What is a Down Valuation? Causes & Prevention Tips (UK 2024)
Down valuation has impacted nearly half of UK properties (46%) in recent years, according to recent data. If you want to avoid the stress and keep your property sale on track, this article will walk you through the following:
- What causes down valuations and how to avoid them
- Strategies for buyers and sellers to handle a down valuation
- How to challenge a down valuation with evidence
Let’s get started to ensure you’re prepared to tackle down valuations with confidence.
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- What is a Down Valuation?
- Causes of Down Valuations
- The Impact of Down Valuations
- Mortgage Valuation: What It Means for Your Loan
- How to Avoid Down Valuation
- What To Do After Down Valuation
- The "We Buy Any House" Scenario: When Valuation Goes Down
- Professional Help: When to Seek Expert Advice
- Long-term Implications of Down Valuations on the UK Property Market
- Final Thoughts and Key Takeaways
- Frequently Asked Questions about Down Valuations
What is a Down Valuation?
A down valuation happens when a mortgage surveyor—the professional who assesses the property on behalf of the lender—values a property lower than the price you and the seller agreed on.
Let’s say you agree to buy a house for £250,000, and both you and the seller are satisfied with the agreed sale price. However, when the mortgage lender assesses the property, they determine it's only worth £240,000. That £10,000 difference between the agreed sale price and the lender's valuation is known as a down valuation.
This can happen because lenders tend to be more cautious, examining market trends, recent sales of similar properties, and what they think the property could resell for.
In fact, homes priced between £400,000 and £500,000 have been hit hardest by down valuations recently. The lender’s main worry is not lending more than the property's worth, which can leave a gap between the mortgage they offer and the amount you need to buy the house.
Expert Advice from our Property Expert Paul
If you’re dealing with a down valuation, collect evidence of similar properties in the area that sold for more. Sharing this with the lender could lead them to rethink their valuation. If that doesn’t work, you might want to negotiate with the seller to lower the price or be ready to put down a bit more to cover the difference.
Causes of Down Valuations
Sometimes, lenders choose to give a lower valuation to protect their interests, as it helps them reduce the financial risks associated with the loan.
This strategy is often used in uncertain or fluctuating markets, where the lender wants to be extra cautious to ensure they’re not overextending on a loan. In these cases, a lower mortgage valuation works to the lender's benefit by minimising potential losses.
1) Market Fluctuations
The property market is always changing, and these shifts can directly impact valuations.
For example, during a downturn, lenders often become more cautious, which may result in lower and more conservative property valuations.
This can be particularly challenging for new buyers entering the market, as they might face stricter lending criteria and a higher risk of down valuations.
2) Overpricing by Estate Agents
Sometimes, estate agents set a property's price higher than its actual value to attract sellers.
While this might seem like a good strategy initially, it can backfire if the lender’s valuation comes in lower. Overpricing is a common reason for down valuations, as lenders tend to base their assessments on more objective criteria rather than just the asking price.
3) Property Condition Issues
The condition of a property has a major impact on its valuation.
If a survey uncovers problems like structural damage, outdated electrical systems, or the need for extensive repairs, the lender is likely to lower the valuation to reflect the costs needed to bring the property up to standard.
For instance, structural repairs can be pretty expensive, with the average insurance claim for subsidence costing around £6,000. This potential expense is factored into the lender’s valuation, often resulting in a lower figure.
The Impact of Down Valuations
Down valuations can have significant consequences for both buyers and sellers since they can affect the entire property transaction process. Let’s explore how these impacts are displayed for each party.
For Buyers
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Mortgage implications: When a down valuation occurs, the most immediate effect is on your mortgage offer. If the lender values the property lower than the agreed purchase price, they may reduce the amount they’re willing to lend.
This can leave you with a shortfall and require you to either increase your deposit or renegotiate the purchase price with the seller.
According to research from property buying firm HBB Solutions, sales hit by down valuations experience an average reduction of 2.8%, which, based on the average UK house price of £286,397, amounts to about £7,978. However, this figure can vary widely.
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Surveyor valuation lower than offer: If the surveyor's valuation comes in lower than your offer, it can put you in a tough spot.
The lender will likely base their mortgage offer on the lower valuation rather than the price you agreed on. This can lead to delays as you may need to rethink your budget, renegotiate with the seller, or even reconsider whether to go through with the purchase.
For Sellers
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Potential sale collapse: For sellers, a down valuation can be a setback. If the buyer’s mortgage offer is reduced because of a lower valuation, the buyer may not be able to proceed with the purchase.
This can lead to the collapse of the sale and force the seller to put the property back on the market, which can be both time-consuming and frustrating.
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Reduced property value perception: Even if the sale doesn't collapse, a down valuation can damage the perceived value of the property.
If potential buyers hear that the property was down-valued, they may question whether it’s worth the asking price. This can lead to fewer offers or less interest overall and create a ripple effect that makes it tougher to sell the property at the price you want.
Mortgage Valuation: What It Means for Your Loan
A mortgage down valuation greatly affects the amount of money lenders are willing to lend you.
Loan-to-Value (LTV) Ratio Changes
The Loan-to-Value (LTV) ratio is how much of the property's value the lender is willing to loan you.
If the property is down-valued, the LTV ratio is based on this lower value, not the price you initially agreed on. This often means the lender will offer you a smaller loan, so you might need to find extra funds to cover the difference.
So now, they might only offer you 90% of £280,000, which is £252,000. That leaves you with an £18,000 gap that you’ll need to cover by increasing your deposit or finding another way to make up the difference.
