal Institution of Chartered Surveyors to give them their full title, are professionals instructed by a party to establish the market value of a property. The market value is described in the RICS Red Book (the valuation bible) as;
“The estimated amount for which an asset or liability should exchange on the valuation date between a willing buyer and a willing seller in an arm’s length transaction after proper marketing and where the parties had each acted knowledgeably, prudently and without compulsion.”
Surveyors will therefore make these assumptions when valuing the asset.
Generally when a surveyor is messing up your plans, it is because they believe the value of your asset to be less than you do. Often the surveyor is acting on behalf of another party, for example the person you are selling to, or a mortgage lender, in both cases the instructing party wants the property valuation to be realistic but with a preference for pessimism rather than optimism.
How many of us have used surveys to negotiate down the price of a property? If you were lending money against a property, wouldn’t you want to be confident that the money you lent against the property was easily covered by the property valuation?
So it is with this background of information that we can start to see where the surveyor is starting their valuation process.
Methods of valuing property
There are five methods of property valuation that are generally recognised globally.
1. Comparative method
- Comparing the property with similar properties.
- For most residential investors this may be the only method you will experience.
2. Investment method
- Uses discounted cash flow techniques to establish value through the incoming producing nature of the asset.
- This method is often used in commercial valuations, as well as HMO valuations.
3. Residual method
- This is used to establish the valuation of development sites.
- Uses the cost of developing the land and the final gross development value to assign a value for the land.
4. Profits method
- Used more as a valuation for a business premises, such as hotels and cinemas.
5. Replacement cost method
- This is generally reserved for buildings with little comparable evidence, such as churches, schools, etc.
- The cost of the land and the cost to rebuild the structure are the basis of the valuation.
For some property developers there will be a need to understand the Residual method of property valuation. For commercial investors and HMO investors, the Investment method will be applicable. For every other type of property investor, simply understanding the Comparative method will suffice.
How to get the best property valuation you can
The surveyor is only human, that’s the first thing to keep in mind. They will go on the evidence before them when they carry out their desktop valuation, and then when they attend site. So how can you ensure the best possible valuation?
- Meet them on site
- provide them with access to everywhere they need
- answer any of their questions (truthfully!)
- make them a cup of tea (let that be the extent of your bribery for the day!)
- Talk through what you’ve done
- Did you redecorate?
- Have you replaced any bathrooms or kitchen?
- Have you put an extension on the place?
- What about structural works?
- Have you fixed the roof?
- Some works will be obvious and the surveyor will know you’ve done it, but if you’ve replaced all of the external guttering that was causing massive damp issues in half the house – how would the surveyor know that?
- Discuss what you paid, and how you’ve added value
- Estate Agents, those people who have a code of silence when it comes to what a property sold for recently or what offers are in on a property, suddenly become the biggest gossips in the world when a surveyor asks them for some comparative evidence. Surveyors are near the top of the food chain in property, so keeping a valuer happy is important to estate agents.
- Tell the surveyor what you paid for it and what the circumstances were. Maybe you paid £20,000 less than you should because you bought it off a family member, or the property sold off market. You can even quote back to them the phrase from earlier about “proper marketing”.
- This, along with point 2, is your best chance to increase the valuation you receive from the surveyor. Demonstrate you paid a lower price for a reason, and then show that you’ve done the work to remove that reason for future buyers.
- Talk about the comparable evidence if you know it will help you out
- If you know the house next door went for the same price you’re looking to achieve, make sure the surveyor knows this. There is a good chance he will have found this out, but it doesn’t hurt to remind them.
- If you can prove that prices in the area have gone up by 10% since the sale of the house next door, or any other comparable property, then prove this with data and show the valuer.
- Discuss views of estate agents
- Don’t lie as they will be checking. But if a number of estate agents have valued the property for over what you are looking for, that will show a degree of local knowledge that the surveyor can use.
- If you have any paperwork from the agents with their valuation estimate, you can present that to the surveyor. Decent agents will show the comparable evidence and their reasoning behind their valuation.
- Discuss any offers you have received if more than one
- If you’re selling the property, maybe you have had more than one offer for the property. Clearly if the other offers were 20% under the price you are hoping to get, maybe keep that information to yourself, but if they are all quite close together let the surveyor know.
- It’s not unusual for higher offers to be rejected due to the buyers circumstances. Perhaps they were in a chain and you wanted a quicker sale, so mention this.
- As a buy to let property, the achievable rental figure will be important for the loan coverage, so again provide evidence of comparables and any offers or current rent achieved.
I could, and usually do, go on forever about topics such as these, but in the interest of your time I’ll leave it there for now.
Hopefully you’ll have learnt a few steps you can take to help the surveyor give you the property valuation you need, and justify it to anyone who may challenge that valuation in the future.
Best of luck and happy investing.
Damien Fogg MRICS
The Property Voice insight:
Property valuations are quite possibly one of the biggest factors in successful property investing, especially when using a buy-to-sell or buy-refurbish-refinance strategy, as I often do.
Personally, I have had a mixed experience when it comes to property valuations, as I will illustrate with a few examples.
On a project in Cornwall my property was valued at 17% below direct sales comparables sold on two neighbouring streets within a matter of months. When questioned I was told by the lender that 'I was free to go elsewhere'...of course this was a short-time before the proposed completion date by this time.
On a different occasion, I had a very positive and supportive property valuation, this despite the fact that in this case my upgrade spend was limited but I had also received a significant discount from similar property values in the area and this was duly noted by the surveyor.
Most recently, I have been left somewhat frustrated that a surveyor appeared to make a clear error in the calculation in the 'Investment Method' basis of calculation and rather than admit this, instead chose to spin off what sounded to me like a list of excuses to cover up their mistake, rather than review and change it. That said, I am of course also biased and so perhaps I did not want to hear what the surveyor said...although in my defence, a different surveyor had used what I believed to be a fair (and higher) valuation only a short time before that...
Damien highlights some very interesting points, such as the surveyor being human - yes they are people too and often it is easy to forget this, especially in the cut and thrust of a deal. Similarly, meeting a surveyor on site, explaining the works undertaken and demonstrating any added value as well as highlighting relevant comparable property values, all helps us to get the 'right' property valuation.
However, as the saying goes, 'you cannot make a silk purse from a sow's ear' and just because we want a certain property valuation does not automatically mean that we will get it. After the financial crisis a lot of surveyors were sued by disgruntled investors and banks alike. They took a big hit for apparently over-valuing properties back then. Many also left the industry altogether, which also in part explains why it can take a while to get the survey booked! Adding it all up, we cannot ignore the human aspects, the threat of being sued and the fact that often we as property investors sometimes having competing motives to other stakeholders in the property food-chain. At times this can be frustrating as said but Damien at least lays out some thoughts and ideas of how best to go about getting what we want.
So, how about you?
What has your property valuation experience been like?
What do you think of surveyors (careful now...moderator settings are on!) and;
Would you like to hear more about property valuations from Damien, a chartered building surveyor?
Please let us know in the comments box below, or start a conversation via social media and we will see if we can get Damien to join in...
Finally, if you had a look at our Mentoring page recently, you may have noticed that the name Damien Fogg appears there too! That is because Damien and myself have teamed up to offer joint mentoring property programmes, which should hopefully give our mentess different perspectives and insights into property investing from our combined approach...two for one mentoring if you like!