



Buying property can become a nightmare. It's probably the most expensive thing you'll ever buy is a popular cliché. Probably true so why do so many buy property without having it looked over by a professional?
"The mortgage lender will be having a valuation survey carried out - surely that's good enough?"
'Could be' is the best answer.
The valuation survey is not really a survey as such. Quite often it is a 'drive by' where the surveyor has gone on-line to see how much similar property in the area has sold for and then a quick look from the car (especially if it is difficult to find a parking space). It shouldn't happen, but it still does.
If the outside looks in reasonable condition then a comparison with how much the property is up for (or the 'offer' made) with how much other similar property has sold for - job done and onto the next one.
Example:
George and Betty want to buy a 4 bed detached, 1930's house with a garage in a road where there are similar houses. They put in an offer for £565k.
The valuation surveyor does a quick check for houses sold in that area. He notes a similar detached house with a garage was sold for £575k last year. Another went for £475k two years ago but didn't have a garage.
A quick calculation: £475k +2%pa = £490,190. Put £7 to £10k on for a garage puts it about £491k tops.
(2%pa - the valuation surveyor will know roughly how much house prices have gone up in that area. The RICS also provide guide figures)
George and Betty want a mortgage for £300k against the total price of £565k. (They are selling their property and will have £265k after paying off their previous mortgage).
The valuation surveyor will provide two figures to the mortgage company.
1. The market value
- how much it would sell for at today's prices.
2. An auction figure
- that is typically about 80% of the market value.
Note it isn't necessarily the price the property appeared at the estate agent though. It is how much it is LIKELY to sell for.
The mortgage lender needs to know how much the property will be worth or likely to fetch at an auction. Why? Well if George and Betty don't pay the mortgage regularly then the mortgage lender can go to Court and ask a Judge to give permission to evict them.
Then the mortgage provider has to sell the property as quickly as possible to try and claim all the outstanding loan. If the property has been significantly damaged such as partly carried out building work, lack of maintenance etc. then the value of the property could be lower than when the mortgage was first arranged.
(The mortgage provider normally takes a gamble that the value of the property will increase each year so it helps offset devaluation due to neglect).
The valuation in this example would suggest the property is worth about £565k. If George and Betty are only borrowing £300k the mortgage provider should easily achieve that amount if it has to go to auction. (£565 x 80%= £452k).
So the valuation survey hasn't gone into much detail other than how much the property is worth. The surveyor should have a look around the property and the property adjacent for a quick check on the overall condition. The roof for example of a 1930's property will probably need recovering with tiles or slates. Slates have a rough lifespan of about 80 years if blue slates and 100 years plus if green slate from the Lake District. If the roof covering looks recent such as concrete interlocking tiles or concrete plain tiles then there shouldn't be any cause for concern.
Conversely old slates, slipped slates, obvious roof repairs etc. suggest it is about time for a re-cover. The valuation surveyor will put that in his or her report back to the mortgage provider. It is usually by way of a retention. That means the survey report will state the roof is in need of re-covering and a 'ball park' figure will be given as to the cost of the work.
The surveyor can use a pricing book such as Spon's or Wessex (now as computer software making it even easier to estimate). The estimated figure is exactly that, an estimate. It is not a quote.
In this example the property at auction should be worth a lot more than the mortgaged amount
(Auction price 452k against £300k to be mortgaged). It is probable that the full mortgage would be approved and comment may be made about the roof covering.
If however the amount to be mortgaged was close to or exceeded the auction price then a retention is more likely. For example George and Betty achieve less selling their existing property and require a £400k mortgage.
Comparing the auction price with the mortgaged amount the result is close. Therefore the mortgage valuation will either be declined and George and Betty will lose their valuation fee. Or it may be approved with a retention.
The figures would be:
Property value at market price £565k
Property value at auction price £452k (£565 x 80%)
Roof re-covering £25k
Auction price less roof re-covering £427k (£452k - £25k)
Mortgaged amount £400k
Difference of £27k (£427k - £400k) is very close.
Property pricing is not an exact science. Although today the value may be £565k next month the value could drop due to other influences therefore the mortgage company try to ensure there is sufficient equity against the mortgage. That basically means if they have to sell at auction the amount of money achieved will cover the outstanding amount on the mortgage. They will also try to recover their costs for Court Action and so on.
Retention
For this example it may be £23k so the retention could be £25k. That means the mortgage provider will lend £375k with a proviso that the roof will be re-covered to an acceptable standard. When the work has been completed and guarantees provided then the mortgage provider will then release the £25k retention and add it to the mortgage.
That means George and Betty will have to borrow or obtain sufficient money to have the roof re-covered before they can add it to the mortgage. The issues will be:
a) mortgages at present have a very low interest rate. The pay back is over a very long period so the repayments are small.
b) Borrowing money will be a lot more expensive especially if your credit rating isn't very good. The repayments will be comparatively more than for a mortgage. If George and Bettys' income just about covers the mortgage and their other outgoings then a short term loan of £25k may not be possible.
How can having a Building Surveyor look over the property save you money? - That's the next blog