Why Properties Get Down Valued

Why Properties Get Down Valued
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Having a property you want to buy valued for less than you have offered can be frustrating. In this article we discuss why properties get down valued.

It’s said that buying a home is one of the most stressful things you can do in your life. It’s certainly one of the most expensive purchases you will ever make.

When a mortgage lender finds that the property’s value is less than the borrower is expecting, a down valuation will happen. This can add even more stress to an already challenging situation. But why are properties down valued?

In this article we will explain why it happens and give you an insight into how surveyors go about putting a value on a property.

Reasons properties can get down valued

When the mortgage valuation is lower than the purchase price, it can cause a lot of hassle for a buyer. To deal with this situation, it is always useful to understand why properties get down valued.

Market conditions

a pile of coins with a small model of a house on top and two further houses next to it.

The market dictates the price. In a slow one, prices tend to be lower, while in a fast and furious market, like we had in 2021/22, prices will be higher.

If the property market is moving fast and prices are rising quickly, it can happen that the valuation doesn’t reflect the higher value the property has gained. In such a case, the surveyor might be basing their valuation on past sales data that may not reflect the current demand and supply.

If you believe this is the case, then trying to appeal the valuation might be a good first step. Of course, that will only be an option if the lender allows you to appeal it.

Cautious surveyor

The surveyor is being cautious and conservative in their valuation, as they have to protect the lender’s interest. They must ensure the property can be sold for enough money to repay the loan in case of default or repossession.

Because the final say of the valuation lies with the surveyor engaged by the lender, you might struggle to argue against it. After all, the mortgage company doesn’t want to risk losing out.

If you think this is the reason for the down value, it might be better to look at your finances or renegotiate with the seller. Applying for a mortgage with a different lender, who uses a different surveyor, might also be a valuable option in this case.

Cautious lenders

When the economic situation is unstable, like it has been during the pandemic and its aftermath, lenders tend to get more cautious. They want to ensure that their risk is as low as possible.

While this can be frustrating for buyers, it’s unfortunately just one of those things that can happen when buying a property. And it’s difficult to argue against.

The trouble is that if one lender tends to be more cautious, many others will be too. So finding one that isn’t could be a challenge.

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Issues with the property

An independent surveyor will tell you realistically what is the value of the property.

In some cases, the property has some structural or maintenance issues that affect its value, such as damp, subsidence or poor insulation. This can result in a mortgage valuation being lower than the purchase price.

If this is the case, you have several options. You can negotiate with the seller, or ask the lender to have a retention on the mortgage. Of course, this means you have to find the money for the repairs.

You might also want to consider if you still want to go ahead with the purchase. Some of the issues that can cause a down valuation can be quite costly to fix.

Unique property

There is always some room for negotiation.

While most properties can be compared to other properties in the area, some are quite unique or unusual. Because valuations are based on comparable properties, this can cause an issue.

It’s also rather difficult to argue against it, because it will be based on the opinion of the independent surveyor.

And as we have already said, the lender will rely on their surveyor’s opinion because they trust them and know that they have their interests at heart.

In a case like this, you can look at your finances, renegotiate with your seller or try to apply to another lender, in the hope their surveyor has a different opinion.

Porperty is overpriced

When the mortgage valuation is lower than the purchase price, sometimes it’s because the property just isn’t worth that much. While a property is worth as much as someone is willing to pay, a lender has to look at their risk.

While you might think your chosen property is worth any penny of the price you have agreed, there is no guarantee that another buyer thinks the same. And this is the concern of the mortgage company. They want to be sure that in case they have to recover their investment, they won’t lose out.

Buying a property isn’t a simple transaction, after all you aren’t just buying bricks and mortar, you are buying a home. So when you find your dream home, it’s difficult to think about market value and other such things.

Emotional attachment, lack of research or pressure from the seller, agent or competitors can all be reasons why a buyer agrees to a price above market value.

