Like religion and politics, house prices are a topic that is sure to spark a lively debate over the dinner table. Most of us have an opinion when it comes the value of our own home and how much we believe it is worth but when it comes to the buying and selling process, it’s important emotions are left at the door and buyers take heed of the surveyor’s valuation.
As housing supply continues to be constrained, advisers are reporting some buyers are overriding the surveyor’s assessment and topping up the difference between what the mortgage company thinks the property is worth – the valuation – and the seller’s asking price.
Buyers who have been searching for quite some time and might have been the victim of gazumping or had sales fall through, can perhaps start to exhibit clouded judgement when they do find a property they like. Either through desperation or a genuine love of a property, they may choose to ignore a surveyor’s valuation and proceed to buy.
A property for example may be on the market for £400k with a buyer prepared to pay that amount. If the valuation comes back as £370k however, the logical thing to do would be to follow the valuation and not offer the £30,000 difference through a channel outside of the mortgage.
Unlike an estate agent’s ‘For Sale’ price, a surveyor’s valuation is evidence-based and derived from other recent transactions on similar properties in the area. It is what mortgage lenders use to assess their lending risk, so going against this would be ill-advised.
An estate agent’s appraisal is purely speculative and often based on the assumption that house prices in the local area will continue to climb. They will usually test the market by putting a property for sale at the highest possible price – especially in a busy market.
We may have seen the market start to slow in recent months, but demand is still high. The average time it took to secure a buyer in July was just 33 days– down from 44 in January and 36 days last July, according to Rightmove.
In such a market, sellers are able to find significantly more buyers for properties, making it easier to find someone who will potentially pay over the odds – heightening the risk of a mismatch in valuations. We have not seen a recent uptick in so-called ‘down valuations’ within our business but even in a quiet market, there will always be instances of a seller asking for more than the property is worth.
Borrowing money from either friends or family or dipping into savings to make up the difference between a seller’s estimate and a surveyor’s valuation however would not be wise for a number of reasons.
Ultimately, by proceeding, the buyer will have bought a property for more than it is worth and this could have several repercussions.
If clients are borrowing at the higher end of the LTV scale and are already stretched financially, affordability wise, wherever their extra money is coming from, paying it back alongside their repayments potentially risks making the mortgage unaffordable.
They could also encounter trouble further down the line when it comes to remortgaging. Given their property’s value is unlikely to have risen in line with what they believed it was worth when buying, they might then struggle if they want to withdraw equity in future.
Making up the difference is particularly risky in a period of house price growth. Annually, house prices increased 8.2% year-on-year in August, according to Rightmove. While prices are not predicted to fall substantially over the coming year, we are also unlikely to see any dramatic unexpected increases that might lead to a positive outcome for those properties that have been artificially inflated by an estate agent.
Buyers who do decide to go down the route of making up the difference might choose not to tell their adviser but if your client does confide in you that this is what they plan to do, where possible you should advise against it and try and add some perspective to the situation.
Simon Jackson is managing director of SDL Surveying
