The myth of ‘down valuation’ - does it truly exist?

Most residential purchases rely on mortgage finance and therefore, a lender’s valuation is usually required to establish that the price being paid for a property represents the it’s ‘market value’.

Paying a purchase price over the estimated market value can place the lender and parties to the sale at extra risk. A mortgage valuation is therefore usually required to determine the value of the property for the lender.

If the mortgage valuation is less than say, the asking price, offer price or agreed sale price (which reflect worth to the parties involved but not necessarily market value) some outside the valuation profession may call it a ‘down valuation’. The sale can still go ahead, but usually only if the purchaser has the funding to make up the difference.

In reality there is no such thing as a ‘down-valuation. What is being described is the difference between worth (to the individual buyer/seller) and market value.

Asking price

An estate agent will usually undertake some sort of appraisal for marketing a property, including sometimes referencing comparable properties, followed by a discussion with the client as to an appropriate asking price. This is not a valuation in RICS terms. It may reflect an aspirational price for the market (particularly in times of growth) and the individual needs of the seller. The agent’s role is not to produce an accurate market value but to achieve a good price for their client, the vendor. An appraisal for marketing is a reasoned estimate of the best price that might be achieved at sale – which informs the asking price.

The mortgage valuation

Firstly, it’s important to note that a lender’s valuation isn’t a survey of the property’s condition or any possible issues. It is a limited check carried out to ensure the market value of the property is at or above the price being paid for it and to calculate the loan the lender is able to offer. RICS advises purchasers to get a survey from an RICS professional, to inspect the condition of the prospective purchase, and whether it has any potential issues (subject to the type of survey instructed). A valuation independent of the lender can also be instructed as part of this process.

The valuation report carried out for the lender is normally carried out by an RICS Registered Valuer who has a duty to report independently and accurately the market value to the lender. All RICS valuers in the UK are regulated by RICS against international valuation and ethics standards.

The market value is usually based on comparable market evidence, which will typically refer to recent transactions of similar types of properties in the local area, other economic indicators and also the professional’s knowledge of the local market and economy.

For this reason, it is quite possible that the lenders valuation at market value does not match the asking price of a property set by a seller or agent.

An increase of ‘down valuations’ in an uncertain market?

Surveyors cannot speculate value; they have to base it on evidence and reach considered conclusions. Market value is determined for a particular valuation date. Valuation can be challenging when house prices are falling or rising at a faster rate than typical, taking into consideration economic challenges, or when transaction levels are perhaps not what they might be. Surveyors can sometimes be accused of being cautious or near sighted in such markets, with some presuming valuer’s providing valuations, for example, at less than the agreed offer price, is just to avoid negative consequences from the lender clients. This is not the case, with valuer’s principle aim being to report an accurate valuation and to fulfil the terms of their instruction.   

Who is the client?

It is important to recognise that the ‘client’ in most circumstances is say a bank or building society (the lender), not the person taking the mortgage. The lender is  asking the valuer to provide them with their opinion of the market value of the property to safeguard themselves both from any loss that may be incurred if they lend too much against an individual property, and also align their capital adequacy requirements under financial regulations.

RICS Registered Valuation Professionals, are required when valuing a property for secured lending purposes to do so in accordance with RICS Red Book Global Standards and the RICS Valuation – Global Standards: UK national supplement 2018, VPGA 11 for all written valuation work they undertake on behalf of their client.

RICS issue advice to individuals buying a residential property, with the above being aimed primarily at members of the public.