Before I get too far into the theme of today’s show, I just wanted to alert you to the launch of my latest book: #PropTech: A guide to how property technology is changing how we live, work and invest. It will launch on Friday 14th December, so just in time for a last minute Christmas stocking filler then 😊 There is a link to a sneak peek page in the show notes, where if you are quick, you can get a little Christmas present from me for ordering the book within the first week of launch: https://www.thepropertyvoice.net/proptechbooksneakpeek/.
OK, so moving on, and last but by no means least, in the horror stories series comes valuers. The so-called down-valuation, where a valuation surveyor reduces the value of a property compared to the agreed sales price or investor stated value, seems to have made a return. So, let’s hear some of the stories, some are my own and some are from others; then we can determine what we can do about this frustrating valuation thing…
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Resources mentioned
#PropTech Book Sneak Peek and Samml Gift from me to you HERE
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Transcription of the show
Hello, and welcome to another episode of The Property Voice podcast. My name is Richard Brown and as always, it’s a pleasure to have you join me on the show again today.
Before I get too far into the theme of today’s show, I just wanted to alert you to the launch of my latest book: #PropTech: A guide to how property technology is changing how we live, work and invest.
It will launch on Friday 14th December, so just in time for a last minute Christmas stocking filler then 😊 There is a link to a sneak peek page in the show notes, where if you are quick, you can get a little Christmas present from me for ordering the book within the first week of launch: https://www.thepropertyvoice.net/proptechbooksneakpeek/.
Plus, if you happened to have bought my first book and registered to receive the book bonuses, then keep an eye on your inbox over the next day or two as well.
OK, so moving on, and last but by no means least, in the horror stories series comes valuers. The so-called down-valuation, where a valuation surveyor reduces the value of a property compared to the agreed sales price or investor stated value, seems to have made a return.
So, let’s hear some of the stories, some are my own and some are from others; then we can determine what we can do about this frustrating valuation thing…
Property Chatter
A poll in the Property Tax & Finance Facebook Group suggested that there are valuation issues with BTL investors. No less than 79% of respondents stated that they had experienced a down-valuation in the past 3 months!
After undertaking some inquiry of my own, possible reasons include the rise of automated valuation models (AVMs), or robots for short, contrastingly individual valuer bias or opinion that differs from the hard data, falling market sentiment including the Brexit effect, strict lender criteria and policy on comparables and so on.
Let’s run through some stories from me and a few friends before we pick up what we can do about it in a little while.
A couple of years ago, I bought a property with the intention of refurbishing it to flip it on. I went to arrange bridging finance through Shawbrook Bank, who I had used for similar purposes on multiple occasions. They sent out a valuer from a major firm of valuers. Sadly, the individual valuer from which was known to me from a previous poor valuation experience on an HMO property that I worked on a year or so earlier. Could lightning strike twice I wonder? You bet!
I had agreed to pay £155,000 for the property, which was significantly below local comparable resale properties, including one smaller directly opposite on the same street recently sold for £261,000. Admittedly, the target property needed work, but there was significant headroom to undertake a programme of refurbishment and resell at a profit, which was my intention.
I had done my homework on local comps and arrived at the most likely end-valuation figure of £264,500 with upside to £285,000, targeting £275,000 for a fully refurbished property. A programme of works was produced by a chartered building surveyor to convert and upgrade the property accordingly.
The valuation came in as follows: £275,000 end-value target downgraded to £235,000 after works despite the recent sale opposite. However, the best part…its current value was stated as £0 pending specialist reports on the roof structure and timbers. These were later revealed to be in order, but not before an additional expense of over £1,000 was uncured for the reports!
We appealed the result via my broker, Simon Allen from Searchlight Finance, and Shawbrook, given the fact that the valuer is instructed by and so works for the lender. To be fair, Simon and Shawbrook were great and in the end, something happened that Simon said he had never seen before; the lender paid for a second valuation. The second valuation was duly undertaken by another firm and came back at £155,000 with it being considered suitable security for the lending.
After the works were completed, we accepted an offer at £275,000 with it subsequently being valued at £265,000 due to some issues with some of the windows, which we had not addressed, and which was fair enough as well.
Whilst £265,000 was less than we hoped for, it was precisely in line with the expected end-valuation, which was based on actual local sales comparables on a like-for-like basis, versus £235,000, which was the valuer’s opinion, just as the zero valuation was.
