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What to do if the bank undervalues your property







After all the years of saving and months of conveyancing, suddenly having your property undervalued by your mortgage lender could mean the end to your plans to buy your dream home. But does it have to be?

During the mortgage application process, you’ll have to pay for the lender’s valuation of your property and they carry it out essentially to check if the value of the property is worth what you’ve offered. If they think the current market value is less than your offer, then they will only agree to lend you based on their current valuation.

This has the potential to derail your conveyancing process completely.

It’s pretty understandable why they do this: they want to cover themselves in the event that they have to repossess and sell your property.

It can come as a shock to find out that the lender has decided that your property isn’t worth its apparent value. But is this such a bad thing?

The lender may in fact be protecting your interests. You don’t want to spend more than the property’s worth especially as an estate agent’s valuation is hardly impartial: they want to sell it for the highest amount possible regardless of what local properties are selling for in the area.

We’re going to look at why lenders undervalue property and how you might save the situation by negotiating over the property value with the lender, estate agent and seller.

  1. Why do banks undervalue properties?

 The property is more expensive than recently-sold similar properties in the area

The lender-appointed valuer decides, by comparing your property with similar properties which have been sold in the area, that it is simply overpriced. They take into account many additional factors such as extensions, relative state of repair, nearness to train stations and schools etc.

This is the most common reason for their refusal to grant a mortgage and the most difficult one to challenge your lender over.

Not enough similar properties around for comparison

The valuer may have found that there simply aren’t enough similar properties in the area to make a clear valuation estimate and so they’ve given their best professional opinion.

This is easier to query than the first example but you should remember that the valuation has still been carried out by an expert so it’s still a challenge to refute.

Property is in poor condition

This is a sub-group of the first example but is worth highlighting because once again, there may be some leeway.

It’s clear that a property in disrepair is worth less than a similar property in the area that has been well-kept. Your property may have issues such as damp, subsidence, Japanese knotweed or rot.

Your lender will note what the property would be valued at if it was in a good condition and you might negotiate successfully by getting them to part-pay some of the mortgage you need, then, once you’ve made good any defects and after a revaluation, you approach your lender to loan you the balance of the mortgage.

  1. Negotiations with the lender, estate agent and seller 

Ask your lender to explain their decision

You should ask your lender for evidence of the comparables (the sold prices of similar properties in the area) they used to come up with their valuation figure.

You can then go online and visit sites like Rightmove or Zoopla to check their data about sold prices in the area in question.

Remember:

  1. You should only consider properties sold in the last 6 months.
  2. The properties have to be in the area your property is in, preferably the same street.
  3. As much as possible the properties have to be of the same size and in the same condition yours is in.

Depending on what you find out, you might have grounds for further negotiation. 

Break the news to the seller

No seller wants to be told that their property isn’t worth what they thought it was and particularly because this can derail a connected home purchase they’d planned.

If they can’t afford to drop their asking price and negotiate, then this is likely to be the end of the road unless you can somehow produce further funds to cover the purchase – you should be extremely cautious about doing this, because as of day 1 of your occupation, your property is worth less than what you paid for it, so you’re already effectively in negative equity.

However, they might negotiate on price – and this is where our email below comes in!

Send our sample email to the seller’s estate agent

Our sample email has achieved success in a number of cases – try it to see if it suits your situation. 

Dear {ESTATE AGENT NAME},

Re: {Property Address}

I hope you are well.

We are progressing well with the conveyancing and have the property searches, property survey and mortgage valuation complete. We have however encountered a challenge that we are going to need your help with.

The Mortgage Lender has returned their assessment of the property valuation and they state it is only worth £x,000. This falls £y,000 under our offer price of £z,000.

The challenge we face is that the mortgage lender won’t lend me the required mortgage to fund the purchase at the current agreed price. This also means that any other buyer getting a mortgage isn’t going to be able to buy the property at this price.

This is very disappointing because I was happy to pay the asking price, however I am sure you’ll appreciate that I can’t purchase a property that exceeds its current worth in the current market.

I do want to continue to buy the property and have invested a lot of time and money to date to achieve this. In order to proceed could you discuss the mortgage valuation with the seller and confirm if they’d be happy to proceed at the current market value of £x,000.

If this can be agreed then we can move to exchange over the next couple of weeks.

I look forward to hearing from you.

Kind regards

YOUR NAME

  1. What if none of this works?

You have to be realistic about outcomes when your lender turns you down for a mortgage on a property because they consider it worth less than the asking price.

The lender employs expert RICS valuers, so you’ll most likely have to go straight to negotiating with the estate agent and seller to lower the price and there’s no guarantee of success there either. However, this should not affect your overall goal.

The best advice is to keep an eye on the property market and don’t stop viewing more homes even after you’ve had one offer accepted. This doesn’t mean you’ve got to put offers on every property you visit, but it stops you ‘putting all your eggs in one basket’ and becoming too emotionally involved in the outcome of one possibility.

And remember that it’s crazy to pay ‘over the odds’ when you don’t know how the property market will be if and when you come to sell your home. Negative equity, as many people know, can be an awful place to find yourself in.

 

By Andrew Boast MAAT MIC, Conveyancing Director at SAM Conveyancing