Covid is wreaking havoc with some property purchases, mortgage brokers have warned, as agreed sale prices are downgraded by banks and building societies.
In the most severe cases, it is resulting in house sales and chains falling through and homeowners unable to move, as mortgage lenders say properties are worth less than the price agreed between buyer and seller.
The problem is that while some sellers and buyers have been ambitious with their asking prices and offers, the pandemic is creating uncertainty about future house prices and with that comes what are known as ‘down valuations’.
While many purchases will be unaffected, these risk potentially becoming part of any house-buying chain and so could affect anyone trying to buy or sell a property.
House sales are falling through due to a practice known as ‘down valuations’
A down valuation occurs when a bank or building society checks the value of a property for sale – and that valuation ends up being lower than the agreed purchase price.
As a result of this down valuation, the mortgage lender then refuses to provide the required loan to fund the purchase.
It leaves the person buying the property either having to negotiate a new lower price with the seller, or being forced to bridge the gap between the originally agreed purchase price and the smaller mortgage offered due to the lower valuation.
The seller in turn can agree to reduce the agreed sale price – or meet somewhere in the middle – but this can have a knock-on effect and leave them unable to afford to buy their next home.
If an agreement can’t be reached, the house sale falls through, affecting the rest of the property chain – something that is beginning to occur more widely across the country.
Lenders have become increasingly nervous about valuations amid the pandemic, due to concerns about job losses and future house prices.
Jonathan Harris, of mortgage broker Forensic Property Finance, explained: ‘Regardless of assurances to the contrary, Covid has been wreaking havoc with property transactions and valuations.
‘Lenders and surveyors are nervous of over-egging loan-to-values and property values, especially on cases where the loan-to-value and borrowing requirement is at the upper end.’
Hayley Fewster and her fiancé Olli Harp have seen their house sale fall through
One couple who have been at the receiving end of a down valuation are Hayley Fewster and her fiancé Olli Harp.
The sale of their Essex flat fell through after the buyer’s lender said the property was not worth as much as the buyer had agreed to pay.
Hayley explained: ‘We started marketing our flat at the beginning of September, so we would meet the stamp duty deadline.
‘We’d already fallen in love with a property, and had an offer accepted. We found a buyer quite quickly, and agreed an offer, which was about £6,000 less than what we had originally hoped to achieve.
‘Everything was going smoothly, and our 85 per cent loan-to-value mortgage had been approved for the house we wanted to buy.
‘Until our buyer’s lender came to value our flat and down valued it by £16,000.
‘Due to the property we want to buy, we really needed the equity in our flat for our next purchase, so were struggling for options.’
How to deal with a down valuation
As a buyer:
1. Negotiate a new price with the seller that both parties can work with
2. Find a new lender that will offer the deal you need
3. Increase the size of your deposit from your savings
4. Bridge the gap with money from friends and family. Perhaps try the Bank of Mum and Dad
5. Pull out and look for a new property
As a seller:
1. Consider lowering the sale price or meeting somewhere in the middle
2. Encourage the buyer to try another lender with different lending criteria
3. If the numbers don’t work for you, get estate agents or solicitors to negotiate reductions or new deals up the chain
4. Put your property back on the market and try to find a new buyer who can offer the required amount
5. Look for a cash buyer
Down valuations occur when a valuation is lower than the purchase price agreed
Hayley and Olli looked to see if they could lower the sale price and still move, covering the shortfall with some of the money used for their deposit. But this reduced the size of their deposit from 15 to 10 per cent and meant they could no longer get a mortgage.
Hayley explained: ‘We then looked to see if we could get a 90 per cent loan-to-value mortgage, but there were only two lenders providing these due to Covid, and we couldn’t make them work.’
She explained that one lender refused to provide loans to buyers with any other type of debt such as a hire purchase loan.
‘We went back to our buyer with the lowest figure we could practically accept, but he couldn’t make this work and so pulled out of the purchase,’ she said.
‘Our flat is now back on the market, but we’re concerned that we might be in the same position if we find another buyer.
‘Unfortunately, the amount the lender valued our property at was only an increase of £8,000 in four years, which given house price growth during this time, seems mad to me.’
