Every time I see mention of the term “downward revaluation” I can’t help but think what an ever-present bone of contention this has been in my 35 years in the mid-market mortgage market, and yet it continues to be a misunderstood aspect of the home buying process.
So it was with a wry smile that I recently read a report by the independent London property and rental agency Benham & Reeves, stating that around 390,285 UK homes had been devalued by surveyors compared to to those sold in the 12 months to April. 2021. This represents around 43% of all UK home sales found in the data reviewed, so a sizeable number.
As a real estate agent, I learned the term ‘Caveat emptor’
What I take away from this contentious issue is that it reflects the poor articulation and promotion of the home buying process, often by some professional participants who should be better informed.
Perhaps the timing of the official valuation has been rather overlooked in the rush to process healthy business volumes, driven by a combination of Chancellor Rishi Sunak’s tax relief move and program generosity. quantitative easing from the Bank of England.
When the official appraisal is made during a home sale transaction, it is the professional appraisal of market value, usually held for a period of 90 days and often made for the buyer’s mortgage lender , even for the buyer regardless if a cash transaction. Any reference to a value of the property prior to this point is largely guesswork, but often given by the seller’s real estate agent or from “research” by the seller themselves.
The problem for both parties who then find themselves in the actual sale, and their agents or mortgage advisers, is that the term “value” has already been used many times by both buyer and seller, either to establishing an asking price for the property or by negotiating its actual sale, to the point of leading them to believe that the agreed sale price is the official valuation. Therefore, a lower official valuation is referred to, incorrectly in my view, as a “downside valuation” rather than a professional open market valuation.
Perhaps the timing of the formal valuation has been rather overlooked in the rush to process healthy business volumes
Are we as an industry – whether mortgage lenders, disposal brokers, real estate agents or mortgage advisers – doing a disservice to our customers – whether they are buyers or sellers – by not referring them fully to this key element of the transaction? Should we better understand the current market environment from which official valuations should be derived?
During the first two decades of this century, the housing market became much more dysfunctional in its functioning, from the boom years of the early 2008s to the credit crash of 2008, the five years of declining transactions and lower prices that followed, and a few years of regaining momentum until the arrival of the Brexit withdrawal and the Covid-19 pandemic in 2020.
In terms of actual property transactions, in England these have never recovered from the pre-2008 period of between 1.2 million and 1.43 million. In only five of the past 13 years since 2008 have housing transactions reached one million, according to HM Revenue & Customs. Combined with the fact that in each of the last four years “net additional housing”, including a huge amount of new construction, has exceeded 200,000, this further highlights the relative decline in overall transactions of accommodation in England. The fact that the year to March 2021 saw only over a million transactions owes a lot to government incentives, creating artificial conditions in both the new and second-hand home markets.
Space for movement
Professional appraisers have had a difficult road to travel and their room to agree on an valuation at the agreed selling price has sometimes been limited, in some regions due to the lack of contemporary comparables. Apart from a small tolerance, they must arrive at a value sought by professionals, a value that they can support in any future claim from a mortgage lender, if necessary.
This has been an ever-present bone of contention in my 35 years in the mid-market mortgage market.
If the official estimate is made lower than the agreed sale price, this allows the buyer a moment of reflection, often under pressure from everyone to complete the transaction.
I never studied Latin but I quickly learned the term “Caveat emptor” while working as a real estate agent. So this key part of the home buying process is one that all buyers should take as a benchmark when deciding whether or not to pay this mark for the property.
James Chidgey is a housing commentator and former mortgage professional