The offer to purchase is accepted. The Surveyor visits the property, and the report arrives in your inbox. You open it and quickly discover the Surveyor's valuation does not match the purchase price. What do you do? A property valuation gap is one of the biggest fears for buyers and sellers, and rightly so.
To discuss strategies and next steps, I have once again enlisted the help of Michael McGrath, Chartered Surveyor and partner at JEC Property Consultants. (For more general information on property valuations, please read our previous blog, Property Valuations: Determining the value of your home.)
Property valuations are subjective.
First things first, remember that valuations are subjective. They are performed by one individual's research on market comparables and recent sales. Most of the time, a purchase price includes the value of chattels. And depending on the home, this can be a pretty substantial amount. To examine comparable net sale prices, Surveyor's use the government website, and this information excludes chattel. In addition, the government records often lag behind the market activity, especially given the current pace of the Cayman real estate industry.
"We obtain our sales comparables and statistics from the government website and there is sometimes a delay in the sales recorded. It is critical that Valuers work with real estate agents to obtain current transactions and offers taking place. These statistics can then be fed into the report and will ultimately help the Valuer reach a value that accounts for recent market movements." - Michael McGrath, JEC Property Consultants.
How to close the property valuation gap.
Now that you understand why the discrepancy exists, here is what you can do about it.
Comparable Sales – Ensure the comparable sales used make sense. If a private or recent sale could help your case, let the Valuer know about it. As mentioned, Surveyor's use the government website to find recent sales, and not only can this information be delayed, but it will also not include private sales. Reach out to your real estate agent for their knowledge of previous offers or recent sales data you and the Valuer may not be aware of.
Second Valuation – You can commission a second valuation. If, after speaking to the Valuer, you feel the valuation is wrong and the Surveyor will not consider other comparable sales – then you might consider instructing a second Valuer. However, be prepared that both valuations could end up being very similar, and your property valuation costs will have doubled.
Contract Renegotiation – With the help of your real estate agent, you can go back to the negotiation table. Buyers and seller can renegotiate the offer to purchase, should one of the parties be unwilling to proceed based on the difference between the sale price and the Surveyor's report. My recommendation is to always discuss your renegotiation strategy with your agent before going back to the table.
How to prevent the property valuation gap
A valuation is an important piece of information to have at the beginning of a real estate transaction. It provides expert pricing information. In the ideal scenario, a Valuer and a real estate agent work together to give the seller accurate pricing recommendations based on industry knowledge and research. This ensures the property is listed at a fair market price. Unfortunately, the current typical practice is for Surveyors to be engaged by the bank to determine the mortgage amount after the offer to purchase is already accepted.
"Purchasing a home is one of the biggest investment decisions you will make in your lifetime. Valuer's reports are legally binding and we are liable for the information included within those reports. We would like to see more sellers and purchasers considering an expert valuation as one of the first steps in the real estate transaction process." - Michael McGrath, JEC Property Consultants.
Tips for Buyers closing the gap
Banks will not lend more than the appraised value of a property. If you are a purchaser, my advice is to weigh up how much you love the home and remember that property is a stable asset class. Meaning real estate historically provides stable returns over the long term. If there is a shortfall in the valuation and you have sufficient cash reserves, it is still a viable option for you to make up the difference.
Tips for Sellers closing the gap
If you are a seller and this situation presents itself, do not despair. Please remember that the buyer has already made an offer. They want the property. They have applied for a mortgage and paid for a valuation and possibly, an inspection. Meaning they are likely still very motivated to buy your property. When there is a willing seller and a willing buyer, there is often a middle ground that can be reached.
Thanks again to Michael McGrath from JEC Property Consultants for sharing his knowledge of the Cayman property valuation process.
Want to know more about the valuation process?
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