Mortgages : True value is in the eye of the beholder - Property valuation advice

There are few more emotive issues than the estimated value of your own property.



Anyone who has been or is intending to remortgage in the foreseeable future will be aware that an independent valuation will need to be completed in most cases. In the current property market, this can be a harrowing and eye opening experience. It has become increasingly evident that property valuers have been taking a very lean view of the UK property market and this has significant implications for seller, purchasers, remortgagers and, most importantly, mortgage brokers and IFAs.



According to London-based data services company Hometrack, which delivers a good indication of a property's value, house prices fell for 18 consecutive months up to December last year, when the average house price in the UK climbed just 0.1 per cent.


For most areas, last year provided the poorest house price growth - if any - in more than a decade. There is no doubt that 18 months of average values falling, or at the very least the speed of growth falling dramatically, have diminished homeowner equity levels and dented consumer confidence. Hometrack's national average house price in December was measured at £160,900, down 1.6 per cent from £163,474 in December 2004.



Glut



From a seller's perspective, the messages are simple: supply outweighs demand and it is a buyer's market. In the first quarter of last year, the number of properties available soared by more than 30 per cent.



During last year, the length of time it took to sell a house grew by more than 20 per cent to eight weeks. In 2004, it took and average of 6.5 weeks from listing to confirmed sale. Importantly, the sale price as a percentage of asking price was down to 93.5 per cent last year, endorsing the point that buyers exercised significant bargaining leverage over sellers and negotiated large discounts.



In real terms, a seller who lists his property for sale at last year's national average of £160,900 will, on average, achieve an agreed sale price or £150,441 and have to wait on an agonising two months to seal the deal.



Even at this price it is a bridge too far for most first-time buyers looking to get their toe in the property market. But there is some light at the end of the tunnel. First time buyers accounted for 11 per cent of total buyers in the third quarter of last year, according to the National Association of Estate Agents. This was up from 7.7 per cent in August. Brokers should be mindful of the important market sector in their marketing plans, and a further interest rate cut in the first quarter of 2006 could really kick start the property market.



Remortgage



From a remortgage perspective, the implications are significant and a conservative valuation can conspire to make the professional mortgage broker or IFA look a bit silly.



Brokers and lenders witnessed and unprecedented level of down valuations last year - where the property valuation is significantly less than the customer's initial estimate. Most lenders require a valuation to be completed on remortgage applications, particularly where the loan-to-value ration is more than 70 per cent. The major issue facing mortgage brokers is taking a customer's estimate of their perceived property value on face value, as invariably it will be on the high side. This is where the fun begins.



Let us visit the sale process of a typical mortgage broker. You spend a good few hours completing a fact find, issuing an independent disclosure document and building the confidence of your client in your ability as a professionally-qualified, Certificate in Mortgage Advice and Practice-endorsed, FSA-registered adviser.



You tell your client that you have more than 4000 mortgage products to choose from and you will find him one that fits his need exactly. A key cornerstone of the selection is the LTV ratio and this is based on the customer's estimate of his property's value.



This estimate will be based on a few things: knowledge of other properties that have sold recently in his street or neighbourhood, the press and a large dose of gut feel.



Clearly many clients will have an over-inflated view of what their property is truly worth; it is an emotive issue and one that can really bite the adviser. Imagine then you have taken all the details required on the fact find, you have sourced a deal, it is tight on equity - but based on what you know and have been told, the deal fits.



The valuation rains on your parade as it comes in much lower than expected - lower than the customer's rose-tinted estimate, lower than the flowery estimate given by the local real estate agent.



Now meet the independent valuer. Independent valuers are a cautious lot, and the subject of much cursing and blaspheming.



From a mortgage broker perspective, however, remember one thing. As far as a customer is concerned, you sent that valuer to value their property, you are the focal point of their mortgage transaction - indeed you are the expert. So when the valuation comes back well below expectations it is you, the broker, that will be left to deal with the problem.



This can create several problems. First, the deal that you diligently sourced from your 4000 choices may no longer fit the lender profile. Second, you need to explain to the client that his net asset position is not as good as he had thought. Third, you will be left to resurrect a new deal without much credibility left.



Some may think it is possible to get a valuer to change his mind. This happens about as often as the moon is blue. In fact, it happens about as often as often as a valuer gives a higher valuation than a customer's estimate.



Remember a valuer will need to substantiate his figure with comparable - and recent - local sales, which is usually tough to argue with.



Even arranging finance for a new build can be fraught with danger. One such case recently saw a mortgage arranged for a new build. The customer had negotiated a discount from the builder's original asking price and, by definition, set a market price for the new property.



Imagine explaining to the customer that the deal he had got on his property was not as good as he thought because a licensed valuation down graded the new purchase by £15,000. This resulted in the deal not fitting the lender criteria and a distressed customer at loggerheads with the builder. The builder was happy to back out of the deal and sell the property to another customer, happy in the knowledge that the chances of the same valuer turning up were remote. The consequence was a very unhappy customer and a very traumatic process for all involved, including the mortgage broker.



So what do we do in these downward trend times? Hometrack estimates that property prices this year will rise just 1 per cent, citing affordability as the major barrier to entry for buyers. Halifax is a little more optimistic, predicting a 3 per cent rise. Either way, the head days of double digit growth of past years are gone. It really is a challenge as a professional mortgage broker to tread the tightrope between realistic property valuations and a disappointment.



POSITIVE



There are, however, positive signs on the horizon for the property market. First-time buyer activity has increased, usually a precursor for renewed vigour in the property market.



Estate agents have reported their first drops in available housing stock for nearly six months, another sign that activity is starting to move the right way.



Interest rates are stable, and the much vaunted interest rate cut to stimulate a slowing economy has not happened - yet. Inflation and unemployment levels will need to be kept in check to facilitate a cut in rates. All of these things may happen or continue to happen; they may not.



In the interim, mortgage brokers need to deal with the reality of a bear property market. At point of sale, be armed with the facts and be ready to re-adjust your customer's estimate of his property value. Check property websites before your sales call and get a feel for local area conditions and trends.



Not only will you be armed with the facts, you may just save yourself and your customer a lot of heartache. Additionally, it is not a bad idea to get to know your local valuers; you will find the same names keep coming up.



When push comes to shove and you need to explain the salient points of a valuation, or worse still a down valuation to a client, you had better know what you are talking about. Saving the deal could rest on it.



Finally, at point of sale, cover yourself. Explain to the client that you are basing your product recommendation on his estimate of property value and that it is subject to qualification from a licensed valuer.



Remember property values are an emotive topic - so know your area, do your homework and you will reap that rewards with much less hassle.

John Smith writes useful, informative articles on the mortgage, loan and propety markets - http://www.blackandwhite.co.uk