PROPERTY JOURNAL

Getting secured lending valuations right

What are the most common omissions from valuations for secured lending purposes – and how can valuers ensure they provide comprehensive reports?

Author: Stephen Todd

12 July 2021

Tall building with vertical red panels, shot from low level looking up

Having worked for large, multidisciplinary property practices and carried out valuations in all sectors around Europe and the UK, as well as running VAS Audit, a valuation auditing company, my team and I have reviewed thousands of valuation reports.

It is fair to say, therefore, that we understand common issues with such reports – in particular the frequent omissions. We hope this article can provide useful tips for valuers in remedying these

Red Book minimum requirements

Breaking the report down into its various components, I will start with the minimum and mandatory reporting requirements in the current edition of RICS Valuation – Global Standards (Red Book Global Standards), as set down in VPS 3 on valuation reports.

These requirements cover three main areas. The first is to provide a valuation report date, a property inspection date and a valuation date. It always surprises me how often one of these is missing from a report. 

Second, a statement on conflict of interest should be included in the report, but again is quite frequently left out. Even where it is included, it may not mention whether the valuer has any previous involvement with the property or the applicant, which is incredibly important for our lender clients. PS 2 of the Red Book, on ethics, competency, objectivity and disclosures, provides the relevant mandatory standards on helping valuers avoid conflicts of interest. 

The final requirement is a statement on professional indemnity insurance (PII), in which the valuer needs to confirm the level of liability for which they are covered. At valuation panel management service, VAS Panel, we have agreed with all our panel of third-party independent valuation firms about the level of PII they provide to our clients; this is clarified with our lenders at quotation stage for transparency. Our internal quality control also identifies any unauthorised liability caps that have not been agreed in advance between the valuer and the lender, managed by VAS Panel. 

The issues of risk, liability and insurance are closely linked, and members should also consult the current RICS guidance applicable in their jurisdiction.

Executive summary

A small but very important section of the valuation report is the executive summary. We quite commonly find, for example, that floor areas, bases of values and valuation figures written in words next to the numbers do not correspond with each other or are inconsistent to the main body of the report. 

This may seem a relatively minor issue; however the executive summary creates a first impression, and many senior managers use it to make a quick evaluation of the viability of a loan application before passing it to their underwriting teams. Any errors here can erode confidence in the rest of the report, raising the question of what other mistakes it might contain. 

The local market

Local market commentary is another area often missing from valuation reports. This is needed to set the scene, in terms of the way the property fits its local environment. For example is there an over- or undersupply of similar properties, and what is the demand for the subject property?

This helps a lender to understand how desirable a property is and how it fits into its local environment. Too often, local market commentary is generic and not property-specific. If a lender is considering taking a property as security, the market commentary enables them to understand the challenges they could face when disposing of it, and may affect their lending decisions. 

Comparable evidence

Finding relevant comparable evidence of sales can often be difficult. If a surveying practice doesn't have its own agency teams, it relies on its subscription to sites such as Radius, Co Star or EI Group and discussions with local agents, and has to trust that the information provided is correct.

Most sale prices can be verified at the Land Registry, but rental evidence is more difficult to come by. Recently, I was in discussion with a valuer who regularly values properties in remote areas, where good comparable evidence is frequently lacking.

The analysis of evidence is again essential for our lender clients. The lender will ultimately rely on the valuer's opinion, but this must be backed up by a clear rationale and good analysis of the evidence relating it to the subject property. 

If there is limited evidence then this must be explained, as must the reasons that the comparables being used are the most appropriate. It would also be prudent to advise some caution on the lender's part where there is a lack of evidence. 

Further guidance in respect of comparable evidence is provided in the current edition of Comparable evidence in real estate valuation, RICS guidance note.

VGPA 10 of the Red Book also specifically advises valuers on how best to deal with any issues where a valuation is uncertain, including circumstances where comparable evidence is limited.

