Property Valuations…if lenders are the Prime Minister, then Valuation Surveyors are the Chancellor holding a lot of power
To use an analogy with Government, a valuer is like the Chancellor of the Exchequer and a lender is like the Prime Minister – they hold a lot of power. Have you ever had a surprising property valuation result? If you have been an investor for a while, then chances are you have. Today I shall my experience of down-valuations, retentions and even a zero-valuation. It is not just me either, as I have it on good record that around half of valuation reports of late appear to have some kind of issue with them. So, it is both topical and potentially threatening to our commercial reality as property investors then. Join me as I share some of my recent encounters with the men and women with the Big Red Book as we talk property valuations…
Link to the Blog post discussing how to get the best valuation for your property
Today’s must do’s
Plan for the unexpected when it comes to property valuations. When selling or refinancing try to ensure that your property is presented in the best light. When buying, perhaps utilise a low valuation to improve your position too. Finally, remember to allow for more cash just in case, but equally
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Transcription of the show
Hello and welcome to another edition of The Property Voice Podcast, my name is Richard Brown and as always it is a pleasure to have you join me again on the show today.
Thanks for joining me in these soundbite episodes, where I share some top-of-mind thoughts as I prepare for series 3. The idea of these episodes is to share some of the regular activity, issues and hurdles of being an active property investor. With a couple of weeks to go before the new, higher Stamp Duty threshold kicks in, two issues are very much top of mind: property finance & valuations.
Today, we shall focus on property valuations after some challenging experiences of late, so on with the show as we dig a little into this issue further.
Have you ever had a property valued and been surprised by the result?
We usually encounter property valuations in three main situations: buying, selling & refinancing property. Generally, we would be looking for a generous valuation when selling or refinancing as this would support our case to extract the maximum value from our property asset. Whilst, generally the opposite is true when buying, where we may seek to use a low valuation to help negotiate a reduced our purchase price, that is not always the case…particularly when we are facing some kind of deadline.
I have covered the topic of property valuations over at The Property Voice blog, thanks to a guest post from a RICS Chartered Building Surveyor, who shared how best to get the right valuation for our property. The link to this piece will be in the show notes.
As this is a soundbite episode, I shall share with you some of my recent experience and perhaps produce a longer musings episode on the subject of you would like me to.
Over the past few weeks I have been directly involved in four transactions: three are purchases and one was a refinance. Of those four, three of them were subject to a ‘down valuation’ or a ‘zero valuation’. Previously, I have also experienced a ‘retention of funds’ resulting from a valuation as well. So, it is a very big deal I can tell you.
A down valuation comes when a valuer sets a lower value against the property than what you agreed to pay for it. This is usually where the comparable evidence does not support the value, or if the standard of the property suggests there is a large cost involved in bringing it up to a level consistent with similar properties nearby, or some other reason which suggest more cost or another reason that could make the property harder to sell. Also, keep in mind that usually a valuer is working for a lender when finance is involved and so they do not work directly for you, even though you pay for the valuation.
On a recent purchase that I was involved with, along with a partner, we experienced a situation where we had agreed buy the property for a value lower than many similar properties in the local area…or at a discount if you like. Our numbers told us that based on the end value post-works and having factored in those costs of works, that the purchase price was fair and reasonable and would result in a tidy profit.
The valuer disagreed with the agreed purchase price. They marked down the value by a further £9k or 11% from an already discounted price. The main reason cited was that the property was described as a 3-bed due to a loft conversion, however, the conversion did not have the certificate to say it was done in accordance with building regulations and so it was valued as a 2-bed instead.
However, we then used this valuation to renegotiate the price down. We were not able to agree the full reduction as that would have severely compromised the vendor’s financial position. We were happy that we would achieve our target margin at the renegotiated purchase price and whilst we could have potentially achieved a higher margin by pressing for the full reduction, we chose not to. The reason was that this would result in a win / lose outcome with the vendor and we were content with our projected end-margin also.
