The House Buying Process – a Guide for First Time Buyers – Part 3

Part two of this guide looked at the process of appointing a solicitor, finalising the mortgage application and choosing the type of survey that would be carried out. In this part, we will look at what happens after the survey results are known.

The whole point of having a survey carried out is to establish that the property is structurally sound and worth the money you are paying for it. It therefore follows that there will be occasions where the survey results are not what is expected, and this is where it really can pay to have a good mortgage broker.

In this section, I will discuss only the results of the lenders valuation report. If you have had a Homebuyers report of Building Survey, this will have been carried out in much greater detail and will pick up faults and problems. In the vast majority of cases these will be minor, and due to the age of the property, but in some cases they may be worthy of further consideration. It is often said that the increased cost of a Homebuyer Report or Building Survey can invariably be recouped by using the survey to renegotiate the price of have repairs carried out by the seller prior to completion. Whilst there is an element of truth in this, it tends to be so only in a less active or falling market, or where the faults are significant. In an active or rising market, the seller is just as likely to withdraw from the sale in the hope that the next buyer to come along will only have a valuation.

When considering the results of a valuation for mortgage purposes, there are numerous possible results, but for ease, I have split these into three broad headings.

Valued Up
This is the term normally used by those in the industry in reference to a property which has been valued at the price it is being sold for, with no serious structural defects. It does not mean that the property has been valued for more than the sale price, which is a very rare occurrence indeed. Common sense would suggest that a certain proportion of property was sold at less than optimum value, but it is rare indeed for this to be reflected in a valuation. At The Mortgage Warehouse, we have decades of experience and have arranged many thousands of mortgages, but know of less than ten instances where a valuer has said in his report that the property is actually worth more than the price being paid. Most valuers we have asked simply say that unless overvalued, the agreement of a purchase price itself establishes a de facto value. We don’t agree, but the net result is that however much you think you have a bargain, don’t expect the valuation to come back at more than the purchase price.

The valuation report will make very brief comments on the condition of the property, and their may be one or two items that it is worth being aware of. For instance, where a property has a flat roof, it is very common for the valuer to include a statement such as “flat roofs should not be expected to have a useful life of greater than ten years, and as the age cannot be determined the purchaser may feel it prudent to make provision for its early repair or replacement”

Downvalued
This is where the valuer believes the market value of the property is less than the purchase price being paid. This might be because a structural problem has been identified, but is more often simply because the valuer doesn’t agree with the value placed on the property.

It would be easy to think that the property has been downvalued because the valuer was having a bad day or was upset by either the seller or the buyer, and we have even had it suggested that the valuer was jealous or wanted the property himself. It would be naïve to think that on rare occasions the valuer was not influenced by such things, but in the vast majority of cases, a property is downvalued for very good reason. There is some evidence that some valuers do try and either read the market forward and value for what they think the value will be in the future, and there is also some evidence that some valuers or firms of valuers will try and influence the market in a given area. Whilst such suspicions are hotly denied, a broker dealing with applications on a national basis is able to spot such trends quickly. On one occasion, The Mortgage Warehouse has found it necessary to inform a lender that we would not place business with them if they continued to use the services of a particular firm of valuers for our cases.

When valuing a property, the valuer will examine the structure of the property, its decorative order, and the advantages and disadvantages offered by the locality. For instance, being adjacent to a busy road is likely to reduce the value, but being within the catchment area for a respected school could increase the value. The value given will be based not only on the valuers opinion, but on the market at the time, and what similar houses in the locality have sold for in the recent past. Let me re-state that, because it is a very important point; the value is based upon what similar houses in the immediate locality have sold for in the recent past. The essential words in the previous sentence are “sold for” which is wholly different to “being advertised at”. In the majority of cases where a property has been downvalued and we are asked to challenge the valuation, it turns out that the valuer was right all along.

So what happens if the property you are buying is downvalued and you think the valuer has got it wrong? The first thing to say is that more often than not, the valuer has got it right, but valuations can be challenged.

To challenge a valuation, the applicant will need to demonstrate why he believes the valuation to be wrong. The evidence is then presented to the valuer, and he is invited to reconsider and change his valuation as a result. In many cases, the valuer will decline to reconsider, but will normally supply evidence to support his original valuation. If the valuer refuses to reconsider, but the evidence is overwhelming, some lenders have a facility to override the valuation and proceed anyway.

