LEGAL GENERAL SURVEYING SERVICES YOUR VALUATION AND PROPERTY

LEGAL & GENERAL SURVEYING SERVICES YOUR VALUATION AND PROPERTY RISK PARTNER. Legal & General Surveying Services is the UK’s leading provider of valuation and property risk management services to UK banks and building societies. Our expertise, independence and infrastructure mean we are able to deliver a unique offer to our corporate customers.

LEGAL & GENERAL SURVEYING SERVICES EQUITY RELEASE COUNCIL AGM 2018 VALUATIONS – RED BOOK AND MORE Geoff Bramall BSc(Hons) Dip. Arb FRICS FCIArb Head of Technical Support

A brief introduction • LGSS is part of the Legal & General group. Based in Barnsley, South Yorkshire. • We manage the valuation process for number of major lenders, including Santander, Royal Bank of Scotland Group, Yorkshire BS and Legal & General Home Finance, and we act for many more, including Lloyds Banking Group and Nationwide. • We handled 550, 000 cases in 2017, approximately 35% of all UK mortgage valuations. • We employ an in-house team of Chartered Surveyors to advise valuers and lenders on technical issues

The mortgage valuation process • Lender valuation and customer survey options • Inspections – what should you and your customers expect? • Definitions of value – RICS Red Book. • Valuation methodology – comparables and rationales • PVQs and valuation challenges • Suspicious activities and vulnerable customers • Hot topics

Valuation and survey options – lender valuations • Automated Valuation Model (AVM) – valuation by computer • Assisted AVM – an AVM with additional desk top checks • Valuer desk top appraisal • External inspection report (often wrongly called a “Drive By”) • Standard mortgage valuation report. • Trend is for more AVMs, Desk Tops, fewer physical inspections

Valuation and survey options – customer reports • We deal with a lot of complaints about mortgage valuations and (almost) all are rejected. We strongly advise that purchaser customers should obtain their own survey reports. • RICS Condition Report – RAG ratings, no advice, not very popular • RICS Home. Buyer Report (“Scheme 2”) - an “off the peg” survey report, suitable for average sized, post 1900 properties • Building Survey (“Scheme 3”) – bespoke report, ideal for larger, older houses

Inspections – typical Lifetime Mortgage customer issues • The Lifetime Mortgage market is a major growth area, moving up market to some very expensive properties; increasingly being used for IHT planning. • Average customer age 72, some are a lot older. The only area of lending where customers are older than the average valuer (58). • Customers can be sensitive about valuer comments and may have outdated expectations about valuer age, dress sense and gender. • Customers should be pre-warned that the valuer will not necessarily be wearing a suit, may be relatively young and could even be female!

Inspections - pre-inspection preparation • Valuer should check the property type online - competence, experience, conflicts of interest? Especially for Scheme 2 and 3’s • Research possible comparables • Land Registry Information if relevant – title plan, lease details • Location map – Street View • Equipment – tape, laser measurer, torch, damp meter, ladders, PPE • Site note pack or, now more commonly, i. Pad or other tablet computer

Inspections - mortgage valuations 1 • Typical inspection time 20 -30 minutes for average 3 bed SDH • Valuer will inspect interior and exterior, including “head and shoulders” view of the roof space if required by lender or necessary to identify construction • It is only a valuation, not an in-depth survey. • Does property meet lender’s guidelines? • Is property a suitable security? • Is it readily saleable for owner occupation?

Inspections - mortgage valuations 2 • Is it readily mortgageable to other lenders? • Is it insurable? • Valuer only interested in location, construction type, general condition and major defects that significantly affect value. • Structural movement, major repairs to the roof, major repairs to the walls, extensive damp or rot, Japanese Knotweed • Information is for the lender’s benefit, customers should instruct their own survey. Customer has no contract with valuer.

Inspections – customer surveys • Up to 2 hours for a Home. Buyer on a standard 3 bed SDH. • Considerably longer for a Building Survey, potentially several days for a very large property. • Inspection of inside, outside, roof space (if possible), grounds and outbuildings. • Much more detailed report, comments are specifically for the customer. Customer has contractual relationship with surveyor.

