Topic 14 - Valuations and surveys (unit 4)

Question 1

The 4 different types of valuation

Basic valuation

RICS Home
Survey Level 1
Report

RICS Home
Survey Level 2
Report

RICS Home
Survey Level 3
Report

Tell me about each

Answer 1

Basic valuation - Between lender and valuer. So the lender can assess the property as a security

RICS Home
Surveys (Level 1, 2 and 3) - commissioned by borrower. As you increase in levels, the valuation becomes more detailed. Enables borrowers to uncover issues with the property

Question 1

What are the 4 types of valuations available

Answer 1

Basic valuation

RICS Home
Survey Level 1
Report

RICS Home
Survey Level 2
Report

RICS Home
Survey Level 3
Report

Question 2

True or false. Building societies are required by legislation to make an assessment on any property they are using as a security for a mortgage, which can be satisfied by a basic valuation, but banks are not

Answer 2

True

The Building Societies Act 1986, amended by the Building Societies Act 1997,
requires a building society to make an assessment of the security offered for
each mortgage secured on land.

In the case of new mortgages, this requirement is satisfied through a valuation report.

Other lenders have no statutory obligation to carry out an assessment, although the vast majority will do so as part of a prudent approach to lending

Question 3

What is a desktop valuation?

Tell me the upsides and downsides to this method of valuation

Answer 3

An valuation arranged by lenders that is out in the office using computer software not requiring a physical inspection of the property.

The valuer researches data on comparable properties and
sales from a range of public data sources, and then selects
a number of properties (perhaps three) that are the closest comparisons to the property being valued.

It helps establish a market
price, but it may not be very accurate and obvs u cannot find any issues if you were to look physically

most suitable where the property has
been inspected in the relatively recent past (because the valuer is not relying on very historical data which couldve changed)

Question 4

What is retention in relation to mortgages?

Answer 4

Where a portion of the loan is held back by the lender until the buyer provides evidence that specified repairs have been completed

This may happen after the lender commissioned a basic valuation and found there were some major repairs needed, and decides they will only release the funds once repairs are complete

Question 5

What happens if a basic valuation is complete but it turns out to be materially incorrect such that the lender or borrower suffers a financial loss

Answer 5

The valuer could be sued by the borrower or the lender if it can be proved that negligence caused a financial loss.

A claim for negligence is only likely to succeed in two circumstances:

„The disclaimer was insufficiently prominent;

The borrowers were inexperienced – this would typically apply to first‑time buyers. (courts state property investors/business borrowers should be experienced enough to understand a basic valuation report is limited so they wouldn’t be able to claim for any loss)

Question 6

What is the ‘reinstatement value’ in relation to property?

Answer 6

It is the cost required to replace or rebuild a property to its original condition following damage or destruction

It is often used in insurance to determine the coverage required and also used by lenders to assess how much they would be willing to lend against a certain property

Question 7

What should a valuer’s disclaimer always include about the basic valuation they carried out

Answer 7

A prominently placed disclaimer notice

Makes clear the limited nature of basic valuation as a superficial inspection for assessing the security for
mortgage purposes, rather than as a survey to evaluate the property’s
condition.

Question 8

After they have carried out their basic valuation, what actions can the valuer recommend to the lender?

Answer 8

Acceptance (ie the property is a suitable security for the loan)

Rejection (ie the property is not a suitable security and should be declined)

Conditional recommendations
for acceptance
(ie repairs are needed and then it is suitable so the lender should retain some of the advance (‘retention’) until they have been carried out)

Lower valuation
(ie the valuer feels the property value is lower than the agreed purchase price. This could result in the buyer negotiating with the vendor, or the buyer continuing with the agreed price and having to pay the shortfall out of their personal resources or the sale falling through all together)

Question 9

Generally speaking, why is it that the reinstatement value of standard property (ie a property with a standard design) much lower than the market value?

Answer 9

With properties of standard construction, the reinstatement
value will be considerably less than the market value;

Mainly, this is due to the fact that the market value includes the
price of the land, which is not a cost when rebuilding

Question 10

If a property has a purchase price of
£200,000 and a valuation of £190,000 what will the lender’s offer be based on?

If a property has a valuation of 320,000k and purchase price of 280,000k what will the lenders offer be based on?

Answer 10

A= 190,000

B= 280, 000

A lenders LTV is based on the lower of the purchase price and the valuer’s assessment of its value.

Therefore, In the case of answer A, if the lender has LTV of 80%, it means it wants the borrower to have a 20% deposit on 190k, 38k, before it would be willing to lend (obvs it also will take into account other factors like affordability)

Question 11

A basic valuation is arranged between the lender and a valuer

What are the three types of valuation available to the buyer? What WERE they all respectively known as?

Answer 11

• The RICS Home Survey Level 1 Report (previously known as the Condition Report);
• The RICS Home Survey Level 2 Report (previously known as the Homebuyer
  Report);
• The RICS Home Survey Level 3 Report (previously known as a Building Survey)

The higher the level of report , the more detailed it is

Question 12

Can advisors recommend their client carry out a valuation on the property they are looking to purchase, such as a RICS Home Survey Level 2 Report?