It is hard for valuers, I appreciate that. Many suffered after the last housing crash when values plummeted and found their judgement come under scrutiny as a result. I have some sympathy for that, but there should be some common sense and ultimately if there is enough evidence to support a valuation, then they should be OK. This was a view shared by a valuer-in-training that I spoke to recently in fact.
Here is another horror story from Ian, who you might remember also had a tradesperson horror story that we shared last week…looks like he smashed a mirror or two somewhere…
Ian had purchased a terraced house for cash and converted it to a 5-bed licensable HMO. The licence had been applied for, but in the meantime, he applied for a remortgage and a well-known national surveyors’ firm were duly appointed.
The valuer pointed out that the ceiling height in the dormer room was 2.08m, whereas the local HMO standards required 2.14m. He, therefore, valued it as a 4 bed HMO with a 100% retention pending the issue of the HMO licence, which is probably fair enough to this point.
Luckily, the local council issued an HMO licence as a compliant 5-bed, so the same surveyor was re-appointed for a new valuation with another valuation fee paid. This time, he insisted on a planning certificate of lawful use for the conversion to an HMO, despite it being allowed under Permitted Development (not an Article 4 area) with an HMO license issued. On the plus side, he valued it as a 5 bed HMO this time!
However, he is now faced with the prospect of a £462 planning fee, costs for a planning and drawings and another 8 weeks delay, merely to obtain a certificate of lawfulness. The insistence of a certificate of lawfulness for a permitted development conversion was an unnecessary condition to request, which is not common or standard practice in our joint experience.
Here are some short stories that come from me, but also courtesy of my broker, Simon Allen, who has helped me through several issues with lenders and valuers around the thorny topic of valuations. As Simon puts it, ‘I tend to try and forget bad news to keep my mind positive. Apart from the valuer falling through the floor at Graveyard Farm, most of the others go into the category of down valuations.’
Here are some other examples that both Simon and I have come across…
- Simon: Property is currently rented for £1,100 per week. Valuer says £850 per week. No appeals process, so the client doesn’t get mortgage amount needed, which means they can’t grow their portfolio!
- Richard: Property converted to serviced accommodation, including change of use recognised by the local authority. It has been successfully short-term let for well over two years at 70%+ occupancy throughout. Valuer turns up when a group of European contractors happen to be staying for a month. Values it in line with expectation but makes a throwaway comment that ‘it’s an HMO’. It isn’t an HMO, but when queried by the lender and then subsequently challenged by us, even after quoting the Housing Act definition of an HMO, he simply responds with ‘I don’t think it’s suitable as a short-term let’! As a result, the lender, broker and I are all left flummoxed and can’t get the lending required.
- Simon: Down valuation from £385k to £280k. Checked Mouse price, all properties valued at £380k but nothing has sold in 3 years, so there are no recent sold comparables to go off. Then, another case where a property was down valued from £500k to £375k. The appeal took a month and was rejected despite comparables of £500k. Go figure…
- Richard: I went to refinance a refurbished flat. It was worth £155k+ all day long, with the last same street sold comparable selling for £155k eight months prior and several prior to that at higher values. However, the valuer is instructed by the lender to only base the value off actual sales prices (so excluding properties for sale) and to ignore comps more than six months old. Therefore, the valuer had no option but to ignore the £155k same street comparable and selected 3 poor condition comparables on worse street resulting in a £120k valuation instead! We suspect that two different people, or even a robot and the valuer were involved in this one given the poor standard of the comps used. However, the outcome is that I need to leave an extra £26k tied up in the property than I had planned.
- Simon: Client remortgage to release capital to add to the portfolio. Down valued from £500k to £400k. As the client couldn’t get remortgage at the amount she wanted it was put up for sale. The property was on the market a week and was sold at £510k. Similarly, purchase price £995,000, valuer valued it at £800,000 so client lost purchase. Then it was sold a month later for the asking price.
- Richard: Undertook a flip project, sold at the £125k asking price within a week to a first-time buyer (FTB). Comps support £120k for properties that have not been fully refurbished, so £5k premium for the condition was justifiable and expected. Result: £115k valuation placed by valuer, which is at the bottom end of the Mouseprice valuation range, which is itself an automated valuation model, but this ignores or rather averages out the property condition, assuming a balance of property sold. Anecdotally, the agent said they get this all the time with FTBs, as valuers seem to deduct from the valuer due to a lower level of deposit/higher LTV. However, as a result, I lost my sale.
