Most common bridging valuation mistakes revealed

Most common bridging valuation mistakes revealed




Stephen Todd, director of Valuation Audit Services, has highlighted the most common errors made during bridging finance valuations.

Speaking exclusively to Bridging & Commercial, Stephen has also offered his views on what impact Brexit will have on property valuations.

What are the common mistakes you noticed in bridging finance valuations?

The bridging finance market is a fast-paced environment, which provides valuers with a daily challenge in order to perform in line with lenders’ expectations enabling them to carry out a transaction, usually within a tight timeframe. However, a valuer requires time in order to inspect a property, carry out due diligence and give themselves enough ‘thinking time’ in order to provide a robust valuation.  

Anyone who has ever read a full loan security valuation report will realise that there are many sections to a report that all require thought and attention, which is probably why most people read the Executive Summary on the front page only, because they do not have the time to read it in detail. This is one of the reasons why Valuation Audit Services (VAS) was founded, in order to pick up on any property-specific risks or mistakes that a lender has not identified to help protect both the lender and valuer.

Some of the most common mistakes seen in valuations are:

Bases of valuation – Each lender has their own lending criteria and requires a property to be valued on different bases. For example, market value (taking into account existing lettings), vacant possession value (including no trading or goodwill of businesses), 180-day and 90-day values etc. A common mistake is for a valuer not to read a lender’s instruction properly and provide a valuation on the wrong basis, with a lender potentially lending money against a higher (or lower) value than they might have required. 

Comparable Evidence – Valuations rely on comparable evidence to determine a property’s rental and market value. Sometimes comparable evidence can be missing altogether from a report, but more commonly the mistake a valuer makes is not to relate any of the comparables to the property they are valuing and therefore provide a valuation which is not justified.

Valuation methodology/calculations – Reading a valuation should be like reading a book, start at the beginning and by the end you should understand how a valuer has arrived at the valuation. A common mistake is the omission of the methodology and calculations, which does not give the reader an ending to the story. This makes it very difficult to tell if the valuation is correct or not if someone does not have experience in valuations.

Purchase price and sales history – Providing the sales history, length of time on the market, number of bids received etc within a valuation report is crucial to a valuation’s accuracy. This is commonly omitted from valuation reports.

What impact will Brexit have on property valuations?

The immediate reaction of valuers was definitely one of uncertainty. Property valuation is an art, not a science, and relies on judgment taking into account comparable evidence in order to determine a view on value. Without transactions creating comparable evidence, it is impossible for a valuer to know what effect Brexit has had. As such it is likely that valuers might become naturally cautious in the short term until actual transactional evidence can prove that the market has changed. This has been evident with the range of caveats inserted into valuation reports highlighting to lenders that, given the referendum result, values reported might differ from a price actually realised following a sale, which questions a lender’s ability to rely on it.

The UK residential domestic market is established and resilient. The strong consensus is, and has been for some time, that demand outweighs supply with a need to create new housing for the expanding population. This will not change, regardless of the referendum result, and it would be surprising to see values reducing. However, they are likely to stabilise in many places in the short term.

It is clear that people’s moods have already become more optimistic and we are unlikely to witness a decline in the market like we did in 2008/2009. In fact, some markets are still recovering from the recession and bank finance has been much tighter ever since, so the market is not as exposed to high LTVs as previously.

Property values are generally driven by the strength of the occupational markets. If a building can be let easily, there will be an investor out there wanting to buy it. So we need to resolve the uncertainty sooner rather than later in order to protect the market in general. 

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