Answer 12

No

This is because if the
adviser specifically recommends a RICS Home Survey Level
2 Report and something later comes to light that would have been picked up by a RICS Home Survey Level 3 Report the adviser may be subject to a claim.

Question 13

What level of RICS home survey report is limited in its scope, based on a traffic light system and will likely not uncover any serious issues relating to the property?

What is the benefit of this report?

Answer 13

This is the RICS Home Survey Level 1 Report (Previously known as a condition report)

The report gives the buyer some legal
backing if the surveyor was negligent within the parameters
of the report

Question 14

What does RICS stand for?

Ie the RICS home survey report level 1

Answer 14

RICS = Royal Institute of Chartered Surveyors

Question 15

What level of RICS home survey report am I.

I am able to uncover any serious and obvious defects with the property, as well as some unobvious ones like visible issues with electrical equipment

I do not include any detailed analysis of the property such as pulling up carpets to uncover issues.

I do not give the buyer much legal cover if a serious issue is uncovered at a later date (unless it is the surveyor carrying out negligence when in the parameters of the report)

I do not include: any costs of repairs, a detailed
description of the construction of the building or detailed advice on specific
defects

I have two versions which are ‘ survey and valuation ‘ and ‘survey only’

I have a traffic light system

I am mid level

I provide a professional market valuation;

I provide an insurance reinstatement figure

I provide advice on repairs and ongoing maintenance;

I provide information about the location, the local environment and
the property’s energy efficiency

Explain how you could tell which one it is

Answer 15

This is the RICS home survey report level 2

Where it differs to level 1:

It is mid level,

Has two versions,

Can uncover unobvious issues,

Provides a professional market valuation

Provides an insurance reinstatement figure

Provides advice on repairs and ongoing maintenance;

Provides information about the location, the local environment and
the property’s energy

Question 16

What level of RICS home survey report am I.

I am a detailed and thorough inspection of the property

If an issue with property is not discovered, the buyer will have strong legal backing so may be able to claim

The surveyor will likely lift up carpets, probe in hard to reach areas where they wouldn’t in the other reports

Question 17

If a buyer purchases a RICS Home Survey Report level 3, will a lender use its valuation figure of the property?

Answer 17

Most of the time a lender will not acceot this

It is because the report has been commissioned by the buyer

And also, if the surveyor is unknown to the lender it may
require considerable time or expense to validate the surveyor’s credentials

Question 18

True or false: Vendors selling their property in Scotland are required to arrange and have a Home Report in place before marketing the property

Answer 18

True

Differs to england where it is the lender who commissions the report

Question 19

When surveying or valuing a property, surveyors will take into account whether there has been any movement in the property, either from the property itself (ie poor construction quality) or from the ground (subsidence)

What will the surveyor consider about the movement itself?

Answer 19

The surveyor will consider whether the movement is:

‘long‑standing and non‑progressive’ (where the movement happened years prior and has not worsened) - this will likely not effect any lending decision

Or

‘recent and progressive’ (where it is still occurring) - This will affect the lending decision where the application may be refused altogether and, a structural engineer will be required to assess it which adds costs for the buyer

Question 20

What is subsidence?

What is Heave?

Answer 20

Subsidence = Occurs when land below the building drops unevenly, causing
it to shift.

Heave = Occurs when underground forces cause the land below the property
to rise unevenly and put upward pressure on the building’s foundations: It is
the opposite of subsidence

Question 21

A lender may attach an undertakings or a retention to the mortgage terms

What does undertakings mean?

What does retention mean?

Answer 21

UNDERTAKING-

An undertaking is a non serious requirement from the lender to the borrower, for them to bring the property up to a decent standard (through decorating) or to fix some issue with the property, such as dry rot.

The lender can check to see if the work has been complete with an inspection or by a phone call, but some don’t even check at all

There is a little a lender can do to enforce an undertaking once a decent amount of time has passed

RETENTION - Much more serious than an undertaking. Where the lender retains part of the mortgage loan until the work they want to be complete is completed. They WILL inspect to make sure the work is done before releasing any funds. Could be because of serious damage to the roof or extensive rot issues.

Question 22

What is the NHBC?

Answer 22

NHBC = the National House Building Council

The National House Building Council provides warranties
and insurance protection for new homes in the UK.

It works with the building industry to raise standards and improve protection for consumers

Question 23

What are ‘new build guarantee schemes’

Tell me what the main scheme around today is and how it works

Answer 23

Exactly as the name states

They are schemes that protect buyers of new build properties against issues resulting from poor construction work by the builders

The main scheme today is the NHBC Buildmark scheme. It provides a warranty and insurance to the buyer

The builder is part of the scheme and they adhere to its standards when constructing the property. If the builder doesn’t meet its standards, the buyer has two years to make a claim where the scheme will force the builder to amend the issue (the warranty part)

The NHBC Buikdmark scheme also provides protection to the buyer for 10 years against damage caused by the builders poor construction work (the insurance part). The buyer has a minimal claim value (MCV) which increases each year. If their claim exceeds the MCV the scheme will pay for the remedial work, if their claim is below the MCV the buyer pays for the remedial work.

