Bank undervalued house 4% over our agreed offer. Thinking about possible consequences as buyer.

scruti

Alert: This is a very long explanation, nice TL; DR from another member in the first response.

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Hello,

As London first time buyers we recently found a house we fell in love with.
Our search has been focused in a quite niche area because we are locals and notice the gentrification during the last years + potential for the area improving with the announced future developments and new transport links.
Also raise an important point: We want to live in the place for long, is not an investment or have planes to go up in the housing ladder in the short or medium term.


The properties we were checking at are 2 bed victorian terraced houses with garden and potential for loft conversion.

Said that, after discarding a couple properties similarly priced in the same couple streets where we're focusing our search at, we found a house that checked all our boxes, with the plus of being way better maintained than the rest of properties we visited, quality materials, having very nice views to the park behind the garden (instead of leading to the back of other houses).
This specific property is also almost one meter wider than the rest of the houses in the street, that immediately adds around 10sqm of usable ground in the floorplan against similar marketed houses, and makes a difference in living room size, bedroom sizes, the space for stairs if converting the loft into a room....

The asking price was 500k (same as similar "modernized" properties being sold around), we got an offer accepted for 480k.
According to the Letting Agent (we address may be BS) they rejected a cash buyer offering 460k and when they accepted our offer they choose us over another buyer offering 10k over us, as we're chain free and the owner that we met really liked us (was a lovely visit with my wife and we got along).

Now the bank valuation came back by letter and... valued it at 460k (20k/4.16% under accepted offer), saying that is based in the current state of the property market and, being in acceptable condition, there is some wear and tear on some items and maintenance/repair/upgrading will be required.

Due to how small is the area/specific style of houses, there are very few recent sales (a couple this year), being the last ones registered around 440k for houses in worse condition/smaller than this one.
The other houses with similar asking price we discarded are still waiting (couple months in the market) and another at the same 500k asking price has been recently sold but still not showing up in the land registry.
So we can understand where the valuation came from and how a 4% difference is not much in overall.

We don't think 480k is a "overpriced" value given the care on maintenance (to confirm with a building valuation that we're waiting results for), nice views and bigger size compared to similar houses. For us makes a massive difference. Seems also does for the sellers, that were quite adamant to not even allow house viewings if our budget didn't get close to the 500k, and tried us to raise our offer to 485k before accepting it. Once I hear from the bank I will definitely speak with the Letting Agent and try to lower the price, but seen the original sellers attitude towards lower offers, the market around and how niche is our search area we don't feel like losing the house for a 4% price difference.


Now it comes the tricky bit.

I'm an IT contractor and went directly through Halifax as they're very contractor friendly. I assume other lenders will value the property similarly to Halifax just by checking the last sold properties in the street without raising the particularities of this property against them, so I don't see much point into try to get further valuations with different lenders (that can also give more problems on my contractor status).

We requested a mortgage at 80% LTV with a deposit of 96k, so we were in the edge of the band and got recommended a 2 year fix with 1.53%.
Still didn't hear from the bank but I assume that, given the valuation, they won't lend over 480k but 460k.
So if we want the same mortgage conditions we will need a 92k deposit + 20k on top for the sellers.

My natural reaction is to lower the deposit to a 15% in order to cover the bank new valuation + extra 20k outside the bank.

But I wonder if starting in negative equity and fixing the mortgage only for 2 years is a shot in the foot. As when in 2 years we remortgage the house will be still undervalued respect the price we paid. In case of proceeding, given the 4% undervaluation would be smart to try to fix the mortgage for 5 years expecting the area value to catch up by the time we need to remortgage?

princeofpounds

Wow that was a long explanation.


TL;DR:
Offered 480k on a house, valuation survey came back 460k.
Trying to decide what to do with offer, and whether to borrow at 15% LTV and buy at overvalue rather than 20%.
Contractor so more limited options on remortgaging in future is a consideration, especially given only 2yr fix is planned.

scruti

Thanks for summarizing it for me. Not being a native speaker does not help to my natural tendency to throw a bunch of words instead of getting to the point.
Apologies!