Valuation rationale

As already indicated, it is important for valuers to explain the rationale behind their valuation for the lender to understand their approach. Indeed it is a mandatory requirement in the Red Book that valuers provide such a rationale in their reports

Point L of VPS3 Valuation reports on valuation approach and reasoning states that: 'To understand the valuation figure in context, the report must make reference to the approach or approaches adopted, the method [or methods] applied and key inputs used and the principal reasons for the conclusions reached.'

Some newer entrants to the lending market are much less experienced than the bank managers of old, and don't necessarily have much property knowledge.

We still find it surprising when we see valuation reports that simply contain three comparables and a reported market value, with no supporting commentary, analysis or justification. This may have been acceptable 30 years ago, but thankfully lenders now demand greater justification and explanation.

Including calculations is important, especially for investment and residual land valuations, so that the lender can see individual inputs at each stage and get a comprehensive grasp of the way the valuer has reached their conclusions. 

It is good practice to back up a valuation with a secondary method if possible; for example, to carry out a comparison method if the investment method is the primary one, or vice versa. This gives extra weight and justification to the conclusions.

The current edition of Valuation of development property RICS guidance note also recommends a second method for development valuations such as a rate per hectare or plot-by-plot values, but valuers often do not include this in their reports. 

A sensitivity analysis is useful for lenders as well because it shows the way that small fluctuations in the inputs for a residual calculation can affect the market value; but again, this is rarely included. If this was included within the report, this could give considerable support to a lender's decision-making process, and help determine how the loan application fits with their risk appetite.

'It is important for valuers to explain the rationale behind their valuation for the lender to understand their approach'
Sales history

Quite often, valuation reports will omit information such as whether the property has recently sold, how long it was on the market, and the number of bids it received. Yet sales history is essential and should form part of the valuers' decision-making process. 

A recent arm's-length, open-market transaction is one of the best forms of evidence. Importantly, should the property need to be resold, it shows the lender whether there was demand for it during the previous sale, and if so, how much. If the property was on the market for a significant period with limited interest, this is also significant information.

Bases of valuation

Lenders require different bases of valuations from valuers. For example, some might require market value, or market value with the assumption of vacant possession. Some may also require special assumptions like restricted marketing periods –  commonly assuming a limited period of 90 to 180 days.

It is quite common for the basis provided not to correspond with the lender's requirements. But it is important for the lender and valuer to be aligned here – if, for example, a lender requires a value assuming a restricted 90 day marketing period and the valuer does not provide this figure, or misreads the lender's requirements, the lender could be working on the basis of a value they have not requested . Such misunderstandings could pose a risk to the lender, as its risk appetite determines the basis of valuation against which it is willing to lend. 

RICS comment

Lenders such as banks and other financial institutions need to know that any loans taken out on property – whether residential, commercial or mixed use – are suitable, and that the risk is properly managed. They need to make an informed decision about whether any loan they make is secure. Getting this right is therefore vital.

Obtaining a valuation by an experienced, RICS-qualified professional is essential, and reputable banks and other lenders will only consider a valuation report prepared by a RICS registered valuer in accordance with the current edition of RICS Valuation – Global Standards (Red Book Global Standards).  

Jonathan Fothergill, RICS senior specialist, valuation and investment advisory

 

Appendices

Often, we find that instruction letters or other appendices are not included in reports. Lenders have varying types of valuation instruction letter, which set equally varied requirements. When the valuer has the Red Book minimum criteria to follow, it can be challenging to meet these and the varying lender criteria as well.

We provide a checklist for valuers to confirm that all the lender's requirements are met; and if they are not, we ensure that any issues are identified as part of our quality control process.

Most of the reports we receive are good – but with a little more care and attention they could be great. 

Stephen Todd is chief commercial officer and co-founder of VAS Group

Contact Stephen: Email

Related competencies include: Client care, Valuation

Related Articles

BUILT ENVIRONMENT JOURNAL

go to article Dealing with data to improve reliability

PROPERTY JOURNAL

go to article Why we need a national housing conversion fund

LAND JOURNAL

go to article What does the One Blackfriars decision tell us?

This website uses cookies to collect information about your browsing session. By collecting this information, we learn how to best tailor this site to you.  To learn more, view our 

Cookie Policy.