When it comes to selling your home, the most important issue is establishing exactly what it is worth. This might seem simple and straightforward, but recent figures show that this is not always the case.
Estate agents and buyers might have one idea of the value of your home, but the official valuer for the bank or building society may well think differently. The difference in these two prices can mean the difference between a successful sale and the whole chain breaking down.
What is a down-valuation?
A down-valuation is where your buyer's mortgage surveyor values your property for less than the price you've agreed to sell it for.
The difference between those two figures is the down-valuation.
For example: If you agree a sale price of £150,000 but the mortgage surveyor only values the property at £140,000, you've had a £10,000 down-valuation. (Unfortunately, it can be an even greater sum than this, with some down-valuations reaching as much as £20,000)
When do I find out about a down-valuation?
To make matters worse, down-valuations usually don't come to light until you are a long way into the process of selling or buying.
This is because once you accept an offer from a buyer, it will take them a while to apply for their mortgage. After that, it'll take a while for the bank or building society to instruct a surveyor to visit. And it'll take a while after that until they actually visit... Another delay before they eventually file their report, and yet another delay before the mortgage company reviews the report, and eventually let you know what it said.
This means you can easily be 4-6 weeks into your agreed sale before finding out your home has been down-valued.
If the surveyor's valuation comes back at less than the sale price you've agreed, you've got a down-valuation, and it can cause serious problems.
Effects of a Down-Valuation
How down-valuations affect sellers?
If you are selling a house then a down-valuation could mean that you lose the sale.
This can be costly and inconvenient, and put you right back to square one. Unfortunately, because it takes a long time to even find out about the down-valuation, any interested buyers you'd had back when you originally agreed the sale may well have moved on - leaving you high and dry. (If this sounds like your position and you can't do with waiting to find another buyer, see the section near the end of this article called "Solutions for dealing with a Down Valuation as a seller".
In many cases, the original buyers will come back to you to try and renegotiate a lower price based on the surveyor's valuation. You are not obliged to renegotiate, but if you are in a chain and have your heart set on your next move, you could find yourself backed into a corner and taking a substantial financial hit.
How down-valuations affect buyers?
If you are buying a home and you need a mortgage, then a down-valuation is problematic and could prevent you getting the home you're hoping for. Quite simply, even if you're prepared to pay over the odds for your dream home, your lender isn’t.
You will have to either:
- Renoegotiate to a lower offer (which the seller may not accept)
- Find more cash to put into the purchase (to make up the difference)
- Or negotiate a higher loan-to-value mortgage (at a higher rate).
Just remember, even if you pull one of these off and get the sale back on track, there could still be a long way to go in the sale due to the solicitors and the conveyancing, so you're not out of the woods yet.
How common are down-valuations?
Unfortunately, very common.
Back in 2018 a BBC report stated that down-valuations were currently at their highest level since the financial crash of 2008. Furthermore, one of Britain’s (at the time) biggest online estate agents, Emoov, claimed that as many as 20% of properties now received a down-valuation, compared to just 5% two years earlier in 2016.
Fast forward to 2020, and sadly for homeowners down-valuations are now even more common. This comes as a result of lender's being more cagey about future property values in the wake of the COVID19 pandemic, as lenders and other institutions start to fear that property prices may fall over the next year. (For example, since the COVID19 lockdown this article's daily traffic has been 4x higher than before COVID came along - reflecting how many more down-valuations are happening since the uncertainty caused by the pandemic).
Add this to the fact that homes are consistently selling for less than the asking price anyway, and it’s easy to see why home sellers are increasingly frustrated about the constant cuts in the price they eventually get for their property.
Why are more homes being down-valued?
Down-valuations have risen over the last 3 or 4 years, and the cause ultimately is that more and more valuers are wanting to cover their backs in case property prices fall in the future.
In the UK we've had a huge amount of uncertainty around the economy in recent years, from the problems resulting from Brexit, and now the aftermath of the COVID19 pandemic. There is a huge amount of uncertainty in the economy at the moment, with no one really sure what will happen as these two major events continue to unfold. When things are uncertain, valuers tend to err on the side of caution.
Valuers have a duty both to their clients (the banks and building societies), and to themselves to take this uncertainty into account. They’re either erring on the side of caution or predicting a crash, and either way, who can blame them?
Naturally, the lenders want to make sure that their investment is protected by the value of property it is secured on. In the worst case scenario, a valuer could be sued for an incorrect mortgage company valuation if the bank loses money, so they are always going to cover themselves.
So while valuers are incentivised to put downward pressure on valuations, remember that estate agents are incentivised to put more and more upward pressure on values.
Estate agents are in the business of helping you get the best possible price for your home, and of course, the highest possible commission for themselves. They take a much more short-term view than lenders, valuing your property at the highest possible price that it could be worth right now, rather than what it might be realistically be worth, or what it could be worth a few months or a few years after a recession.
The conflict between these two parties (valuers wanting to be cautious and place low valuations on property, and estate agents wanting to be optimistic) is what is causing the current rise in down-valuations.
So, which value is right?