Higher Deposit Requirements
If the lender offers less than expected, you might need to come up with a larger deposit.
For instance, if you planned to borrow 90% of the property's value but it’s down-valued, you’ll now only get 90% of this lower amount. This means you’ll need to find extra funds to bridge the gap between what the lender is willing to loan and the price you agreed to pay.
Potential Changes in Interest Rates
If you have to increase your deposit, it might change the mortgage deals available to you.
Some mortgage lenders offer better interest rates for lower LTV ratios, so this could help you get a better deal. However, if you can’t increase your deposit, you might face higher interest rates or find it harder to get a mortgage.
How to Avoid Down Valuation
Avoiding a down valuation requires a few smart strategies to keep your property transaction on track.
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Realistic pricing strategies: Set a fair asking price by researching local market trends and recent sales of similar properties. Overpricing might attract initial interest, but it increases the risk of a down valuation, which can derail the sale.
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Property improvements: Make sure your property is in good condition. Simple fixes like fresh paint, minor repairs, or tidying up the garden can positively impact the valuation. Consider upgrading key areas like the kitchen or bathroom to boost the property’s value.
Related read: Home Selling Mistakes that will Turn off Homebuyers (Checklist)
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Choosing the right estate agent: Select an experienced estate agent who knows the local market. They’ll provide a realistic valuation and help you market your property effectively. Avoid agents who suggest inflated prices, as this often leads to down valuations.
Related read: Smart Questions to Ask your Estate Agent Before Selling
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For New Buyers: If you're new buyer, it's important to avoid overpaying. Work with a knowledgeable estate agent who knows the local area well and can guide you in making a realistic offer that reduces the risk of a down valuation.
What To Do After Down Valuation
When a down valuation occurs, it doesn’t have to mean the end of your property deal. Both buyers and sellers can use effective strategies to handle the situation and keep the transaction moving forward.
Valuation Advice for Buyers:
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Renegotiate the price: Use the down valuation as a basis to renegotiate with the seller. If the property was valued lower than the agreed price, you can argue for a price reduction that aligns with the lender’s valuation.
Do you know that 2 in 5 buyers get 5% or more off the seller's asking price? -
Increase your deposit: If the seller isn’t open to lowering the price, you might need to consider increasing your deposit to cover the shortfall.
Most banks typically prefer a 10% deposit on the property you’re buying, according to Zoopla. By raising your deposit, you can help secure the mortgage and keep the purchase moving forward.
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Explore other lenders: A different lender might value the property differently. If you’re not happy with the initial valuation, you could try applying to another lender who might offer a more favourable assessment.
Valuation Advice for Sellers:
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Review the valuation report: If you think the lender’s valuation isn’t inaccurate, carefully review the report. You can challenge a down valuation, but you’ll need solid proof to make your case.
Start by looking up recent sale prices of similar homes in your area using the Land Registry.
Find at least three properties that sold for a fair price. Your estate agent might also be able to help gather this information.
Once you have the evidence, present it to the lender and ask them to reconsider their valuation.
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Offer to meet halfway: If the buyer is struggling to cover the difference due to a down valuation, you might want to consider lowering your asking price a bit to meet them halfway. This can help keep the sale on track while still making sure the deal is fair for both sides.
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Market to cash buyers: If a down valuation puts your sale at risk, it might be worth marketing your property to a company that buys houses for cash. They’ll use their own funds to purchase properties, which means they aren't tied to mortgage valuations.
The "We Buy Any House" Scenario: When Valuation Goes Down
In the "We Buy Any House" scenario, a down valuation can play out a bit differently. These companies often provide quick cash offers, but they base their prices on their own valuations, which can sometimes be lower than what you’d expect.
If the valuation comes in lower than you hoped, you might need to decide whether the speed and the stress-free sale are worth accepting a lower price.
It’s important to go in with your eyes open, understanding that while these companies offer a fast sale, the price might reflect a more conservative valuation. Be sure to weigh the pros and cons before proceeding.
Professional Help: When to Seek Expert Advice
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Role of Surveyors and Valuers: These professionals can independently and accurately assess your property’s value. Seeking their advice can help you avoid down valuations by setting a realistic price or challenging an unfair valuation with solid evidence.
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Legal Considerations: Sometimes, getting legal advice is a good idea, especially if a down valuation is putting your sale or purchase at risk. A solicitor can guide you through the contracts, help with negotiations, and make sure your rights are protected every step of the way.
Related: Conveyancing in property explained
Long-term Implications of Down Valuations on the UK Property Market
Down valuations can have a lasting impact on the UK property market.
When properties are regularly down-valued, lenders often become more cautious, tightening their lending criteria and potentially offering smaller loans. This makes it harder for buyers to secure mortgages and for sellers to get the prices they want.
Over time, this can lead to a general slowdown in the market, as both buyers and sellers adjust their expectations. Down valuations can also shake consumer confidence, making people more cautious about property transactions and financing, which can further cool the market.
Final Thoughts & Key Takeaways
Down valuations are a common challenge in the UK property market, affecting both buyers and sellers by potentially disrupting transactions and influencing pricing strategies.
As the market evolves, understanding the causes and impacts of down valuations will be necessary for handling future property deals. Stay informed, prepare adequately, and seek professional advice to reduce the risks associated with down valuations.
Key Takeaways:
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Set realistic expectations: Price your property realistically and be prepared for potential valuation discrepancies.
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Be prepared to negotiate: Both buyers and sellers should be ready to renegotiate terms if a down valuation occurs.
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Seek professional help: Engage surveyors, valuers, and legal advisors to navigate down valuations effectively.
