If you're a current investor or thinking of getting into the market, it's vital that you understand the three biggest problems with valuations today and how to deal with them. (It could mean a great deal for you too).
Hurdle 1 – Land registry at ‘net net' price
Regular readers of my investment blog will already know that there are big problems with the property valuations industry today that are making it very hard (sometimes impossible) to get deals done.
It used to be that when you negotiated a deal and did the right thing by disclosing an incentive the higher amount could be registered on land registry (what we call ‘gross price'.)
This meant that when the time came to remortgage, the valuer would see what the higher price was and use this as part of the basis of their valuation.
Nowadays it doesn't matter what the price was. Even if you bought at a genuine discount, anything inside 12 months and possibly as long as two years, your property will most likely be ‘down valued' to the LOWER amount or what we call ‘net net price'.
If it's longer than 12-24 months then this normally is long enough for them to take account of the market and comparable properties.
It also now means that if you are buying as part of a bulk deal, regardless of discount, the price will be reset to the net price you paid for the one to two years because it was bulk. This doesn't present much of a problem as most mortgage deals have redemption penalties within the first two years.
The only exception to this is buying off plan where there are phased releases and completions. Valuers understand that the people who bought in phase 1 get a better deal than subsequent phased buyers and whilst they will value at the net price this won't affect other people's valuations.
The disappointing fact of the matter is that in any other business when you buy bulk it acts in your favour. Just because you got a good deal doesn't mean anyone else will. People recognise you got a deal and if anything they are happy at your shrewd business sense.
Not in property though. Do a bulk deal and rather than benefiting from negotiating a good deal, everyone else will now get the same deal as you. Hardly a normally functioning market but it's the reality of the property market we find ourselves in.
Hurdle 2 – Repossession comparables, or ‘fire sale' price.
Rather than following ‘red book rules' which are the guidelines that all valuers should follow, the down turned market has now meant that lenders are instructing valuers to value as a fire sale price or repossession price. Often these are ridiculously low and do nothing to help the market or present a realistic picture on pricing.
It is likely to mean that developers won't do a deal as the price is simply too low for them to justify selling.
And worse, if we send 10 valuers in nowadays we'll end up with 10 different values. Hardly comforting when you consider these people are supposed to be the property experts. If they cannot get it right then what hope do the rest of us have?
Hurdle 3 – Professional indemnity cover
Valuers' sole priority right now is covering their bums when it comes to their PI insurance. In fact, one of the big players (Lexicon) went out of business because their PI premiums shot up so much due to claims.
It's this climate that has meant that valuers are more likely to down value just in case you have your property repossessed rather than considering the market. In other words, by down valuing, it's less likely that the deal will get through (which means they're safe), or, the client is required to put more money in and therefore the bank has less risk (which means they're safer). Forget natural market forces or just doing their job. This is all about risk management for them.
And of course they get paid whether they value the property properly or not. So the incentive is all wrong.
I'm not saying that some properties don't deserve to be down valued. There are many cases where this is needed and appropriate. But fair is fair and some of the horrific practices that are going on now are just plain appalling.
A valuation by definition should be ‘an arm's length transaction between a willing buyer and a willing seller' whereas most valuations are now based on how much the valuer wants to cover their ass and limit their risk.
Don't think for a minute that I'm blaming valuers only here. The industry as a whole seems to be focussed on destroying itself from within rather than organising and finding a visionary leader who can lead it through these tough times.
Your opportunity has never been greater
Because of this turmoil there's still lots of property available at ridiculous prices which may land you a cashable, bankable profit immediately and once the market turns you'll be sitting on a pretty bit of equity ready for remortgage.
Give the team a call if you want to take advantage of the last 6 months of recession prices. 2012 is the year that the rest of the UK resets itself by the middle of next year things will be very different for UK property so call the team on +44 (0)207 923 6100 or on their mobiles.
Live with passion,