Hi, this is Tom Soane and welcome to another episode of the anonymous landlord and today I’m talking about down valuations.
When you’re purchasing values the property compared to the purchase price that you’ve agreed, so I’m going to share a few tips on first of all how it will affect you as a buyer or a seller and second of all how you can still profit from it if you’re buying a property because there are some really major opportunities right now for anybody who’s looking to buy an investment property and especially if it gets down valued which is what we’re talking about today and I’ll also explain to you what a down valuation is and how it’s working at the moment because there is an abnormally high number of down valuations in the property industry right now, and like I say it’s basically where you agree a purchase price of say a hundred thousand pounds but a mortgage value or a chartered surveyor comes out to the property and then down values it to say 90,000 pounds suggesting that it’s not actually worth the price that you’ve agreed to pay for it.
Now, it doesn’t necessarily means that the property on the open market is not worth the price that you’ve agreed to pay, that’s not what a down valuation necessarily means. What it means is it’s a reflection of how lenders are acting in the current property climber. They might be overly cautious because there might be a grim outlook on property prices in the future or there might be an unstable market or a bit of uncertainty, you know Brexit and pandemics will do that and what lenders are doing and chartered surveyors are doing is being more cautious on their valuations to protect the lender from uncertain risk so to speak.
Now, there is an opportunity for property investors like I’ve said and I’ve got an example of a way that I’ve just capitalized or optimized because of a down valuation so I want to share that with you and share how I did it and what I’ve learned, but there are also some risks well, which I want to share with you as well so I’ll talk through how it affects buying a property and selling a property and also how you can protect yourselves and lastly if you do get a down valuation on a property that you’re selling you can appeal so I’ll give you a couple of tips on how to do that, so let’s start off with buying a property. Now, if you’re buying a place and you’ve agreed a price, let’s say a hundred thousand pounds and the mortgage value or the chartered surveyor goes to the property and says “No, it’s only worth 90,000.” That means the lender is not going to lend 75% of a hundred thousand they’re only going to lend 75% of 90,000 Right, pretty straightforward so you might well want to change your offer and that’s the first thing I would go to. Do I want to change my offer to meet the same level that the valuer has as valued it at?
The next thing I would suggest for you to do is calculate your numbers again so redo all of your return on investment figures, your true yield investment figures and does this still stack up to be a good yield, good return on investment based on the new valuation but also if this seller of that property doesn’t negotiate so if they’re saying “No, I want to get a hundred thousand for it.” You might be okay with it if you run the numbers, you might still be able to proceed with that purchase it just means that you’ll have to find a little bit more cash but if there’s a good return on investment that might not be a bad thing if the yield is good meaning if you put in the extra 10,000 as cash, but you’re going to get all of your cash back in two years time as long as the numbers work might not be a bad thing, so remember it’s only the loan amount that changes so if the down valuation happens, it doesn’t mean you can’t buy the property for the same price that you previously agreed to just means the amount of the mortgage lender will lend to you is going to be slightly different, so it’s also by the way this goes the same route if you’re refinancing so if you’re going to buy a property, refurbish it and then refinance it and you get it down valuation it’s the same thing just means you can borrow less.
Now, if the numbers still work then hey you can still o for that property but there is a key thing to remember here. Like I say if you’re going to buy a property, refurbish it and refinance it and at your purchase a valuer has down valued it the chances are the next surveyor or the next mortgage valuer is also going to down value it because generally speaking chartered surveyors calculate values in the same way as each other and they’re all governed by Rick’s which they have to adhere to a certain process in order to value properties and they were audited on those as well so you know they’re going to protect themselves, so they’re going to value a property using a very tried and tested scientific formula and certain due diligence, certain evidence, certain analysis and research of the market, so if one valuer values it at 90,000 the next value is probably going to do the same and my example, by the way, is I’d bought I’ve just about to complete actually on 4 cottages over in Wales and initially I’d agreed to purchase price of 625,000. You’ll just have to trust me it’s a really good price for those properties, so the mortgage valuation was done buying them with mortgage and the mortgage valuation has done and the value came back at 575. Now, I know because I’m in the industry that this is just a period of time where mortgage lenders and surveyors are being massively cautious and trying to protect themselves as much as possible because the future is a bit uncertain and that’s what causes down valuations and even in other areas of investment.