Question 24

The main ‘new build guarantee scheme’ is the NHBC Buildmark scheme

Tell me about what protection it provides to the buyer/homeowner

Answer 24

The main scheme today is the NHBC Buildmark scheme. It provides both a warranty and insurance to the buyer

The builder is part of the scheme and they adhere to its standards when constructing the property. If the builder doesn’t meet its standards of construction, the buyer has two years to make a claim where the scheme will force the builder to fix the issue (the warranty part)

The NHBC Buikdmark scheme also provides insurance for the buyer for 10 years against damage caused by the builders poor construction work (the insurance part). The buyer has a minimal claim value (MCV) which increases each year. If their claim exceeds the MCV the scheme will pay for the remedial work, if their claim is below the MCV the buyer pays for the remedial work.

The scheme also provides cover from exchange of contracts to the completion date if the buyer loses their deposit or has to pay extra costs due to the builder becoming insolvent or committing fraud

Question 25

What is the Premier Guarantee scheme

Answer 25

Similar to the NHBC Scheme in that it provides insurance for 10 years

The insurance part is better than the NHBC’s schemes insurance.

The insurance in the premier guarantee is made up of two parts.

0-2 years: the ‘defects insurance period’ (covers snagging defects and arranges remedial work if the builder fails to do so)

3-10 years: ‘structural insurance period’ (covers major structural defects that may compromise the structural integrity of the building)

Question 26

What is the difference between ‘speculatively built properties’ and ‘custom-built properties’

Answer 26

Speculatively built properties - are those built by developers, in advance of receiving orders or finding buyers, in areas where they anticipate high demand.

‘custom‑built properties - are built to
a specific design on behalf of a buyer who place an order in advance.

Question 27

What is the LABC New Home Warranty Scheme?

Answer 27

It is a structural/latent defects warranty offered to the builders of speculatively built residential housing, social housing and completed properties

Offers similar terms and conditions
as the Premier Guarantee warranty and the property must have been built to NHBC Building Code standards.

The cover is split into three separate periods:
the building period, the defects insurance period, and the structural insurance period

Question 28

What is a latent defect of a property

Answer 28

A latent defect is a fault in the property that could not have been discovered by a reasonably thorough inspection before the sale.

One of the things the LABC New Home Warranty protects homebuyers against is latent defects

Question 29

What is LABC?

Answer 29

LABC is the member organisation representing local authority
building control departments in England and Wales, promoting the design and construction of safe, accessible, environmentally efficient buildings that comply with building
regulation

Question 30

What is the consumer code for home buyers?

Answer 30

It aims to make homebuyers better informed about their rights (both before and after the exchange of contracts);

it seeks to reinforce the protection afforded to them by the existing home warranty schemes. ( ie the Premier Guarantee, LABC New Home Warranty and NHBC buildmark

The code aims to provide greater clarity and transparency in the
documentation given to buyers of new properties, and includes an independent dispute resolution service

The code requires consumers are:

treated fairly;
„
know what service levels to expect from their builder;
„
are given reliable information;
„
know how to make a complaint if they are dissatisfied.

New house builders registered with NHBC, Premier Guarantee and LABC NewHome Warranty must comply with the code

Question 31

Tell me the difference between a RICS Home Survey Report level 1 and a basic valuation

Answer 31

The RICS Survey Level 1 Report is a more detailed inspection than a basic valuation, and is intended to identify aspects of the property that are dangerous, in need of attention or that need further investigation.

It also provides advice for buyers’ solicitors that summarises the key risks associated with purchasing the property. It does not include a valuation.

Question 32

A basic valuation is for the benefit of the lender and is paid for by the lender. True or false?

Answer 32

False:

It is for the benefit of the lender but paid for by the borrower

Question 33

Jackie has been informed that the property she is hoping to buy has a large patch of wet rot in the living room. The rest of the property appears to be in reasonable condition. Her lender is most likely to:

A - require an undertaking
B - impose a retention

Answer 33

B

As the rest of the property is sound, a retention is the likely response. An undertaking would be appropriate for less extensive, less serious issues

Question 34

A significant difference between a RICS Survey Level 1 Report and a RICS Level 2 Survey Report is that only the RICS Level 2 Survey Report includes: WHAT?

How are they similar

Answer 34

BIG DIFFERENCE. Level 2 gives ADVICE on repairs and maintenance.

Similarities: Both reports use a traffic-light system to rate parts of the property. Neither report includes an energy efficiency assessment, although the RICS Level 2 Survey Report will include details from an Energy Performance Certificate if an assessment has been carried out. Unlike the RICS Survey Level 1 Report, the RICS Level 2 Survey Report includes advice on repairs

Question 35

How is a basic valuation different to RICS home survey report Level 1

Answer 35

The RICS Survey Level 1 Report is a more detailed inspection than a basic valuation, and is intended to identify aspects of the property that are dangerous, in need of attention or that need further investigation