Most property developers, investors and landlords will have been there once or twice; you're looking at development finance, a new BTL mortgage or investing in a new-build in a lucrative area - and your plans are hit with a valuation that is well below your expectations.
What can you do; and is the investment dead in the water?
Let's look at why surveyors deliver down valuations, and how you can rejig your investment plans to ensure your project survives.
Down Valuations - When and Why They Occur
There are a million reasons a surveyor will return a valuation that is lower than you had anticipated.
One of the first things to do is establish on what basis the valuation has been calculated, and whether there is anything you can do to influence that.
- New builds are often down valued due to market uncertainty about depreciation after the initial sale, and demand for properties in a newly developed area.
- The lender might anticipate lower rental income than you think is achievable.
- Market uncertainty - particularly in the tumultuous environment of 2020 - can make a surveyor cautious about an optimistic valuation.
It's worth understanding that market appetite is a contributing factor; so if market values have dipped and soared over the last few months, most surveyors will be extra careful about being conservative.
Remember that an optimistic valuation could come back to bite them if the market dives again, and a lender could end up in a repossession scenario with a property that is worth well below the valuation. So it's fair to expect a little cynicism in the current landscape.
One of the most significant conflicts of interest exists between lenders, who will want the most conservative valuation figures to ensure their debt is always robustly covered by the value of the property it is secured against.
Conversely, an estate agent will push for a higher valuation, as they want the best possible sale price for a property on their books - since their commission is calculated against this figure.
Therefore, we have a prime situation for down valuations, with an unsteady market, conflicts of interest, and surveyors who will be erring well on the side of caution.
What Impact Can a Down Valuation Have on your Portfolio?
A down valuation doesn't automatically mean you won't be able to secure mortgage lending against a property; buy can have several knock-on impacts.
Some of the biggest issues to consider include:
- The LTV cap the lender is offering; and how much the down valuation will reduce your maximum mortgage amount by.
- Conflicts over surveys can cause time delays, and additional costs if you decide to invest in a second independent survey - which might have no impact on your lending capability.
- Lower rental predictions will decrease the amount you can borrow on a BTL loan and might make the investment unviable.
- Remortgages to raise capital to invest elsewhere, or buy another property, might fall short of the funds you need to raise if the property has been valued at less than anticipated market value.
Any decrease in a property valuation is, ultimately, going to mean you can borrow less than you expected - or, in some cases, can't borrow at all if a rental property looks not to be cost-effective.
If you have spare capital available, you might decide to go ahead. Still, many investors are reluctant to reduce their liquidity and prefer to rely on low-cost borrowing secured against their properties.
Actions You Can Take if a Property is Down Valued
So, the important bit - what you can do in this situation? Fortunately, there are plenty of strategies available to help you bounce back from a down valuation blow:
1. Renegotiate the property price.
First up, if you're buying a property that has been valued independently at less than you're considering paying, you are in a strong position to renegotiate that price.
One surveyor is likely to come up with a similar valuation than another, so it's a pragmatic choice for a seller to decide that they can't achieve their requested sale price if the property simply isn't worth that much.
2. Offer more security.
That could be in the form of a higher deposit, or it could be in the form of another security asset - but if you can reduce the lender's risk, they might be willing to offer the lending you need, hedged against a lower LTV or second security.
If the valuation isn't a considerable distance away from the property listing price, a small increase in the deposit might solve the problem relatively painlessly.
3. Appeal the valuation.
Say you're genuinely shocked at a down valuation and think that the surveyor has got it wrong, you do have the right to appeal.
To do so, you'll need to present evidence of three or more property sales, in the same area and of comparable size, to demonstrate that the selling price is fair and that the valuation isn't a reflection of current market conditions.
You can also lodge a down valuation appeal against a rental calculation if you know that you can achieve a higher rental income than a surveyor has indicated they think is achievable.
Just as with a property market value estimate, you'll need three examples of rental properties that match with your original anticipated income.
If you can collate a larger number of examples, you have a better chance of winning the appeal process. You'll also need to evidence properties that have already sold, since a home currently on the market with a comparable listing price isn't proof that the property will sell for that value.
4. Apply to a different lender.
Finally, it's always worth bearing in mind that every lender has different policies around LTV caps, risk exposure, and eligibility criteria. If one mortgage provider isn't happy to lend the value you need because of a survey, another might have no issue with it.
There isn't any assurance that a new surveyor, acting on behalf of a new lender, will return a valuation that is any different. Still, we often work with clients who are stunned at how easy it is to find competitive mortgage lending, with the insight of knowing which lender's criteria you meet, and who offers the most generous LTV ratios!
If you've received a down valuation, are concerned about a remortgage survey, or need help finding mortgage lending at a higher LTV than your usual lender can offer, get in touch with the Revolution team.
As an independent, whole-of-market broker with years of experience in the UK mortgage sector, our teams can offer tailored advice, and negotiate compelling lending terms to help your investments proceed, profitably.
Contact us now to discuss your personal options, Revolution Finance Brokers specialise in commercial and residential finance in Essex, Kent, London and Hertfordshire.