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Tuesday, July 06, 2010

Buy-to-let over valuations

Many landlords suffering from negative equity in their buy-to-let investments may be able to do something about it if they are prepared to sue the surveyor that carried out the initial valuation.

Over valuation during the boom years was common practice by many RICS surveyors who saw the whole valuation process as purely turning up to a property and ticking a few boxes to than walk away with their survey fee.

A recent court case highlights that unwitting buy-to-let investors who may be suffering because of this practice do indeed have some kind of legal remedy which could result in a successful prosecution of the surveyor and the company for which they worked for.

Buy-to-let investor successfully sues surveyor

The recent case of Scullion vs Bank of Scotland where an investor successfully sued the lenders surveyor for negligence.

The court held in this case that the duty of care owed by a valuer to a commercial buy-to-let purchaser was no different from the duty owed to someone buying a home for themselves. The surveyor Mr Collins knew that the buy-to-let investor Mr Scullion would rely on his expertise and valuation, and would suffer loss if this was excessive.

The result was that the court found in favour of the buy-to-let investor and that the surveyor acting for the mortgage company still had a duty of care to the buy-to-let investor because the investor also relied on this valuation.

In this particular case the financial loss suffered by the landlord was attributed to the fall in house prices and as such could not be reclaimed. However, the landlord was able to claim back the difference in rent they achieved compared to that specified by the Colleys' surveyor at valuation.

This case raises some very interesting points for landlords who may have suffered from RICS over valuations at the height of the buy-to-let boom.

The basis on which a landlord may be able to seek compensation for an over valuation are set out in a precedent called "The Banque Bruxelles Principle" which has been established by the House of Lords. The basis of this principle is that a surveyor cannot be held liable for a fall in the market but can in fact only be held liable for the losses that can be attributed to the overvaluation. For more details.

Have you been stung by overvaluation? Share your experiences by posting a comment.

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David Lawrenson said...

The valuations were often quite crazy and took no account of the looming oversupply of the same type of 2 bed flats.
I recently wrote a long comment piece for the Mortgage Finance Gazette (see below) which looked at this and other mistakes made by lenders in the buy to let space.
David Lawrenson

The Editor said...

Hi David. Whilst I am no way justifying some of the crazy valuations put on by RICS surveyors. As a former surveyor myself I know how difficult it is to 'go against the market'. The basis of a valuation is based on Open Market Value backed up by 'comparibles'. This means that if a property sells for a crazy price where there is limited evidence in the market place. That price can be used to justify prices. This is what happened in many 'regeneration' areas during the boom. Unfortunately, a surveyor cannot take into account future supply in giving a valuation. If that was the case then surveyors would have to be into the business of crystal ball gazing.

Lets face it - who knows how future events will impact on house prices!

Anonymous said...

I'm a bit concerned that your post mentions The ROYAL Bank of Scotland when the actual article refers to The BANK of Scotland. I suggest someone amends the post on this blog and quickly before someone at RBS legal finds out :o)

Anonymous said...

Presumably the landlord did his homework before he bought the property, didn't he? But if he loses money, it must be somebody else's fault!

Many valuers have been guilty in the past of going with the market when they shoud not have been. But pre-crash it was very difficult for valuers to go against the market when there were numerous comparables from multiple new-build sites supporting the valuation.

In addition the situation was made worse by housebuilders not disclosing incentives (eg deposits paid, cashback, etc) and lying to valuers in order to get valuations passed at the alleged sale price.

When a valuer down-values he incurs the wrath of both the landlord and the lender - the lender because they are losing business, and the landlord who claims the valuer 'doesn't know what he's talking about'. Yes, valuers should be immune to these pressures, but it does become very wearing.

In case you are wondering, yes, I used to be a valuer, but I left partly because of this sort of thing. Nobody ever thanked me for down-valuing a property and saving them a load of money!

Hope that provides a little view from the other side of the fence.