UK Property Investment - Banks Undervalued Asking Price

B

Brendano

Guest
Has anyone else had this experience ? I am in the process (?) of buying an investment property in Birmingham and am due to sign next week. The banks valuers (who I have to pay!!) have valued the property at St£130k, the asking price for the apartment is St£155k leaving me to make up a shortfall. This despite recent valuations from same valuers agreed with the asking price. Land registry figures are saying that at worse there is a 1 - 2% downward shift. Given that I can only borrow 85% on an Interest Only mortgage it looks like I have to come up with extra St£25k on top of 15% down payment plus other costs !!
 
Sorry to hear that. The credit crunch is seriously hitting the UK market.

Banks have become very conservative in their lending. One (think Nationwide) will only lend 70% on new builds now.

Is it off plan? have you put a sizeable deposit down? If not and its just legal fees you've spent then I would pull out asap.
 
Hi Ringledman, thank you for taking the time to reply to my post.
It has come as a bit of a kick in the head as I was about to close on this deal before christmas. It is an apartment scheme in Birmingham city centre which was off plan as you suspected. I believe there where 10 or 12 investors from Ireland who bought and some of these people would have closed a few weeks ago. To the best of my knowledge these purchasers didn't have the same problem ie the valuation coming in so far below the asking price.
I used an insurance bond by way of deposit and as I have only been informed of this development yesterday (Friday) I haven't had the opportunity to see if I can get out of this deal, to be honest I had been happy to proceed despite the downturn as I felt that it was a good investment in the medium term. What will make it very unattractive is the requirement for the extra funds upfront.
 
Out of interest what is an insurance bond as a deposit? Never heard of that.

Is it a 1 or 2 bed flat?

I guess your options are to remortgage at home if you have equity to do so or to pull out and lose your deposit.

What about going to another bank for a mortgage quote? May cost you more in getting a new survey done but they may value it better.

I don't think you should rush into pulling out though. The new build market is suffering and the developer will be looking to get you to complete. I doubt they have too many people waiting to buy. On this basis I would explain to the developer the situation and buy yourself some more time to sort out what you are going to do to fund the shortfall or give you more time before pulling out.

Good luck.
 
There's an old expression "don't catch a falling knife".

The UK market is at a tipping point now:
http://news.bbc.co.uk/1/hi/business/7118336.stm

Personally, I think you are mad to want to buy a new build flat in a regional city, especially given that these are the units that are most exposed in the current UK downturn

If you are set on buying the flat, then you need to go back to the developers, and offer the survey price, rather than the asking...

In the medium term the general market might rise, but regional cities like Brum are awash with 1 and 2 bed new build flats, and so would probably be depressed in price for some time to come
 
Brendano,

I would get another valuation done as they can vary wildy from one valuer to another. I have had the same thing happen recently in the UK myself.
The other 2 options are to question the valuation by getting the developer to provide comparables on both value and rental potential (I assume its a btl mortgage?)...option 2 is to push back at the developer although if you secured with an exchange bond its legally binding and you would lose your 15% deposit unfortunately. Hope this helps.
 
I think you should be grateful to the valuer for saving you from getting your fingers burnt! You should take a close look at the difficulties in the buy to let apartment sector in the uk at present and consider the difficulties you may have in renting your place out. Will you be able to fund the mortgage if it is vacant for any period of time?
 

easy to say but when he's put 15% already down its not much help.
 
Hey you guys, thanks for all the advice!!

BeanPole you are right, I will speak to the developer tomorrow although I doubt they would except a new offer especially as my original offer is legally binding. Telling me not to invest in Birmingham isn't quite so helpful, I don't agree that the downturn is going to be anything like the media are suggesting and this investment will be based on performance over a number of years.

SarahW I am trying to buy a property which I believe to be worth £155k, the banks valuers however have all of a sudden started to value these (newly built) apartments at £130k despite valuing them for other buyers up until very recently at £155k. This despite the fact that the UK Land Registry states this week that house prices in the midlands are up between 1.7 and 2.9% year on year. How can the banks valuers suddenly revise their valuations downwards by more than 15%. I have a legally binding contract but how can anyone be expected to find £25,000 to complete this purchase in this situation? This is what I am seeking advice on.

Ringledman to answer your question an Insurance Bond or Exchange Bond is an instrument you can use instead of a cash deposit. In the event of a default the Bond company guarantees your deposit to the developer, it also gives the purchaser protection against a developer going bust and losing their deposit. My Bond cost c£1,000 for 10 months cover of £15,500 and allowed me to proceed without tying up that amount of money for 10 months.

Ennisboy, you are familiar with the Exchange Bond concept. I will take your advice and seek another valuation although this may involve switching lenders as the valuation was given by my chosen lenders nominated valuer. You say that the same thing happened to you recently, would it be rude to ask what you did ?

Webtax the valuation doesn't get me out of the contract it jusy means that I have to find a lot more cash than expected to close the sale. You may be right about the rental market in the UK or then again you may be wrong !? These are the chances you take but I felt it was worth the punt! That debate is for another forum I think as I am just trying to deal with my situation which pertains to my commitment at the moment.

Thanks again.
 
1 Bed, 550 ft2 with Balcony. Does not include car park which is available.
 
Most UK banks accepted professional valuations obtained by owners in order to secure financing up until quite recently.

This practice was clearly open to abuse and most finance houses now wholly rely on nominated valuers who will be dropped in a heartbeat if they are even suspected of overvaluing properties.

