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Valuing a landlord’s property

How to value a landlord’s property?

On the face of it this seems a pretty straight forward question to answer and one in my professional capacity of surveyor I was asked many times.

For instance a landlord may have had their residential investment property valued recently. They may have needed it valued for a remortgage. Let’s say the surveyor valued the residential investment at £250,000 just over 12 months ago. Since then a landlord knows that the Governments own figures produced by the DCLG (Department for Communities & Local Government) show that the average house price is up by 9.1% in the year to December. Therefore, a landlord not wishing to overvalue could reasonably assume that the value of their buy-to-let property would have risen by 5% or another £12,500 giving an up to date valuation of £262,500.

Where do professional landlords go for their landlord insurance?

However, before getting carried away with the apparent ease of the process, landlords need to be wary of these generalist ‘back of the fag packet’ estimations.

How accurate is the property valuation?

For a start, landlords need to be cautious about placing too much emphasis on mortgage valuations. The guidance from the Royal Institute for Chartered Surveyors on how a surveyor should value residential property was contained in Appendix 5.1 of the Royal Institute for Chartered Surveyors Red Book Appraisal and Valuation Standards (Red Book). The basis for the valuation of a residential investment property is normally its’ market value. Market value is defined in the Chartered Surveyors hand book as:

‘The estimated amount for which a property should exchange on the date of valuation between a willing buyer and a willing seller in an arm’s-length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently and without compulsion.’

A mortgage valuation is carried out by a chartered surveyor acting for the mortgage company prior to the buy-to-let mortgage being approved. The aim of the surveyor is simply to ensure that the value placed on the residential investment property by the potential borrower is accurate. In practice this figure does not need to be that precise. This is because its real purpose is to ensure that there is sufficient equity in the residential investment property to guarantee the lenders capital should the borrower have to repossess. The relatively low loan to value requested by most landlords and the fact that house prices have risen steadily over a decade has meant that generally a buy-to-let lenders security has been seen as very secure.

This means that buy-to-let lenders have taken a fairly relaxed attitude to the whole process of valuation and certainly up until the ‘credit crunch’ and covid were keen to approve as many buy-to-let mortgage applications as possible. The result is that buy-to-let mortgage valuations on residential investment properties take all of 20 minutes to complete and are largely desk top exercises using comparibles sourced from online systems.

Surveyors implicitly encouraged by lenders hungry for new business have been keen to view the ‘glass half full’ rather than half empty in arriving at a residential investment property’s value. The result has often been valuations that whilst not technically wrong, if tested in the current less buoyant housing market could prove to be wildly optimistic.

Other forms of property valuation

If a landlord hasn’t recently obtained a buy-to-let mortgage, where else is it possible to obtain a valuation of their residential investment property from? Most landlords who have had their buy-to-let property valued are likely to have had this done by an estate agent. This could have been carried out because of the curiosity of the landlord or because they intended to sell.

Again landlords need to be cautious about putting too much store by an estate agents value. Its widely assumed that when an estate agent comes out to a landlord buy-to-let property, in their smart suit, with folder and tape measure in hand, that you the landlord are about to have the job done by a professional valuer. The chances are that this will not be the case.

Whilst 25 years ago valuations were carried out by professionally qualified valuers or surveyors; cost cutting means that many estate agents do not employ a single professional surveyor. Their staff are likely to have worked in a pub or coffee shop before starting on their estate agent career. The result is that with a mere 350 hours of study an estate agent can obtain the highest qualification available to them. This contrasts with the 5 years minimum required to be a Chartered Surveyor.

The momentum effect of property valuations

One of the problems of this lack of professional accountability is that estate agent’s valuations can be subject to a ‘momentum effect’. This is where estate agents have seen house prices in the area rise because it is perceived to be on the up. The agents then proceed to extrapolate the figures upwards buoyed by the general feeling that the market is rising and will continue to do so. If each agent values in such a way, in a rising market, valuations can accelerate well ahead of the real market.

The other thing that landlords need to appreciate is that an estate agent will give you the landlord the valuation that you want to hear. If you listen very carefully in the sales spiel the estate agent will at some stage ask you as the potential vendor ‘how much do you think your residential investment property is worth?’. After all the estate agent wants your business and they know that they are more likely to get it if they give you the landlord a valuation figure that you like, which is not necessarily the one that they are confident they can get.

Fixed property investment values

The problem for many landlords and for residential property owners generally is that once they have a valuation carried out, however imperfect they were, these often serve to fix a landlords expectations. These unrealistic property valuations & expectations can then be very difficult to change.

A friend of mine had an unfortunate experience when he bought a buy-to-let property off the back of an inflated valuation on his own home which he ultimately intended to sell. However, the housing market in the area rapidly cooled, but his expectations of owning a half a million pound property had already been established by the estate agent. He was then effectively trapped by this unrealistically high valuation and had made a whole series of business decisions based on it. He then found it very difficult to accept that he was never going to get the value he once was led to believe that he had. Eventually, several years on he has had to concede that the property was probably all but for a short blip in time was worth a lot less than the magical half a million. He has now sold up for 30% less.

Owners of residential property including landlords are notoriously bad at accepting that values have fallen or are less than a value that they were once given. They are on the other hand very receptive to high valuations and ready to believe that the value of their buy-to-let property has gone up.

The result is that landlords and residential property owners will hold on to their residential properties with their over valuation rather than sell at a perceived loss. This tends to disguise real price falls, as price levels and market valuations rely on market evidence. Therefore, weak or falling residential markets will often be signalled by a fall in transactional volumes as by a slump in house prices.

Importance of up to date property valuation

For the vast majority of landlords, having an up to date valuation for their residential investment property is not of pressing importance in the same way as having their residential investment property fully let. However, where it is significant is if landlords are making important business decisions off the back of the assumed values of their portfolio such as was the case with my unfortunate friend. In this situation landlords need to be sure that they are aware of the pitfalls in valuing their residential investment property and make sure that their decision making is not skewed by inaccurate or unrealistic valuations. If landlords are thinking of selling then landlord should be ultimately aware that the true value is of their residential investment property is simply ‘what a buyer is able and prepared to pay for it.’

Information is power
Landlords are reminded that Property Hawk’s Property Manager allows them to keep & update the value of their residential investment properties giving a landlord an instant up date of their portfolio’s value.

Chris Horne the author of this article was employed by the country’s oldest surveying practice Drivers Jonas and English Partnerships as a Development Manager. In the coming weeks he will explore the world of DIY property valuation and examine the best ways for a landlord to value their own buy-to-let investments.



Other useful information on being a buy-to-let landlord:

Guide for new landlords

3 Pillars of buy-to-let

Becoming a student landlord

Finding investment property

Property investment clubs

Property investment talk

BMV properties explained

Lease options

Advanced investment strategies

Landlord insurance options

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