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The Valuation was the problem

We’ve all heard that before. A deal, be it a house sale or a factory falls through because the valuer down-valued it causing the bank to revise (or retract) its offer of a loan. Really? Did the valuer down-value the building to such an extent that it was the sole cause of deal failure?

As a valuer for more than 30 years it has been a cause of no little frustration that as a group we get such blame. It is certainly true that some valuations I have seen leave much to be desired but there is much misunderstanding as to what a valuation is, how it is arrived at and how it should be used.

We are industrial and commercial valuers. We spend our waking hours looking at, measuring, describing and comparing buildings which in some cases are disparate in nature. Over a period of a professional life spent in a specific area one gets to see most (I can’t say all) buildings and many more than once; but familiarity with the buildings and area is not enough. A full and thorough understanding of the macro-economic and political factors affecting property must be known. It may sound highfalutin but we are Land Economists (indeed many chartered surveyors have Land Economics degrees, as do I) and we must understand economic trends as well as any banker, accountant or financial adviser at least how such may affect property and specifically how it affects property in the market where the valuer operates.

A valuation is not a rubber stamping exercise. It is a professional opinion based upon experience, local knowledge and an understanding of where the building sits in the context of the market as it is at the date of valuation.

However, we are asked, usually by the banks, for our “evidence” in support of our valuations. Evidence, both rental and capital evidence is generated from completed transactions. There is a hierarchy of evidence with deals done by one or ones firm being the best evidence and hearsay of a deal from a third party unrepresented in a transaction you have no direct involvement with being the weakest. Arbitration evidence is almost worthless.

But being “evidence” means that at the point it was used, it is already historic and can therefore be challenged. Don’t get me wrong, evidence is extremely important in the valuation process but it is not the only input especially if, for whatever reason, the market becomes volatile. It is the interpretation of the market of which the evidence is one factor which is important.

15 September 2008, Lehman Day (7 years to the day) is a day burnt into the hearts of many. I have been in seminars in the intervening period going over the entrails of that day when the consequences of the banking crisis began to affect us all. There had been warning signs a year earlier (14 September 2007 when Northern Rock applied for and received a liquidity support facility from the Bank of England), but it was generally acknowledged that any valuation undertaken after 15 September 2008 not having regard to the banking crisis crystalized by Lehman Brothers would or could be negligent. But whilst these global events are obvious, more subtle and local influences can easily be missed.

Valuations are relied upon for decision making, usually involving large sums of money and it makes sense, therefore, for the appreciation of where a valuation lies, with the early appointment of a valuer in the process, rather than expecting the rubber stamping of a decision made. That valuation advice should be given with known market evidence and a thorough knowledge of the context in which the valuation is given.

But going back to the failed deal; there may be eight parties directly involved in the transaction; buyer, seller, seller’s agent, buyer’s surveyor, seller’s solicitor, buyer’s solicitor, mortgagee, mortgagees valuer and mortgagees solicitor. It can be more if pension funds or other institutions get involved but any one of these parties can influence the transaction.

So to avoid disappointment my advice when borrowing funds for any acquisition is to put pressure on the lenders to instruct local expertise in the valuation process. Then one is at least reasonably assured of accuracy based upon local knowledge and experience. If a valuation so carried out “disappoints” that should generate a conversation between lender and valuer rather than “computer says no” response.

 

 

Written by Mark S Hanson  – BSc FRICS

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