Valuing Residential Property – from an Underwriter’s Perspective

– Introduction
– Reviewing Sold Prices
– Evaluating Property-Specific Factors
– Estimating Market Demand
– Accounting for distressed sales and repossessed properties
– The Underwriter’s Approach to Risk Assessment
– Conclusion

Residential property valuation is the process of determining a security’s value based on various factors such as location, condition, market demand, and recent sales of similar properties. This valuation is crucial for buyers, sellers, lenders, and insurers to ensure fair pricing and financial risk assessment.

Underwriters play a key role in property valuation by analysing historical data, market trends, and property-specific details to assess whether a property’s value aligns with the loan amount being requested. Accurate valuation helps mitigate financial risks, ensuring that properties are not over or under-valued, which could impact a loan’s approval and investment decisions. This assessment will normally be supported by the formal instruction of a RICS valuation report or AVM (Automated Valuation Model,) but is important to establish the lender’s appetite to provide formal loan terms prior to the borrower committing any fees towards the loan.

As a lender, BIG rely upon accurate property valuations to determine the true value of our security. As this is the primary source of recovery for our debt, if the borrower was to go into default, we need to know there is sufficient value within the property to clear our debt, with a margin for future fluctuations.

In today’s article we will be exploring how a property may be valued from an Underwriters perspective, to empower property investors to review their own projects and set expectations on how a loan application is assessed.

Historical sales data informs the valuation of current properties, as it reflects market appetite and demand. A property is only worth what someone is willing to pay for it, so sales data provides tangible evidence of transactions that have been completed as opposed to the asking price of hopeful vendors.

• Comparable evidence needs to be recent, close in location and of a similar property style and condition. As an underwriter we would generally assess sales information from the last year within 1 mile or less of the security.
• Sites such as ‘RightMove’ list recent residential property sales and allow you to filter by location, tenure, timeframe and property type (https://www.rightmove.co.uk/house-prices.html).

Most recent sales information will include a floor plan and property size, allowing you to determine the property’s ‘price per square foot.’ This simple calculation is the sales price divided by the property size e.g. a property that has sold for £350,000 measuring 1,200 sq. ft. equates to £291.66 per square foot.

Determining a property’s ‘price per square foot’ allows you to compare properties of slightly different sizes and find an average sales price or range for that location and property type. Larger properties normally warrant a higher value, as space is a recognised commodity.

Structural condition and quality of construction

A property requiring substantial refurbishment or renovation will have a significant impact on it’s value. From taking comparable properties in good condition, the cost of works can be reduced from the potential GDV (Gross Development Value) to estimate the current value. If more potential structural issues have been identified, such as subsidence, fire damage or rising damp. A professional report and evaluation of the works would be required, before the impact on the property’s market value could be determined.

Influence of renovations and home improvements

Bathrooms and Kitchens tend to add the most value to a property if renovated to a high standard, as these can provide high value assets to a home. Cosmetic work such as decorating and minor repairs will influence appeal but have a less detrimental influence on the property value.

• Kitchen Upgrades: can add up to 10% to a property’s value.
• Bathroom Improvements: Installing a new bathroom or upgrading an existing one can increase value by 4-5%.
• Loft Conversions: Adding an extra bedroom through a loft conversion can boost value by 15-20%.
• Extension (Single or Double-Storey): Can add 10-20%, depending on size and quality.
• Garden Landscaping: Enhancing outdoor space can add up to 10%.
• Energy Efficiency Improvements: Adding insulation, double glazing, or a new boiler can increase value, especially with higher energy costs.

Location considerations: Affluent areas will be of more appeal and attract a higher price tag, being in catchment to the best schools, close to transport links and local amenities all increase property demand. Crime rates can be viewed from sites like ‘Street Check’ (https://www.streetcheck.co.uk/) that provide recent data for individual post codes. Higher crime rates are associated with reduced property values and increased insurance rates.

Analyse House Price Trends

• Use property websites like Rightmove, Zoopla, and Land Registry to track house price changes over time.
• Rising prices usually indicate high demand, while stagnation or decline may suggest weaker demand.

Check Sales Volume and Time on Market

• Look at how many properties have sold recently and how long they took to sell.
• If properties sell quickly (within a few weeks), demand is strong. If listings remain unsold for months, demand may be weaker.

If someone fails to meet the terms of their secured loan agreement and is unable to repay funds in a timely manner, the loan would be in default and the property will normally go into receivership. This will often lead to a ‘distressed sale’ in which the property needs to be sold quickly to recover the debt. This is normally achieved as a sale through auction. Whilst most auctioned properties are sold at slightly below market value, with a distressed sale the guide price may be further reduced to sufficiently increase interest and the speed of sale. This may mean a property is purchased at ‘Below Market Value’ and the sale isn’t reflective of what funds may be achieved if it were to be marketed for sale in a normal timescale. At BIG we rely upon a property’s 180-day value for our lending purposes, which is normally closer to an auction value anyway. However, we may consider higher lending against a BMV if we can support a significant discrepancy with the purchase price and true value. We would need to establish if there are any further extenuating circumstances that would make the property difficult to sell and why a higher price could not be obtained.

Balancing valuation with risk exposure

•       Is the perceived property value sufficient to support the loan funds required?
•       Are significant fluctuations in the property market likely during the loan term?
•       Does the borrower own other significant assets that could be used as additional collateral or to support a PG?

Common underwriting red flags impacting a property valuation

1.     Sudden Fluctuations: The perceived property value has changed considerably within a short period of time for no clear reason.
2.     Structural Issues: Signs of subsidence, damp, cracks in walls, or roof problems can make the property high-risk.
3.     Unusual Construction Materials: Properties built with non-standard materials (e.g., concrete, timber-framed, asbestos) can affect future ‘mortgageability’.
4.     Short Leasehold: A lease with fewer than 80 years remaining can impact value and future mortgage approval on exit.

 Working with appraisers and industry professionals

At BIG Property finance, most of our loan terms will be supported by the instruction of a formal RICS valuation report confirming the property’s 180-day value (sale within a restricted marketing period, 90-day to market, 90-days to complete.)

In summary, investors should consider having data-driven and cautious approaches to their property valuations. Having a clear understanding of recent property sales from comparable properties in the local area helps guide a property valuation. Consider reviewing market demand and take into consideration the property’s condition and location. Are there any extenuating circumstances impacting it’s appeal?

At BIG Property Finance we are happy to receive enquiries through telephone, email or enquiry form on our website. We aim to provide indicative loan terms within hours and a potential loan offer in a matter of days. We look forward to hearing from you soon. Contact us today on 121 348 7830 or at info@bigpropertyfinance.co.uk.