Banking

Nearly 400k property transactions hit by down valuations last year

Nearly 400,000 properties have been down-valued in the past year, as mortgage lenders poured cold water on sellers’ high price expectations.

An estimated 390,285 homes have been down-valued, according to research by estate agent Benham and Reeves – putting potential sales in jeopardy and taking negotiations back to the drawing board.

A down valuation is when a surveyor acting for the buyers’ mortgage lender decides that the price they have agreed to pay for a property exceeds its market value.

Lenders’ valuations are based on the prices of similar properties in the area. If a seller has priced their home too highly, they could get a down valuation

This means the bank or building society will not lend them the full amount they need to buy the home, as they would risk losing money in the event of a repossession and resale.

The average down-valued property saw a discrepancy of between £5,000 and £10,000 on average, according to the report.

A mid-range drop of £7,500 would see the typical home down valued by 2.8 per cent.

This would represent 5 per cent of the average property price in the North East, or 4.9 per cent in Northern Ireland and 4.3 per cent in Scotland.

In London where house prices are at their highest, this valuation adjustment would result in a drop of just 1.5 per cent.

What is a lenders’ valuation based on?  

Unlike other types of property survey that might be carried out during the sale process, a lenders’ survey is not based on the condition of the property or any material, structural or planning factors.

Instead, the surveyor will seek to ensure that the price being asked for the home is fair, based on other, similar transactions in the local area.

According to the RICS: ‘The market value is usually based on comparable market evidence, which will typically refer to recent transactions of similar types of properties in the local area, other economic indicators and also the professional’s knowledge of the local market and economy.

‘For this reason, it is quite possible that the lenders valuation at market value does not match the asking price of a property set by a seller or agent.’

 

But London has seen one of the highest instances of down valuations of all UK areas, with a huge 59 per cent of transactions being affected according to Benham and Reeves.

It estimates that 47,769 of the 80,965 homes sold across the capital in the last year would have been subject to a down valuation.

The North West saw 54,043 of the 96,506 homes sold in the last year being down valued, or 55 per cent.

Meanwhile, the South East is the region to have seen the most transactions hit by a down valuation by volume.

Of the 137,107 homes sold in the last 12 months, an estimated 60,327 are thought to have been down valued.

This means more than 40 per cent have had their sale price disputed.

While half of all transactions in Northern Ireland were down valued, a lower level of homes sold means that a total of 12,346 transactions have been impacted in the last year – the lowest number of all UK areas.

Marc von Grundherr, director of Benham and Reeves, said: ‘Down valuations can be a real thorn in the side of those eager to progress with a property transaction but unfortunately they are a prevalent occurrence within the UK property market.

‘They often occur due to over expectant sellers setting their asking price too high but we’re also seeing more lenders request a greater degree of caution by valuers in a market where prices are climbing at a rate of knots.

Benham and Reeves’ research was based on a devaluation report by Bankrate. 

What happens if you get a down valuation?

Sellers have several options if their home is down-valued.

They can look for another buyer, but they will need to be using a different mortgage lender than the one who has already down-valued the home. 

Another option is to wait, and hope that the property increases in value. However, this carries the risk of losing an interested buyer, and there is always the possibility that the value of the home could go down.

House prices have risen dramatically over the past year, with Nationwide reporting that the typical UK home saw an 11 per cent price growth in August based on its mortgage lending. 

However, some experts have predicted that prices will begin to fall now that the incentive provided by the stamp duty holiday has now been significantly reduced.  

If neither of the above options work, the seller may be forced to lower the asking price.

Approaching a different lender, or renegotiating the price with the vendor, may help a buyer to push their property purchase through in the event of a down valuation

Approaching a different lender, or renegotiating the price with the vendor, may help a buyer to push their property purchase through in the event of a down valuation

For buyers, one solution is to approach a different mortgage lender and hope that they arrive at a new figure.

They could also renegotiate the price with the seller.

Alternatively, they could try and find enough money to cover the shortfall between the amount that the lender is willing to lend, and the amount of their original deposit.

This could mean dipping into savings or even taking a loan, though these options should be exercised with caution.

Von Grundherr said: ‘As a seller, you can look for a new buyer purchasing through a different lender and hope they agree on the value of your home. 

‘Or you can hold tight until values increase at the risk of losing your buyer or simply accept the lower value placed on your home.

‘As a buyer, you can also negotiate with the seller or lower your offer, or you can get the property valued by a different surveyor and lender. Otherwise, you face getting a loan to cover the shortfall or bumping up your deposit to cover the cost.’

Down valuations are most common when buying a new property, but they can also happen when remortgaging.

If a homeowner cannot find a lender willing to give them the mortgage they require, and their current two- or five-year fixed rate has come to an end, they may need to move to their current lender’s standard variable rate, incurring higher levels of interest.  

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