- Simon: Property was valued at £600k by bridging lender. The client decided to switch lenders and new valuer from the same firm valued it at £525k just a week later! As a result, the client punished for switching lender but with no apparent logic as to why. Or, property valued at £700k. Unbeknown to everybody except underwriter the valuation was pulled for audit by panel manager and subsequently down valued 3 weeks later to £520k. Result client gets less money, valuation firm removed from panel and underwriter moved to a department that doesn’t communicate with the public.
You will notice a couple of recurring themes by reflecting on these stories.
First, the valuer works for who instructs them, not who pays for the valuation and that’s the lender, not the investor when finance is involved. This leads to several potential issues arising, such as a lender straitjacket around suitable comparables, criteria and policy, a lack of recourse from the valuer to the paying investor client and the biggest one…the valuer’s fear of being sued by a lender!
Second, inconsistency abounds! There are so many stories, both here and in the press where one valuer values differently to another, but it is the same valuer/valuation firm being inconsistent that is the hardest to fathom! Just Google ‘BTL down valuations’, visit the Property Tax & Finance Facebook Group or Property Tribes to see for yourself.
Third, is expectations on our part. To be fair and balanced, investors, developers and agents also have false and unrealistic expectations at times. Gone are the days when commercial lenders will value an HMO at ten times the gross annual rent. Naturally, we might aim to sell our lovely presented flips for the street ceiling price or even more. However, if a bank is then lending against that property and the buyer is a first-time buyer as well, then expect the bank-instructed valuation to be lower than the street price or open market value…that’s just being prudent from the bank and valuer’s point of view, even if we don’t like it. Equally, how many of us have used a low survey valuation figure to chip away at the purchase price and profit with our acquisitions? Hands-up to that from me.
Steps to take to help protect ourselves
- Try and help the valuer, but without undue pressure! Be present when they visit your properties, point out any works undertaken and the costs, consider handing over a list of comparables to assist the process and remember…valuers are human too, so be nice! There is a good article around this over at our blog here.
- Use a good broker and seek their advice on which surveyors are used by which lender that would best suit your project. Brokers know their lenders and their patch and have their little black book too.
- Try to choose your surveyor/valuer as carefully as your lender if possible. Remember, there does seem to be an unwritten rule to low-ball valuations for first-time buyers and equally, we can profit from down-valuations sometimes as well. Equally, there is a rise in the automated valuation among some lenders, which when coupled with a less-than-robust appeals process, can lead to some odd results, with a lack of resource…so check the lender’s approach here with your broker.
- Check the valuation report carefully for conditions. Ian’s initial valuation above stipulated the requirement for a certificate of lawfulness but he didn’t spot it and the revaluation contained the same condition. The planning fee for a certificate of lawfulness for HMOs is halved if the conversion has not yet been carried out and refinancing delays are avoided.
- Put yourself in the valuer’s shoes – would you give a high valuation when you don’t have enough evidence to support the decision, where a large financial institution, with big legal guns, could sue you and potentially close you down? Thought not. So, have realistic expectations that are supported by evidence, especially when refinancing. Have a contingency plan in place: flip if not refinance, leave more funds in, switch lender, etc.
Receiving a down-valuation is disappointing and frustrating and I have had my fair share of that of late! However, there does seem to be something afoot, which is borne out of my discussions with brokers, solicitors, agents and even a valuer himself. There is a negative sentiment around house prices, with the RICS valuer house price barometer at a six-year low. This seems to be exaggerated by the excuse for all things recently: Brexit! Honestly, Brexit seems to be the go-to excuse for everything at the moment…maybe that’s a cue for buying more than selling or refinancing wouldn’t you say?
Personally, I have had to respond to overcome several challenges resulting from unexpected, disappointing or plain wrong valuations…but that’s my role as an entrepreneurial property investor and developer too! I have adjusted my expectations, built in contingencies and then realised that in the land of the blind lender, the one-eyed valuer really is king…
That’s the end of our Horror Stories mini-series now, perhaps you will be pleased to hear! I plan to share one more episode before Christmas and then take a short break myself. In the meantime, the show notes can be found over at www.thepropertyvoice.net. Or, if you want to talk about anything from today’s show, or just talk property investing more generally, email me at podcast@thepropertyvoice.net, I would be happy to hear from you!
Once again, all I want to say is thank you very much for listening once again this week and until next time on The Property Voice Podcast…it’s ciao-ciao.