Have you been affected by a down valuation?
If you’re buying or selling a property in England or Wales you now have a one in five chance of this happening to you. But first let’s take a look at what a down valuation is.
- Once a buyer and a seller have agreed a price for a property, the buyer’s mortgage company will instruct a surveyor to check what the property is worth.
- The surveyor will then visit the property, on behalf of the mortgage company, and look at criteria such as the current condition, sale price of similar properties in the area, and market conditions.
- If the surveyor then believes the property is worth less than the price agreed by the seller and the buyer, they will provide their new lower valuation to the bank or building society. This is known as a “down valuation”.
- For example: The buyer and the seller agree a price of £100,000 for a property but the surveyor values the property at £90,000. The property has then been down valued by £10,000.
“There has been a “significant” rise in homes being valued at less than what buyers have agreed to pay, the UK’s largest mortgage advisers have said.”
What happen’s when a property is down valued?
If, let’s say, like the example above, the property has been down valued by £10,000 there are only a few options available. You can contest the valuation. Renegotiate with the seller to the new valuation. Find an extra £10,000 yourself to make up the difference. Or the sale falls through.
Down valuations have been blamed for an increase in housing chains breaking down across the UK.
Once a property is given a down valuation, the buyer isn’t able to borrow as much money as they thought they would. This often results in the house sale falling through if the seller cannot be persuaded to lower their price or if the buyer cannot find the extra cash.
There has been lots of speculation as to why only a couple of years ago, down valuations affected one in twenty sales where as we have seen a huge increase recently to one in five sales affected. This is the highest rate since the UK’s financial crash in 2008, according to agents from 10 mortgage adviser groups contacted by the Victoria Derbyshire programme.
But how can we be sure that it’s the surveyors that are down valuing properties, and not that sellers and estate agents aren’t simply over-valuing the properties in the first instance?
But why is is happening so often?
I would suggest it’s a combination of a few factors.
- Surveyors covering their back
- Lenders expecting a housing crash
- Estate agents overvaluing
- Buyers willing to over pay
Surveyors covering their back – It’s possible that surveyors are prophesying a [financial] crash. By valuing properties at a lower rate they are also protecting the lenders financial risk should a crash happen and therefore covering their own back. Furthermore surveyors must be certain that they can evidence a particular property’s value on paper to avoid being sued by lenders for overvaluing properties if the bank repossess and cannot then recover all of their money when they sell.
Lenders expecting a housing crash – Leading mortgage brokers told the BBC’s Victoria Derbyshire programme there has been a significant rise in the number of homes being valued by banks and building societies at less than what buyers have agreed to pay. An increase in lenders placing down valuations on properties could signal a growing anxiety over the health of the housing market. This would of course feed the surveyors cause to cover their backs.
Estate agents overvaluing – Tricky market conditions could be responsible for some agents overvaluing properties to secure much-needed instructions leading to inflated house prices. I have actually written an article on the issue here. Estate Agents Are Overvaluing Properties
Buyers willing to over pay – Maybe the title to this is wrong. However with a limited amount of properties coming to the market compared to recent years has created a higher demand and therefore it’s reasonable to suggest that buyers will over pay.
I’m not convinced that a crash is on the horizon. Personally I believe there will be a further reduction in the number of properties coming to market. The positive to this scenario is with a restricted supply of properties there will be less chance of a crash. However that isn’t to say it can’t or won’t happen.