How are homes valued?
The Royal Institution of Chartered Surveyors (RICS) does not like the phrase ‘down-valuation’, as they believe that their valuations are accurate, and that it is the estate agents who are inflating prices. “It is questionable whether the term down-valuation is an accurate reflection,” a RICS spokesman told This is Money.
A RICS-compliant mortgage valuation process uses what is called the International Valuation Standards. Things that affect their valuation include:
- The overall condition of the property
- The sale price of at least three similar local properties
- A knowledge of supply and demand in the local area
- And an understanding of the prevailing market
It is this final element - "the prevailing market conditions" - that can cause the discrepancy, especially when there's so much uncertainty in the world.
It is worth remembering that this type of survey is done on behalf of the bank or building society, not for the buyer or seller. It may not cover the same elements as a home buyer’s survey and should not necessarily be used in place of a full building or structural survey. While it should involve more than a drive-by and some basic background research, it will never be a thorough, in-depth assessment of the property.
Of course, all valuations, whether by your estate agent or by the bank’s valuer, are only ever best guesses. Even if an identical house in the same street sold just last week, the influence of various issues on the realistic value of your home can only be estimated.
How to deal with a down-valuation?
Most people don't know what to do if the house valuation is less than the offer. We've got you covered. Here are your options and solutions - whether you're the buyer or the seller.
Solutions to a down-valuation as a buyer
You have a few options... Unfortunately, not many great ones.
- Challenge the valuation. In theory, you can challenge a valuation, but this rarely succeeds. After all, why would a valuer hold their hands up and admit fault, when they can just insist that they're correct? At best, it'll take a long time and the seller may decide to move on while you pursue the lender for a re-valuation.
- Go with a higher Loan-To-Value (LTV). You could try and get the lender to agree to loaning a higher LTV, but remember that lenders have the right to lend as much or as little as they want against a property. Unless they already offer products with higher LTVs, they are unlikely to be persuaded to take a bigger risk. (Remember that higher LTV mortgages usually come with higher interest rates - so you'll be paying higher mortgage payments if you do move forward with one).
- Reapply with a different lender. You can apply to a different lender and hope that they will come up with a higher valuation. The problem is that this means writing off the fees you may already have paid to the first bank or building society, and then paying more fees to a different bank with no guarantee of a different result. (They may even end up contacting the same surveyor, who will just repeat their initial findings).
- Re-negotiate and lower your offer. This is the most common route buyers usually take. And it's understandable. After all, if a professional valuer says a property is only worth a certain amount, why would you want to pay more? Of course, the seller is under no obligation to accept your new offer, so if they reject it the sale simply falls through, and you lose the house.
- Put more money in. The lender may think the home is worth less, but it doesn't stop you paying more if you can afford to. If you've had a £5,000 down-valuation and you have an extra £5,000 in savings, you can put it towards the purchase and move forward. However this means you have less cash left to spend on renovating the property - if that's what you were planning to do.
Solutions to a down-valuation as a seller
Your options will depend on what your buyer does.
If the buyer wants to try applying for a new mortgage with a different lender in hopes of a different survey result, you have a couple of options.
- You can wait. (But just remember it could take another 4-6 weeks just to get the survey result).
- Find a new buyer. Alternatively, you can go back on the market and look for a different buyer.
If the buyer comes back to try and renegotiate their price to a lower level, you have a couple of options.
- Accept the lower offer. Take the hit, and move on towards completion.
- Reject the lower offer. Go back on the market, and wait for more viewings.
Neither are great outcomes - which is why every homeowner dreads a down-valuation.
But what if the buyer pulls out completely? - We can help
This can happen.
Sometimes the valuer may down-value a property due to genuine issues they've identified with it. Once the buyer sees the findings, they may decide to look for a different property instead.
This is bad news for you as the seller, but exactly how bad depends on your ongoing plans.
If you're in the process of buying your dream home, and you're relying on the sale of your own property so you can move on, then a down valuation could mean you lose your dream house altogether.
If this is your position, our service may be the perfect solution.
If you're in the process of buying your dream home, and you're relying on the sale of your own property so you can move on, a down valuation could mean you lose your dream house altogether. If this is your position, our service may be the perfect solution.
With our service you can sell your house quickly, repairing your chain and keeping your next purchase on track. We can step in as your new purchaser, buying from you directly at a guaranteed price and moving quickly to patch up your chain. Follow that link if you'd like to learn more about our service.
As a seller, the alternative to either accepting your buyer's reduced offer, or agreeing a new sale quickly with a company like ours is going back on the market and waiting for more viewings. You may end up eventually securing a higher sale price this way, but you may lose any ongoing purchase you had planned because of the delay.
With down-valuations being yet another new hurdle for sellers to get over in the property market, our service may be more valuable than ever - we're happy and ready to help if you'd like to learn more.
If you think we could be your solution call 0800 133 7687 to speak with our friendly team to learn more. At the very least, with our guaranteed offers you'll have the peace-of-mind that you can move on to your new life without worrying what the bank’s next valuation will do to your dreams.
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