D3.02: ASSESSMENT OF SECURITY SYLLABUS Types of survey Relative costs Specialist surveys Responsibilities of surveyor Requirement for and nature of valuation Liability for costs Unusual property Short leasehold Common property defects Vacant possession NHBC guarantees Types of survey Where a property is offered as security for a loan, the lender will want to ensure that its value is adequate to support the loan required A buyer of a property will also want to be reassured as to the state of the property These needs can be met through one or more surveys, and there are essentially three different types, with widely differing content A basic valuation is intended primarily to value the property as security for the loan, and is carried out for the lender The nature of a basic valuation is discussed in more detail below A full building survey is an in-depth examination of the property by a qualified surveyor (or sometimes an architect or engineer) Almost all properties have defects and the full survey should identify them Finding such problems will not necessarily put a buyer off completing the purchase of a property (though it could do so if it is serious) It should help to identify any problems which could result in additional repair costs having to be met after the purchase This may result in an attempt to renegotiate the purchase price of the property The survey should cover aspects such as the electrical wiring, heating system, drains and decorative state Defects which are present at the time of purchase are unlikely to be covered by any buildings insurance policy, so the buyer should consider carefully before deciding against a full survey If some aspects of the property could not be inspected, this should also be made clear in the survey For example, the floorboards might not have been inspected because it would be necessary to lift carpets, and the seller might not have allowed this The full survey is carried out for the purchaser and the surveyor is responsible to the purchaser However, the lender may accept the report instead of requiring its own separate valuation, which would save some cost
The lender would not accept the report if there was uncertainty regarding the standing or qualifications of the surveyor however The Homebuyer s Report lies between the basic valuation and the full building survey in terms of it thoroughness This type of report is covered in more detail below Relative costs Inevitably the relative cost of the three types of survey reflects the different degrees of detail involved, and therefore the different amounts of time and expertise involved The basic valuation is cheapest, often around 250 currently for an average property, and is the most common type of survey obtained by purchasers Sometimes the cost of the valuation is reduced or eliminated for the borrower by special deals available from lenders The Homebuyer s report for a similar property might cost around 500 A full building survey could be 700 or more, and few purchasers (estimated at only about 2%) commission such a survey Specialist surveys If the valuation (or a more detailed survey) finds indications of a problem which requires further investigation, a specialist survey may be required Where the possibility of a serious problem has been indicated during a valuation survey, a lender may insist on a specialist survey before making an offer to lend, and indeed may decline to make an offer if the survey reveals serious problems The specialist survey could cover various areas, for example, the electrical system, the drains, possible subsidence etc Such problems require a specialist to investigate and evaluate the problem Responsibilities of surveyor The surveyor must carry out the task with proper care and it may be possible to take legal action against the surveyor or the firm if he/she does not For a basic valuation, the valuer s contract is with the lender and he/she is responsible to the lender It is unlikely that a borrower could have any reasonable chance of successfully suing the valuer in these circumstances therefore, although attempts have been made Lenders will generally include prominent disclaimers underlining that the valuation is limited in scope, is not intended as a means of identifying repair problems with the property and does not indicate market value If any such caveat is not prominent, it may be regarded as ineffective from a legal point of view Lenders should ensure that borrowers understand the position, or there could be a possible claim against the lender, particularly if the borrower was inexperienced and did not realise that the valuation was limited in scope For a Homebuyer s Report or a full building survey, the surveyor s contract is with the borrower and he/she is responsible to the borrower, who would have a right of action in the case of negligence The terms of the surveyor s contract are carefully set out however, and include caveats explaining what can and cannot be expected from the survey results
For example, a Homebuyer s Report will generally not involve lifting carpets and inspecting floorboards Requirement for and nature of valuation Lenders will always require a valuation of the property in order to be sure of its adequacy as security for the required loan Building Societies (but not banks) have a legal obligation to establish the value of any property used as security, though in practice, all lenders adopt a similar approach As discussed above, a basic valuation is intended primarily to value a property as security for a loan It should pick up major defects (which are likely to influence the value of the property as security, either immediately or in the longer term if not rectified) Examples would be a defective roof requiring repair or replacement, timber problems such as dry or wet rot, or damp Only obvious visible manifestations of these problems are likely to be detected, because the survey does not extend to lifting carpets, moving furniture etc The valuation does not give an indication of the market value of the property It is carried