She added that it makes a mockery of the stamp duty cuts, saying: ‘If I’m saving £8,500 on stamp duty, yet missing out £16,000 on the down valuation, I might as well wait until after Covid to sell as I’d potentially be better off.’
WHY DOWN VALUATIONS OCCUR
This Is Money’s mortgage expert Sarah Davidson explains: Frustrating as the current situation is for those trying to purchase a home, the reality is that it is very difficult to claim anyone is right or wrong here. Valuations are an opinion, albeit one made by an experienced and professional person.
Estate agents value properties based on what they think people will offer and at what price they can agree a sale.
At the moment, many put homes on the market at about 5 to 10 per cent over what they think they’ll get because everyone wants a discount. Many buyers are trying their luck with an offer around 10 per cent under the asking price.
This is one definition of value – a property is worth what someone is prepared to pay for it.
That’s different from the mortgage valuation though. Surveyors are legally obliged to value a property on behalf of the mortgage lender as part of the mortgage approval process.
This mortgage valuation assessment is based on the risk that property and mortgage represents to the lender. Surveyors making this valuation factor in the future saleability of the property in this market and post stamp duty holiday.
Say the valuer puts a £200,000 value on a property. Then the borrower defaults on repayments following a job loss.
Say, a year later the lender has to repossess and put the property up for sale in what’s known as a ‘firesale’ – in other words, they accept a quick offer over the best possible offer.
In that same year, let’s say house prices drop and the property is valued at an open market price of £150,0000. A firesale price might be £125,000 at auction.
If that property had a 90 per cent mortgage against it, the lender is facing a shortfall of £55,000. That debt belongs to the borrower.
If the borrower cannot pay and is declared bankrupt, the lender is forced to write it off as a loss.
That scenario is likely to trigger the lender to sue the valuer for placing too high a value on the property in the first place. Though contracts between valuers and lenders vary, it’s entirely possible that the lender is within their contractual rights to do that.
This is why all surveyor firms take out insurance policies, to protect them in case this happens. But the cost of professional indemnity insurance for valuers has rocketed over the past 13 years, largely because there were a lot of court cases brought by lenders after the credit crisis in 2008.
Professional indemnity premiums are so high now, that there is a huge cost implication and disincentive for valuers to put that £200,000 value on the property in case of the very real possibility of the above scenario materialising.
Being sued costs their insurer a huge amount if they lose – especially if that is multiplied for a big firm of surveyors over thousands of properties. Their insurance premiums go up and it could put them out of business.
This is why valuers insist on there being recent comparables of similar properties in the same area having sold within the past three months for that price – it’s evidence they can defend themselves with in court.
The net result of this is that it makes sense for valuers to put a lower value on properties ‘just in case’.
Ultimately, the consumer is paying for the valuer’s cost of doing business because lenders do not take the valuation risk.
It’s a large part of why lenders aren’t doing high loan-to-value mortgages at the moment. Lower debt ratios provide them with a double insulation where the borrower is taking the equity risk through their deposit.
While no consolation for borrowers, this is basically causing gridlock in the housing market because mortgage valuations are not matching up to agreed sale prices.
Experts suggested there may be a solution in some cases, including asking family to help bridge the financial gap.
Mr Harris added: ‘In this case, the £16,000 down valuation seems trivial and unnecessary but the margins on such transactions are tight and similar scenarios will arise until lenders and valuers can see more stability return to property values.’
Mark Hayward, of Arla Propertymark, suggested more down valuations are happening due to Covid.
He explained: ‘We are seeing more of this happening due to the caution of lenders.
‘The question is whether the market will continue performing as it has or will it drop away. That was the expectation late summer but there is no sign of that – and lenders remain cautious.
‘Lenders do not want to be repossessing properties that are in negative equity. Any down valuations on high loan-to-values means that they will not go ahead.’
He added: ‘It is a difficult situation and in this case it is worth trying to encourage the purchaser to try another lender who doesn’t have the same criteria.
‘It is difficult as you’re in the hands of those you can’t control. No-one knows what the future is as we are not going to return quickly to life as we knew it, even if you get the vaccine.’