Unfortunately (IMO) the revised valuation for your appt would appear more realistic. Would contact agencies (Wolfes/Knight Frank) to get a feel for rental / re-sale value on the ground. They're at the coal face and won't **** you as little is moving at present. Then it's your call whether you even proceed with the contract. What's your potential loss if you walk away at this stage?

If this isn't an option and you can cover the expected rental deficit over the next 3 - 5 years (assuming UK mortgage) then I believe Birmingham to be better positioned than most to provide positive returns in the medium to long term.

If you've got the cash flow would advise you to hang in there.....you won't lose your deposit & things will improve but it's going to take a while.

IMO this will be an even greater problem for off-plan purchasers in Ireland over the last few years where pre-closing bank valuation reductions will be far more dramatic.......
 
Brendano said:
1 Bed, 550 ft2 with Balcony. Does not include car park which is available.
Click to expand...

Brendano,

If I was you I would walk away from the 15% depoist. I know of a large syndicate in the UK in a similair predictament that was also late on in contractural stage etc. They walked away though, the difference being their depoist was £7m.

They considered the HP downturn against lower bank revaluation [same as you] and were left a hole that could not be financed because of the credit crunch. Ringleman posts quite alot on HPC in the UK. I suggest you go into same and consider your situation again. Especially as your apartment is very vunerable being more than likely located on brown site inner city developement which is everywhere. Check out Birmingham sub-forum on http://www.housepricecrash.co.uk. A lot of crazy posters but more of them are relevant and on the money too. Thread very carefully in the UK, that's my advise...
 
Brendano said:
Webtax the valuation doesn't get me out of the contract it jusy means that I have to find a lot more cash than expected to close the sale.
Click to expand...
Odd. The preliminary property contracts that I have seen for an advanced purchase contained a clause that allowed a painless exit if you could not obtain a "normal" mortgage against generally available commerical rates on the property, but as this is off-plan in the UK I guess things may be different. Worth checking the small print though. Good luck. 15K5 is a fair whack otherwise...
 
Brendano,

Just to answer your further question on valuations.
Yes the valuer would have been on the lenders 'panel' but they normally have 2-3 options on valuing companies.
You can either:
1.try to question the valuation with back up comparables and see if they will up value (the developer and local agents should be able to help here)
2.Get another valuation done from the lenders panel
3.Get another valuation done independantly and/or switch lender
4.Talk to the developer but contractually I doubt they will do anything.

Hope this helps and good luck with whatever you decide to do.
 
Don’t Believe everything you read in the paper……. ‘last quarter?’

As widely predicted for several years many city centre new build flats from Newcastle to Basingstoke have not only failed to increase in price over the last 3 years but will lose a fortune over the next 2 to 3!

Taking Newcastle as an example there are hundreds and hundreds of new builds unsold by developers some on the market since 2005. There are hundreds of 2 bed’s owned by BTL’s stood empty whilst the ‘investors’ ask £800 per month in rent, not because this is the market rate but because that’s what they need to cover their mortgage and block management charges! Oh and there’s another 1000 due for completion in 2008 should anyone feel inclined to 'invest'!

BTL’s is a dangerous market for the inexperienced and naïve investor
 
Surveyors/valuer’s employed by a lender have two things in mind when valuing property.

  • I’m valuing to protect my customer (the lender) in the event of the purchaser failing to perform under the terms of the mortgage contract between them and they have to take possession and sell to recover the debt plus costs.
  • In the event of either party suing me in the future will I be able to objectively justify my valuation so my professional indemnity insurance covers me?
In a rising market they can value at the front/top end of the valuation window. Conversely in a stagnant/falling market the valuation will be lower, building in a margin of safety to allow for the falls. Just as in the run up to the top this helps to reinforce market sentiment and therefore drive prices higher, on the way down it acts to reinforce the falls. This happened in the UK 1989 to 94 crash and the Florida crash Late 2005 to 2009? Two years ago in Florida there was no end of Brits whinging because valuers were consistently ‘down’ valuing properties the buyers thought were ‘cheap’ or fair value. Those ‘low/down valuations’ prevented many from buying at top saving many from 40% negative equity and yearly operational losses.

What the OP needs to take an opinion on is this: Is walking away from the deposit the lesser of two evils?

On the assumption that all lenders are now down valuing new build off plan city centre flats (and Birmingham has been in the press for 18 months with falling new build flat prices), so the OP proceeds by upping the deposit. On the one side you have to weigh the opportunity cost of the deposit being put down and all the upfront charges/costs. Then look at the ‘realistic’ net rental to be achieved allowing for a 10 months rental year to factor in voids + all other running and mortgage costs.

It may well be that the rent achievable is £100 per month less than your costs (all in). So you’d be subsidising the property to the tune of £1200 pa (the numbers may come out a breakeven or a slight cash flow positive position). With your starting point being that the flat has dropped £25k (£155k to £130k) in value before you take possession and may fall (lets be conservative even though every man and his dog is saying the city centre flats are at the beginning of a huge crash) only a modest -4% a year for the next 3 years. That would leave you with a paper loss of circa £42k and id could take a further 4, 5, 6 years to get back to where you started?

Is any one on here in any serious doubt about the severity of the financial turmoil in the markets and the impact on the UK property market, starting with new city centre flats?

http://business.timesonline.co.uk/tol/business/industry_sectors/construction_and_property/article3048591.ece

http://www.moneyweek.com/file/11557/latest-issue.html



It is very difficult to walk away from the deposit but your in the good company of hundreds of thousands who are or are about to face the same decision.

Good luck.
 
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