Stocks and business and everything if there’s any uncertainty and that generally means that people are going to start being more cautious fair enough I get it, so anyway the valuation of this property came back at 575 so I re-offered I reran the numbers, did everything I’ve just said earlier on so I calculated the return on investment, calculated the yield, worked out how much cash I would require and I re-offered 600,000 so I was happy to put the extra bit of cash in because I knew I’m getting such a good deal and these four properties generate such a good return on investment I couldn’t pass it up and the deal still stacks up fantastically, so what I’m getting at is the first thing I did was reran the numbers, second thing I did was check to see whether I still got the right yield, still got the right return on investment and the third thing I did was re-offered based on the new valuation because there’s no avoiding it wasn’t me being cruel, it’s not anything to do with that. It’s just the evidence.
I was given was that the mortgage lender will not lend on that full value so I had to adjust my offer accordingly and I think I’ve made the right choice and look I sympathize with the seller because it’s not their fault. They haven’t valued it themselves, you know, they haven’t decided to go through Brexit or a pandemic or anything like that they haven’t done it so I sympathize with them but at the end of the day, I’m the investor. I’m investing my money I’ve got to do what’s right for me, so I follow those steps that deal now works brilliantly. I’m really excited that’s going to be complete this week actually. Anyway, in the long run if you’re working out whether you should still buy the property or not, whether you’re going to have to increase the amount of cash that you put into the property, renegotiate the offer because of a down valuation. Try to remember the long run. You’re not going to buy this property and sell it again tomorrow. You’re going to probably keep it, rent it, out generate some income from it and property prices will recover and I use the example I just gave you earlier on was that if you can get your cash back, if you’re going to increase the amount of cash you have to put in the property and you’re going to get it back over say two years that might not be a bad thing or if you’re going to re-adjust your offer and pick up that property for slightly less, but there’s a fear in the back of your mind thinking “What if property prices have dropped that much. What am I going to do?” Well, property prices will recover over time they always do and the evidence shows us that they do, so think of that as a long-term thing rather than “Oh no, property prices are going to drop in the next 12 months.” Maybe they will maybe they won’t nobody knows but actually what we do know is that property prices over time balance out and increase and go up they have to, so look the question you have to ask yourself is can I still get the return on investment and if the answer is yes carry on buy that property. You could look at this a different way, couldn’t you?
A down valuation might be a way to get a discount on the property, again if you’re thinking long-term, you might be able to buy it for 25 grand less than actually, you know it’s worth, so if you get down valuation of 25 grand, let’s just say then you get it for that 25 grand reduction. Now, you and I both know that on the open market you might well be able to get the full price that you know that it’s worth so I use the example I said earlier if you’ve got a place that you’ve agreed to buy it for a hundred thousand and the mortgage value is come in and said “No, it’s only worth 75” and you say to the owner “Okay, I’m going to have to offer you the 75.” and they accept because they see the logic then you might be able to stick that straight on the market again and make that as a prophet and might become a flip.
Who knows there are opportunities here, every cloud has a silver lining so they say. Now, if you’re selling a property slightly different but similar types of prospects in that you’ve got to run the numbers. The first thing you’ve got to do is run the numbers especially if you’re selling a I don’t know property investment that you’ve had before so if you’re selling a rental property that you’ve always rented out, then run the numbers and work out which is a better yield shall I sell it at the lower price or should I now say “Okay, I can get a better yield if I just continue renting it out for a year to let the property prices recover.” It might well be worth holding onto a property and reselling it in the future once property prices recover if they do take a tumble and the next thing to consider, can you refinance that property in order to release the cash that you wan and then reinvest that maybe or use it for whatever you want to do, but keep hold of that property and rent it out? There’s another option here as well and I use the term option very specifically. You could sell a lease-purchase option. Now, that is basically where you give someone the right to rent that property from you for 5 years let’s say. Five years at a pre-agreed rental price meaning that person will guarantee that you have that rent coming in every single month and alongside that you might offer them a purchase option where you agree a price right now and then that person’s got the opportunity or the option to buy that property from you at that pre-agreed price and any time over the next five years, so how does that benefit you?