RICS Red Book definition of “Market Value” • The estimated amount for which the property should sell on the date of valuation, assuming that it has already been properly marketed for a reasonable period • Assumes an arm’s length transaction between a willing seller and a willing buyer who have acted knowledgeably, prudently and without compulsion • Used as the basis for mortgage valuations • Mortgage valuations specifically disregard any extra value from possible development e. g. a building plot in the garden, unless the lender specifically instructs otherwise (RICS Red Book, UK Appendix 10, Mortgage Valuation Specification)

RICS Red Book definition of “Projected Market Value” • Projected Market Value is the estimated amount for which the property should sell on at a date a short time in the future as specified by the valuer. Widely misunderstood by valuers and misused by lenders. • It is intended to highlight short term trends in value. It is not intended to be a “forced sale” value. • Otherwise subject to similar assumptions to Market Value • So the only difference between MV and PMV is MV says “what’s the value today, if we had started marketing it in the past? ”, whereas PMV says “what will it sell for on a particular future date, if we start marketing it now? ”

Insurance Reinstatement Cost • Based on cost of rebuilding, nothing to do with market value • Calculations based upon RICS BCIS rebuilding cost data • Available online or can be completed manually using tables • Can be used for most standard forms of construction. • Doesn’t work well for historic properties, listed buildings because the data are not available. Specialist advice would be necessary.

Valuation methodology - comparables and rationales • Most residential properties are valued using the Comparison Method • The valuer will estimate the value of the subject property by comparing it with other properties which have recently been sold (or let, if rental figure required) • Typically at least 3 comparables required for mortgage valuations • Comparables should be as similar as possible to the subject property. Most important factors are location, property type, size. Other factors such as condition, quality of fittings, decoration are less important. • Special rules for new build valuations, there must be mix of new and secondhand comparables, helps to isolate any excessive “new build premium”. • The comparable evidence should be supported by a rationale to justify the reported valuation

Valuation methodology – sources of comparables • Quest database – records of previous valuations • Office database – valuer will keep records of previous jobs • Land Registry websites • Local estate agents – good source of recent comparables • Rightmove – public site • Right. Move Intel SCT – subscription site, now the main source, used most valuers, including all the corporates

Valuation methodology - sources of comparables – and Rightmove Intel Valuation Comparables

Suspicious activities and vulnerable customers • We operate a Suspicious Activity Report mechanism. • We repeatedly ask valuers to be alert to any suspicious activities, e. g. scheme abuse, possible frauds, sale and leasebacks etc. • In the lifetime mortgages market there is a particular concern regarding vulnerable customers. • We ask valuers to be alert for signs of vulnerability, e. g. customer unsure of purpose of report, mental confusion, self-neglect, hoarding, evidence of scam activity, undue influence by family members and third parties.

Post valuation queries and valuation challenges • Post valuation queries (PVQs) is a huge growth industry, we need to do all we can to reduce them by clearer instructions, right-first-time reporting, better management of customer expectations. • Ideally, valuers should not engage directly with mortgage customers, this can lead to “being helpful” syndrome, which often ends badly. • Customers who wish to challenge a valuation should be asked to explain why they think the valuation is incorrect. Disappointment with the figure is not, in itself, a valid reason. • Customers can complete a Valuation Challenge Form, which gives them the opportunity to provide comparables to support a challenge.

Hot topics • New build incentives e. g. cash backs, deposits paid. Recent case – sale £ 950, 000, vendor deposit of £ 95, 000. What is the real price? • New build lease terms. Short leases and escalating ground rents now very common. Some very odd review clauses. What is acceptable, what is not? • Help to Buy. Is it just “Help to Sell”? Has it pushed up prices? • Modern Methods of Construction – what is acceptable, what warranties are needed. • Cladding systems on high rise flats. What to do post-Grenfell?

Pre-instruction advice? Valuers may be able to help… • Your panel valuers should be able to help with unusual, marginal cases before you instruct (and pay) for a valuation, e. g. • Non-traditional construction, e. g. steel frame, concrete panel, MMC • Flats in council high rise blocks where very few have been bought, or over commercial premises, especially hot food retailers. • Agricultural, equestrian properties with lots of land. • Short leases. Escalating ground rents. • The golden rule. Would someone buy it to live in it themselves?

The end. . . • ANY QUESTIONS?