Lokolo

You won't be in negative equity. You should understand that negative equity is where you've borrowed more than what the property is worth. You aren't.

The other thing is, if this is a long term investment property (which personally I wouldn't class it is so if it's only 2 bedroom, doesn't give much room to grow, you talk about we, usually means children later on!), then overpaying 5% for your dream property is not much of a hit.

- You can go back to the vendor stating the banks valuation is £460k and therefore this is your revised offer. Offer proof. It does mean others may struggle to get a mortgage on the property at anything other than £460k, but it does mean the vendor may go to the "cash buyer"

- You can revise your mortgage as you say, get a higher LTV and use part of the deposit on the additional part

- Get a longer fix. If you are serious in that this is a long term thing, get a 3-5 year fix

Mutton_Geoff

The bank haven't undervalued it, the vendor/agent have overvalued it. You now have professional advice on what it's really worth, it's up to you whether you pay over valuation for it.

scruti

Bank confirmed that if I want to proceed I need either to pay more on top or move my LTV bracket from 80% to 85%.

Agent asked me for the valuation letter and was "shocked". They want to collect data in order to make a cause for the surveyor to reconsider the valuation. They think the surveyor may not be aware on the property size difference and just made an assessment on "2 bed sold in this area".
To be honest I have no hope in this front, I read about how infrequent are successful surveys re-evaluations.

I asked the agent for the seller position about meeting in the middle to take the hit and got what I've been getting until now: The sellers need the money for their purchase so they already lowered the price to the minimum they could accept.

This is going to end with me having to accept the 4% hit falling on my side or walking away.

In case of taking the hit probably will go for a 5year fix and increase the LTV to 85%.

Thanks for the responses!

Mutton_Geoff

scruti wrote: »

The sellers need the money for their purchase so they already lowered the price to the minimum they could accept

Surely that's their problem, not yours? Why should you be financing their future home?


It's the same I see in private used car sellers when they say "the car owes me x" and then ask that price.

Grenage

Rationally look at equivalent house sales and compare the prices. The estate agent's opinion is worthless - they work for the seller.


20k is still 20k. Only you can decide if it's worth more than the bank's estimate. One should remove all emotion from the house-buying process.

AdrianC

Simple answer...

You are buying at £480k with £384k mortgage. You make that 80% LtV.
The lender will view it as the mortgage is secured against £460k-worth of property, so 83.5% LtV.

That's it. End of.

letitbe90

Fellow IT contractor here


I would be careful about getting into negative equity as, due to some changes with respect to IR35 in private sector, the contract market might change quite substantially in the next few months - and remortgaging might become tough as a result (e.g. I would need a permanent salary of ~£100k to remortage my current property as things stand if I no longer am contracting when it is time to remortgage). Luckily for me I am already in positive equity as I bought just before the March Brexit extension (which drove prices down) but I still have an in excess of £400k mortgage to finance in 2 years when its time to renew...

hazyjo

scruti wrote: »

Agent asked me for the valuation letter and was "shocked". They want to collect data in order to make a cause for the surveyor to reconsider the valuation. They think the surveyor may not be aware on the property size difference and just made an assessment on "2 bed sold in this area".
To be honest I have no hope in this front, I read about how infrequent are successful surveys re-evaluations.

Not up to them to ask the surveyor to reconsider the valuation. Plus, size isn't everything. If the price is making that larger 2 bed more like the value of a 3 bed, then people are going to buy the 3 bed. There will be a ceiling price for a 2 bed, so make sure you're not paying over that.

I asked the agent for the seller position about meeting in the middle to take the hit and got what I've been getting until now: The sellers need the money for their purchase so they already lowered the price to the minimum they could accept.

As above - that's their problem. You might as well be giving them a loan or free cash in order for them to buy a bigger house!