Well, first of all, you know, you get a guaranteed sale at that price if the buyer wants it, secondly you get a guaranteed income during that time, thirdly the buyer takes a bit more of the risk hope is that the property value increases over the next five years so it kind of is a good thing if it’s calculated correctly and I would probably say that you need to look at this in the buyer’s favour because they’re the ones that you want to buy that property, so when you’re working it all out try not to be too greedy with that because it’s the buyer that’s kind of guaranteeing you the income, guaranteeing you the price and you to them you’re guaranteeing this is the amount I want to get for that property at any time over the next five years. Now, yes the purchaser does have the option not to buy it, but that’s a whole different story and it means that if they don’t buy it in that five years, then you could either then sell it or renegotiate the option, but what I would say is if you do have a down valuation on a property, you’re selling don’t just sell it. Don’t just carry on with it if it’s not right, if it’s not the right figure, the right return or the right sale price and you know what the sale price is I did the podcast about the three ways to value your property follow that do those valuations if it’s not right don’t sell. Do something else to make sure that you can still treat this like an investment and the last thing I want to say is encourage an offer from the buyer, so again using that same example, if you’ve got a property that’s agreed a purchase price of a hundred thousand and the value of comes in at 90,000. Encourage an offer not just to go with that down valuation price encourage an offer, you might be able to agree meeting in the middle with the purchaser but encouraged an offer. You don’t have to take an offer. You can just get the offer on the table, consider it, calculate it and either accept or decline that’s up to you but generally speaking a chartered surveyor will value a property based on actual evidence.
There’s two halves to it I suppose. The first part is the analysis of evidence IE sold prices and completed sale price uplifting the area demand all that sort of stuff. They’ll also value a property based on what the feeling is in their market meaning if mortgage lenders have said we need to be extra cautious than they might calculate a value based on a factor of naught point nine, whatever and meaning take the full valuation of the property times by naught point nine will give them a risk factor or uncertainty factor whatever you want to call it and I’d love a chartered surveyor to comment on this by the way.
Give me an email or a message through Facebook let me know what you think of this, but generally speaking if it’s cautious uncertainty in the air then they might value a place at naught point nine percent. Sorry at 90% of what would normally be or if we’re really rocketing and everything’s fantastic they might go with it and just value at a 100% so I’ll be interested to hear from a charters surveyer but overall look if you’re buying a property and the property that you’re buying get’s a down valuation don’t let that put you off because you can change your offer you can run the numbers again, you might be okay with a slightly increased amount of cash that you need to put in because of a slightly lower loan to value that you would have to accept as long as the yield is there, the return is there then you can carry on with it and it might be an opportunity to pick it up at a lower price and if you’re selling the property same thing run the numbers it might still be okay just re-enter the numbers into your spreadsheet and work out “Is this still viable for me to sell?” so I hope that helps but you know, what as always if you’ve got any questions about purchasing an investment property or anything that you need help with. I just offer 30-minute discovery calls, you can use them for whatever you like, you book the call in with me and then I’ll just advise you.
It might be that you’re a landlord and you’ve got a problem with a tenant, it might be that you’re an investor and you want some due diligence done on a property, it might be you just want advice on property investing whether you’re a beginner or a seasoned experienced veteran property investor. My Discovery calls are for me to discover your issues, your challenges, your needs, your wants and whatever and it’s for you to discover what my opinion, my solution, my advice or my strategy would be in your instance so it’s a discovery call just for that. It’s totally free, I just enjoy them, I like helping people out, it’s kind of cool. Hey, maybe in the future I might charge for them but right now I’m enjoying, so I don’t mind doing them for nothing. I’ve got my income from my business, from my properties and from my investments so I’m happy with that and I’m happy growing those investments, so if you need any help yourself just book in a discovery call.
You can message me through Facebook or through Linkedin it’s just Tom Soane or through Instagram, if you want probably best for Facebook and Linkedin or you can just email me email@example.com and hopefully that helps and this is a good way for you to take an opportunity if there are any down valuations, you might be able to capitalize on them and I hope it helps so I’ll speak to you soon and my name is Tom Soane and this is the Anonymous Landlord.