out for the lender and the valuer is responsible only to the lender, not the borrower If the property is acceptable as security for the required loan, then the loan can proceed, subject to the lender s other requirements In some cases, the valuation might be lower than the borrower might have hoped, and this may mean that the lender will only offer a loan of an amount less than that applied for Sometimes, the outcome may be a recommendation that the lender impose special terms on any loan offered In some serious cases this will take the form of a retention, where part of the loan is withheld until specified repairs are completed In less serious cases, an undertaking may be required where the borrower undertakes to complete specified repairs within a set period after completion, but the loan is advanced in full A specialist survey might be recommended to check specific areas such as the drains if problems which could be serious in nature are suspected Finally, in some cases, the property might not been seen as suitable as security at all this might be the result of serious problems such as subsidence The valuation may be carried out by a member of the lender s staff, or by an external valuer The valuation will also indicate the insurance value essentially the sum insured needed to cover site clearance and rebuilding in the event of total loss This may be more or less than the valuation of the property as security and is no guide to market value Liability for costs In general, the costs of a valuation, and any more extensive survey must be met by the borrower As already mentioned, some lenders may offer deals from time to time which offer a valuation for a reduced fee, or even a free valuation
Unusual property Property which is in some way unusual inevitably presents some difficulties This would include properties made wholly or partly of unusual building materials, or whose design is different to the norm One difficulty is in valuing the property if there are few or even no comparable properties to give an indication of price and marketability An unusual property may also be difficult to sell at a realistic price if the lender has to take possession following a default, because the number of potential buyers will be limited The valuation of such a property as security may as a result be lower than the borrower might have expected A listed property may also create difficulties Such properties are subject to various restrictions, for example, regarding repairs and redecoration, and this may also affect marketability and therefore value as security Similar considerations apply to properties which are not of standard construction, for example, those with a thatched roof, or walls which are not constructed of bricks Freehold flats may also be unacceptable to some lenders, because of the possibility that problems could arise regarding maintenance of common areas such as stairways and corridors In practice, few flats are held on a freehold basis Short leasehold The tenure of a property can influence its value, particularly in the case of a leasehold with only a short period remaining until the end of the lease The issue is that, at the end of a lease, if it is not extended, the property reverts to the freeholder and the leaseholder is left with nothing If a short leasehold is used as security, the value of the leasehold will reduce as the end of the lease approaches, and potentially, the lender could be left with no security Accordingly, most lenders apply a condition requiring a minimum remaining term in order for a leasehold to be acceptable as security Common property defects Structural movement is probably the most serious defect which can be found in a property offered for security Various causes may be involved including subsidence (an uneven downward movement) or heave (an uneven upward movement) in the land on which the property stands These problems can be very expensive and difficult to correct and may result in lenders declining to accept the property as security There may also be difficulties in insuring the property if such problems are in evidence Other usually less serious problems could include damage to or collapse of drains, which is usually more easily remedied, although the expense is still likely to be considerable Vacant possession Whether vacant possession of a property is available is an important aspect of value If a property is rented out to tenants who have long term rights of occupation, perhaps at a low rent, the property will be far less valuable than if vacant possession is available
With vacant possession, the property if repossessed could be occupied by a new owner, or let out at a current commercial rent For this reason, a property with sitting tenants may not be acceptable as security for a mortgage by most lenders Where a family is buying and occupying a property, lenders will aim to ensure that all adults not directly involved in the mortgage sign a consent to mortgage form This essentially involves their giving up occupancy rights in the event of repossession NHBC guarantees New build houses are often covered by the Buildmark guarantee offered by NHBC (National House-Building Council) The terms of the guarantee will reflect the basis in force at the time the property is first sold by the builder, and the precise details need to be consulted in individual cases The essential basis is that Buildmark covers all defects in the property for the first two years The builder is primarily liable but if he cannot fulfil his obligations, the Buildmark guarantee will do so, within specific monetary limits (generally up to the purchase price, with a maximum of 1,000,000 for new property and 500,000 for conversions) In years 3 to 10, cover is still provided under the Buildmark guarantee, but against major defects only The cover is not limited to the original purchaser, but passes to subsequent owners within the first ten years The existence of an NHBC Buildmark guarantee makes a property more attractive to a lender as security because of the protection it offers