I can’t re-enforce enough how important it is to be objective if challenging a valuation. For example, let’s consider the hypothetical example of Mr Smith who is buying No.10 High Street, a four bed semi-detached. Mr Smith has agreed a purchase price of £180,000, and decides to opt only for a valuation for mortgage purposes. The valuer conducts the valuation and values the property at £168,000.

Mr Smith challenges the valuation and uses as evidence three “comparables” being similar property sold in the recent past in the same locality. Specifically, No 7 High Street, also a four bed semi sold three months ago for £182,000. No 17 High Street, a four bed terraced house sold for £191,000 late the previous year, and No 8 High Street, the three bed semi next door sold for £172,000 last month. On the face of it, Mr Smith would appear to have a solid case for reconsideration.

In response, the valuer said that he was not prepared to increase the valuation, as he believed he had accurately assessed the valuation in the current market. He used as evidence the same three bed semi next door as Mr Smith, along with numbers 18 and 28 High Street, both three bed semis being currently marketed at an asking price of £170,000 by two different estate agents. The valuer also made the following comments in support of his valuation:

• The subject property was not originally constructed as a four bed property and had been converted into such by the sub-division of an existing double bedroom into two singles. No’s 7 & 17 High Street were originally constructed as four bed properties and had larger internal dimensions, and number 17 in particular was a three storey recently built town house which were in greater demand.

• No’s 7 & 17 were on the opposite side of the road and benefited by having larger gardens than the subject property. No. 7 had the benefit of a garage.

• No. 8 next door also had the benefit of a garage and had recently benefited from a new kitchen and bathroom. Whilst still maintaining its original three bed layout, it was sold with the benefit of planning permission for the conversion of the loft.

• No’s 8, 10, 18 and 28 all suffered by having a railway line running along the bottom of their garden.

It is obvious to see that the valuer was if anything, over-generous in his valuation. The fact that two very similar properties were currently being marketed for £170,000 would suggest that their actual selling price may turn out to be significantly less than the valuation of £168,000, especially in a falling market.

If you find you are in the position of having a property downvalued, you have two choices. You can decide to withdraw from the purchase and look for a property elsewhere. You will be out of pocket to the tune of the valuation fee, but that should be considered a small price to pay in comparison to the amount the property was overvalued. Alternatively, you can re-negotiate the price to match that of the valuer, and in some cases the seller will agree, especially if they knew that they were being “hopeful” with the price of the property in the first place. More likely, you will settle on a renegotiated price somewhere between the original price and the valuation. Do bear in mind though; the mortgage lender will base the mortgage on the valued price, and any extra over that will have to be an addition to the deposit from your own money.

Retention
A retention may or may not be accompanied by a downvaluation, and means that there is something significantly wrong with the property to such an extent that the valuer thinks it would be a good idea for the mortgage lender to withhold some of the mortgage until certain repairs or work has been completed.

The lender will not always follow the valuers advice, and it is quite often the case that for minor issues, the lender will simply want an undertaking that the work will be done. A good example of this might be very old electrical wiring, which the valuer suggests is replaced prior to occupation and suggest retention of £3,000. The lender may apply no retention, but make it a condition of the offer that the property is rewired within six months of occupation. If the lender does apply a retention, then unless a lower price can be negotiated, or the seller persuaded to carry out the repairs between exchange of contract and completion, further funds would need to be obtained from elsewhere to allow completion to take place.

Retentions are much less common nowadays than they used to be, and should be taken very seriously when they are applied. In some cases, the retention will be applied because there is a serious problem with the property. Such things as damp and rot are able to be remedied, but you might think it calls for a renegotiation of the price, unless of course the defects were known at outset and reflected in the price. If the defect is structural, you will need to ask yourself whether it is worth proceeding with the purchase, even if repair is possible, as the hassle involved in the repair may be far more than cutting your losses and finding another property. However, do bear in mind that previous structural problems that have been properly repaired are not a reason for a reduced price. Many such properties will have been given a certificate of structural stability as part of the repair process, and can be a better bet that an unaffected but at risk alternative property.

In part four we will examine the process from getting the mortgage offer to the day of moving in.