After attendig the first AOBP quarterly forum last week it became clear that one topic causing much debate within the bridging industry is the issue of valuations.
The topic of valuations, which was raised by one audience member curious to establish what percentage of cases reach completion after a valuation has been done, resulted in the lenders on the panel revealing very different approaches.
Whilst many of the lenders rely on an approved panel of valuers whom they can out-source valuations to, Goldentree Financial Services chooses not to rely on valuations for the majority of the deals it lends on. We caught up with a valuer and some of the lenders who were present at the AOBP event to find out why the companies have chosen to adopt such different approaches…
Shaf Ali, Partner at Belleveue Mortlakes Chartered Surveyors, told us: “Any property transaction involving the transfer of an interest in land or buildings should be valued by an independent panelled Chartered Surveyor specialising in property valuations. This process should form part of each party acting knowledgably and prudently to safeguard their interests.”
He explained that his firm’s training and registration with RICS means that the company is “duty bound to provide an unbiased and professional opinion.”
So, what about lenders who don’t rely on valuations?
Shaf continued, “Lenders that don’t use valuers run the risk of being unable to demonstrate that they have exercised due diligence in agreeing a loan or an advance.”
However Simon Ismail, Director at Goldentree, advocated his company’s decision to not necessarily utilise an independent valuer, stating: “For the lenders who do not visit the security they are lending against, a valuation is essential. We prefer to do this ourselves and be comfortable that both the property and the borrower are worth the funds being lent against it/to them.
“Local values, recent sales prices and planning history can all be checked easily online, within minutes usually. Fraud is a very real problem within our industry and we believe at Goldentree that our loan procedure (visiting the property – meeting the client and stringent in-house diligence) is the best deterrent against this crime. I do not see what improvement a valuation can give to our already diligent procedure when protecting against fraudulent applications.”
Simon explained that his company’s model involves visiting every single property, and meeting every borrower. He said, “We are the ones lending the cash so we want to be certain that the deal we are recommending is the right one for us and the borrower. There is no-one better positioned to make that decision than ourselves!”
He also provided some insight as to why Goldentree is less inclined to seek valuations. He said, “Most, if not all, lenders have no choice but to obtain a valuation as their funders insist on this. Goldentree is in the fortunate position of lending its own funds. We are not regulated by banks or other funders’ rules and covenants.
“We believe we have a wealth of experience which varies from bankers, surveyors, lawyers, accountants, developers and entrepreneurs. Collectively, we make decisions to lend on deals that make sense to us. This enables us to lend on deals that other lenders cannot due to restrictions put in place by their funders, credit lines or investors.”
Does Goldentree ever outsource?
Simon revealed that a valuation is only outsourced if the lender believes some local knowledge or greater detail on a difficult/specialist asset is needed. In that case, “a ‘local’ surveyor is then instructed, or a surveyor who specialises in that particular field.
Tomer Aboody, a Director at MT Finance, revealed that his company doesplace emphasis on valuations. “As non-status lenders we are uniquely placed to assist borrowers whether they have great credit or not. That is because at MTF we lend on the open market value of the property and not on a borrower’s last three pay slips and credit file.
“This is not only fairer, but faster. This is a major advantage of our operational model and also means that great reliance is placed on an accurate open market valuation of the property. We feel it is vital to seek the opinion of experts to provide this valuation.”
Brian Levin, Underwriting and Operations Manager at Masthaven Bridging Finance, said: “As a lender which lends across England and Wales it is not possible to have an in-depth knowledge of such a large area. We feel that by outsourcing our valuations we are able to get a valuation conducted by a local surveyor, which gives us greater comfort as to the accuracy of the value of the property.
“The property market is also still recovering from the events of the past few years and it will be some time before the market becomes “normal” again. Each area and, specifically, property has different factors that would affect the value and the best way to ascertain these is by having a valuation undertaken.”
Are lenders who don’t outsource leaving themselves more vulnerable to fraud?
Despite choosing to rely on valuations, Tomer does not necessarily think in-house systems leave lenders more vulnerable. “We fundamentally believe an independent valuation is in all parties’ interests,” he told us. “However, we feel that if a lender chooses to value all assets internally, and if they have the in-house expertise to do so, if they stick to the RICS Red Book requirements, and if they fully inspect the properties, then there should be no increase in the risk of fraud.
“It all depends on the approach employed. Clearly, if a lender decides to run desktop valuations only, then we would consider this to be an invitation to fraudulent applications. Either way, the idea of in-house only valuations runs contrary to our principal of transparency and is not something we would ever consider.”
Jonathan Rubins, Managing Director of Alternative Bridging Corporation Limited, said: “We are firm in our belief that to work in the bespoke area of bridging in which we lend, you require specialists in the various disciplines: law, tax, valuation etc. to ensure the best advice possible allows our credit team to make the best decisions which we in turn can offer to our borrowers.”
He added, “We look to attain an accurate valuation for the basis of every loan we offer; for this we have a large panel of valuers who are pre-agreed with our funders. We tend to try and use specialists either through geographical expertise or sector specialism, to ensure the most accurate and secure valuation for both ourselves and the borrowers.”
Shaf highlighted that he believes in the importance of valuations. “We estimate that of the 1,200 – 1,400 valuations we carry out per year, 40-50 per cent are lower than the purchase price/estimated value (the majority of these valuations fall within 10-15 per cent of the specified value). However, there are a number of valuations that fall outside this range where the lack of a formal valuation could potentially put both the lender and borrower at significant risk of financial loss.
“The purchase price may not reflect the true value, as there may be other factors. By way of an example, we recently valued a substantial residential dwelling in Kensington where the purchaser openly admitted that she was aware that the agreed purchase price was around £100,000 above market value, but the client was willing to pay more to secure the purchase.”
Brian believes that, without a valuation, “There is definitely a chance that the risk of fraud is increased; the level of this risk will depend on each loan. It is always worthwhile to have a survey done as in our experience the feedback from the surveyor not only relates to the property itself but in many cases the borrowers involved. This additional feedback has proven to be invaluable to Masthaven over the years.”
Whichever method each particular lender chooses to rely on, what is important is ensuring that they are as fully protected as possible from fraud, and that the right decision is being made for both their own company and for the borrower.
