Buying a property is a notoriously fraught and often complicated experience. That goes for seasoned home owners just as much as first-time buyers. The last thing you need is a new source of stress. Unfortunately, there is a growing phenomenon that seems designed to exacerbate the process known as ‘down valuation’.
How Are Properties Valued?
Ordinarily when a house or flat is put on the market the estate agent will agree a sensible asking price with the seller. This valuation is made on the basis of factors like the sale prices of comparable properties nearby, the type, size and condition of the property and its location.
If you’re a buyer the price is usually the most important factor in deciding whether to make an offer. Your offer may be slightly below this or you might be happy to pay the asking price. So far so good.
It’s common practice for purchasers to commission a survey to confirm the price is fair. Finding a reputable surveyor isn’t always easy, so it’s worth using a concierge service like Sam Conveyancing, which gives you access to a wide choice of surveyors.
Your surveyor will use similar criteria to the estate agent and may additionally consider structural and environmental issues. For example, a home buyers survey in Watford will take into account the risks of things like settlement and subsidence in properties built on the shrinkable clay sub-soil in this part of the country. With any luck they won’t find anything to conflict with the agent’s valuation.
What Is a Down Valuation?
The difficulty many buyers face, if they are buying with the help of a mortgage, is that the lender might take a different view. In the past the loan company would normally accept the surveyor’s findings. However, it’s increasingly common today for lenders to conduct their own survey, and if they are uncomfortable with the purchase price they’re being asked to fund, they might come up with a lower valuation. This is a down valuation.
Why Are Lenders Down-Valuing?
Lenders fear that borrowers won’t be able to meet the rising repayments. Consequently they are protecting themselves by ensuring there is sufficient value in the properties secured against their loans for them to recoup their outlay in the event of default.
The Implications of a Down Valuation
If your lender disputes the value agreed, they will only be prepared to lend on the basis of their lower valuation. For example, suppose you’ve agreed a purchase price of £300,000, planning to put down a 5% deposit of £15,000 and take out a 95% loan for the balance. You’d need to borrow £285,000. If your lender down-values the property at £280,000, then the 95% becomes £266,000. Add to that your £15,000 and that gets you to only £281,000, leaving a £19,000 shortfall. For most people this makes the purchase unviable.
What Can You Do?
You have three choices: raise the funds elsewhere, perhaps from savings or some other kind of loan; negotiate a lower price with the vendor; or withdraw from the transaction. You won’t change your lender’s mind, and if you approach another bank the chances are they’ll come to the same conclusion, not least because most lenders use the same local surveyors.
In reality, if your purchase relies on getting the full loan amount, then a down valuation could be an insurmountable problem.
