Down valuations on the rise: how to proceed when the property you’re buying is deemed overpriced

June 15, 2022

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The old adage goes that the home is only worth what someone will pay for it – but let's say your bank disagrees?

Homebuyers are experiencing their moves scuppered by down valuations from mortgage brokers, who believe the property they’re buying isn’t well worth the price they’ve decided to pay.

But are eager buyers over-bidding for properties considering the stamp duty cut, or are lenders as well as their surveyors being cautious due to COVID-19? Which? investigates.

Buyers blocked by down valuations

Buyers facing a race against time to move prior to the end from the stamp duty holiday are now being stopped right where they are by down valuations.

A survey by Bankrate UK, a web-based mortgage comparison and financial informational site, found 46% of prospective buyers have experienced properties down-valued since March, using the most of homes down-valued by between lb5,000 and lb10,000.

Bankrate says down valuations were most common in Wales (63% of properties) and London (59% of properties).

Cottages received the greatest proportion of down valuations (66%), followed by semi-detached homes (48%).

What is a down valuation?

A down valuation happens when your mortgage company has a valuation survey done on the property you’ve agreed to buy and concludes it isn’t worth the amount you’ve agreed to pay it off.

For example, if you’ve agreed to pay lb200,000 and the lender’s valuation comes back at lb190,000, the home continues to be down-valued by lb10,000.

This shortfall means you won’t be able to borrow the amount you wanted, which you’ll must find the extra cash to pay for the agreed price or renegotiate.

It does mean you’re offering more than a surveyor thinks the home is worth, perhaps calling the entire transaction into question.

How do mortgage valuations work?

When you’ve had a deal accepted on a property, your lender will conduct its own valuation to guarantee the home will act as sufficient to safeguard the mortgage.

Mortgage valuations sometimes involve the lending company having a surveyor to go to the property and supply a report. This is apt to be the case if the mortgage is considered high-risk (for instance if you’re borrowing in a high loan-to-value level) or the property is non-standard.

Lenders may instead conduct ‘drive-by’ or online valuations, which look at house prices and recent sales data to determine value. These types of valuation were common throughout the COVID-19 lockdown when surveyors weren’t permitted to visit properties.

Why are properties being down-valued?

The property marketplace is volatile right now, with the stamp duty cut bringing greater demand and higher prices, but concerns remain within the future of the economy heading into 2021.

This brings the question whether buyers are over-offering, or mortgage lenders and their valuation agents are now being exceptionally cautious.

Will Rhind of the online large financial company Habito told Which?: 'Lenders do not have an affect on what independent surveyors value properties at, so it's not lenders being risk-averse.

'The reason this is likely happening is because there isn't enough sold price data for particular properties. Surveyors work off sold prices, not what is on the market.

'When we see a short, sharp increase in house prices – once we have in the impact of the stamp duty holiday – this means there just aren't suitable, comparable properties in that area to corroborate the larger price sellers are asking for, therefore, the down valuation'.

What to complete when you get a down valuation

Which? spoke to Chris, a first-time buyer thinking about purchasing a home near Manchester.

Chris made a successful offer on the property, but was instructed to take out after receiving a significant down valuation from his lender.

He told us: 'We then found a second property and made an offer. Everything was running smoothly before the mortgage valuation returned at lb10,000 less than we'd offered'.

This time, however, there was an answer. Chris were able to renegotiate the price using the seller, who decided to meet in the middle.

David Hollingworth of L&C Mortgages believes renegotiating might be more successful than attempting to appeal a down valuation.

He told Which?: ‘A down valuation could give buyers an opportunity to return to the seller and try to negotiate a lower price.

‘It will generally prove extremely hard to appeal a valuation decision – there would certainly need to be plenty of up-to-date and comparable transactions to construct a powerful case.

‘There is a chance that another valuer would have a different view, but there’s no guarantee. There’s not really a guarantee that another lender wouldn’t instruct exactly the same surveyors to act for them.’

Are buyers offering too much for properties?

With savings as high as lb15,000 on offer during the stamp duty holiday, house prices have been on the rise – resulting in concerns that some buyers might be paying above the odds.

The latest data from the Land Registry shows house prices increased by 4.7% year-on-year in September, compared to 3% in August.

Competition in certain areas has been fierce, with properties selling quickly and buyers competing to secure a deal. This has resulted in more buyers providing the full asking price.

The property portal Rightmove found that 26% of properties sold for at or over the selling price in August, compared to 22% in March.

The estate agency Savills told Which? that ‘momentum on the market has continued’ during the second lockdown.

Andrew Perratt of Savills says: ‘You may still find properties coming to the marketplace that are priced too high, but our own experience is the fact that properties are continuing to market inside a few percentage points of the guide price’.

How to create a deal on the house

If you’re contemplating buying a house, it’s vital to take time to seek information properly and not rush into making a deal.

While the stamp duty cut could offer big savings for some buyers, overpaying could have consequences in the long term, especially if the property market suffers a slump.

David Hollingworth says: ‘There’s lots of sales data available these days online for free, that ought to help borrowers assess their very own estimate against similar properties around the market’.

Will Rhind offers similar advice. He says: ‘Research your options by checking recent sold prices – not asking or listing prices. Look at how long properties have been on the marketplace, or maybe they’ve been discounted once already. If they’ve been on there for some time, they are probably overpriced’.