In a case like this, it’s important that you put all your emotions aside. You don’t want to overpay for a property, do you? Renegotiating with the seller will be the only option here, unless your finances will allow you to buy the house anyway, and you are willing to pay more than the house is worth.

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How surveyors value a property

Make sure you understand all the mathematical details and do your due diligence.

When the mortgage valuation is lower than the purchase price, it’s easy to get frustrated. However, this won’t help. Instead, it will help to understand how surveyors come up with their valuation and why they are done in the first place.

That the independent surveyor is not being difficult when they value a property at less than what you believe it is worth. Their job is to make sure that they establish a realistic market value of the property so that the lender’s risk is appropriate.

The lender’s aim is, according to the Royal Institution of Chartered Surveyors (RICS), who are often instructed by them to help them establish the market value of the property:

  • To establish that the purchase price that has been agreed on a property is reasonable
  • And for remortgaging, the lender needs to establish that the market value currently of the home is what the borrower says it is.

Based on these two criteria, the surveyor will base their valuation on:

  • Checking other properties locally for their selling prices, where possible
  • Use their knowledge of supply and demand in the area and market conditions
  • Check the property’s condition to see whether it affects its value

So, ‘is a mortgage based on the purchase price or value?’ I hear you ask. It would be a great situation for all of us if mortgages were handed out for the home seller’s price.

Unfortunately, mortgage lenders have to be realistic and in a worst-case scenario, they will have to sell your home to recoup the balance of their mortgage debt. So they are not particularly interested in how much a homeowner says their home is worth.

Instead, they are interested in how much they can sell it for, if needs be, which means they need an accurate and independent valuation of that property.

You may even find that it’s worthwhile investing in a full property report from a RICS surveyor, so you are not only made aware of any issues with the property you want to buy, but the surveyor will also offer an idea of its market valuation.

This information can also be used to negotiate a lower price. The valuation figure being quoted may also prepare you for disappointment when it comes to sourcing a mortgage to buy the property.

Down valuations are fairly common

Unfortunately, down valuations are an increasing problem.

It can be heartbreaking when the mortgage valuation is lower than the purchase price. But how often does it really happen?

It is actually fairly common for a valuation to be lower than the agreed purchase price. And the higher the value, the more often it will happen. Especially, in more challenging economic situations or under certain market conditions.

During the pandemic in 2020/21, the housing market got a boost, partly due to the stamp duty holiday and partly because people wanted more space following their experience with lockdowns. As a result, prices rose sharply, which worried lenders.

Because the prices were artificially inflated due to the circumstances, lenders anticipated that they would come down again soon. To keep risks low, mortgage companies became more cautious and down valuations increased.

Once the market rebalances, down valuations tend to reduce again. However, in 2023, this didn’t happen, because the price fall was very gradual. This made it difficult for lenders to guess where the price will end up. And that made them more cautious.

So while down valuations are part and parcel of the house buying process, their number will increase and decrease according to market and economic conditions. It’s always good to keep this in mind.

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There are many reasons why properties get down valued

Having a property down valued can be frustrating. But it’s not an uncommon occurrence, so it’s just one of those things that can happen when you buy a home.

There are various reasons why it can happen and many of them will be out of your control, such as market conditions or cautious surveyors.

In the worst case scenario, it could mean that you won’t be able to afford your dream home, but it doesn’t have to come to this.

There are things you can do to handle down valuation without walking away. If your property has been valued at less than you offered, read our article about how to handle a down valuation.

Authors

  • Steve Lumley

    Steve Lumley has years of experience writing about property. His output has covered everything from property investment, news for landlords and student tenants to articles on how to run a successful portfolio and starting out as a property investor. He has also written several books on the subject.

    View all posts
  • Paul James

    Paul James, is a marketing expert with a passion for property. As well as being a property investor, Paul has also worked within the marketing departments of some of the UK’s leading estate agents. Paul is the founder of Property Road.

    View all posts
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