That said, there was a consequence to this position for us, as the lender would only advance a loan based on the valued price rather than the higher purchase price. That meant putting in more of a cash deposit, which was not ideal. However, did it fundamentally change the profitability of our deal? No, from a profit point of view it did not. However, it did mean higher cash input and a slightly lower ROI as a result more cash in was offset by lower finance charges to soften the blow to our ROI here.
Was the valuer wrong with their valuation? Well, the vendor and us had our own idea of the correct value and so did the valuer – it is after all an opinion and unlike the stock market say, where the value of a single company’s share is set instantly by buyers and sellers trading that share, that is not the same as the property market where each property is different. Anyway, I digress.
In another case, we had a zero valuation, which can come as a shock and we experienced this also of late. A property was valued at zero can you believe? Was it worth zero? No, it wasn’t. However, the reason for the valuer adopting this approach was actually quite sensible, if also slightly annoying at the same time! The valuer had some uncertainty around certain aspects of the property and sought additional reports before providing a final valuation figure. Keep in mind that most valuers are general surveyors and not specialists here. In this case a structural survey was requested to confirm that some cracks were long-standing and not subject to recent movement. The building has been standing since 1861, so it probably won’t fall down now but reluctantly I accept the cautious approach from the valuer…remember that they act for the lender and can be sued if they get it wrong.
A zero valuation is not necessarily a bad thing and once the reports come back can allow the valuer to value in line with the market comparables. Of course, as a result of the additional reports, it could also give rise to additional works and costs which may or may not be expected. This may also result in a lower valuation or even a retention on the advance by the lender until specified works are undertaken. If nothing, else though, it does add to the time, uncertainty and also cost of the acquisition process, which with a stamp duty deadline to beat is not too helpful!
In the above two examples, any lower valuation, retention or suggestion of additional works cost can be used as leverage to chip away at the purchase price. If we receive a low valuation and share this info with the vendor, they will realise that it could happen with any potential buyer and the fact that it comes from a third-party who is a professional at least helps to soften the blow and reduce the emotion.
Of course, there could be a situation where either the vendor withdraws their property, or the buyer does – this will result in abortive costs to be taken into consideration, which is part and parcel of being a property investor…you win some and you lose some, so always keep that in mind.
The refinance valuation I had was again down-valued. This was for an HMO refinance where the valuer adopted a cautious view of the investment value based on some other properties of a lower standard as comparisons. I am phlegmatic about this one to be honest with you as it’s a little bit of lose on the swings and win on the roundabouts here. It means leaving more cash in the deal than could have been the case…boo! However, it also reduces my debt level, plus it improves my net cashflow income position on the property too…yay!
To add some colour and wider context to this discussion, it is not just me that seems to be experiencing issues with valuations of late. I spoke to a respected mortgage broker last week, who told me that around 50% of the valuations her had seen lately had an issue with the valuation, with it being down-valued or set at a zero value pending further reports. Now, I am not privy to what goes on within RICS or the communications between lenders and valuers, but I wouldn’t mind betting that something is afoot here…keep an eye on your valuations as they go through is all I can advise.
We have not reached the full end of the story as far as valuations go. In my case, with these 4 valuations, 3 are now fully resolved, 2 resulting in a lower purchase price being negotiated and the third a lower level of refinancing cash release. The fourth is still awaiting the results of the special reports, so we shall just have to wait and see on that one. In each case, it has added to the time and stress of doing the deal though. In a couple of cases it has also lead to an increased cash requirement into the deal; so plan for this arising too is my top tip for today. Keep that in mind for your next deal therefore.
My final thought on this topic is this: valuations are just an opinion, but unfortunately the valuation surveyor’s opinion counts the most and that is why they are akin to being the Chancellor of the Exchequer – they are such a big player in the financial outcome of our property commercial reality. They, along with the Prime Minister, or the lender, are a powerful force that we need to navigate and manage around if we are to be successful.
That’s what I wanted to share with you today. So, if this topic has stirred you up…and it often does I find, then you can always drop me a line, firstname.lastname@example.org and the show notes as always can be found over at our website, www.thepropertyvoice.net
Meanwhile, as always, thank you for joining me on the show today and until next time on The Property Voice Podcast…it’s ciao ciao!