How to avoid a down valuation by giving a fair offer price on a home ?
Ensure offer prices are aligned with mortgage valuations as well as a margin of safety #ukmortgages #pompompricing
It is quite an ordeal for a prospective buyer to put down an offer, negotiate to find a price that is acceptable to both the buyer and seller along with dealing with a potential scenario where the purchase falls through due to a down valuation (see note on this definition1).
The key way to avoid such a scenario is to make sure the offered price is aligned with a mortgage valuation provided by a lender. Such a valuation can be based on an automated valuation (“AVM”) by Hometrack2 or a more be-spoke survey.
But, since these tools are usually available to mortgage brokers or mortgage lenders, it is difficult for an individual or family to apply a reliable offer price. One way of resolving this issue is to follow a multi-step process shown here:
Step 1: Explore recently sold prices of similar homes
Use the Land Registry3 (which is for free) to identify recently sold homes which are on the same street or adjacent street or same neighbourhood to the home of interest. These homes will be deemed your comparable.
You can then cross-reference the address of the comparables via Zoopla. In a Zoopla search you can type in the address by postcode and address to find photos of the comparable. Assuming they are of similar condition, you have a reliable comparable. If not, whereby the comparable is in a much worse state than the home of interest, then apply reasonable adjustments (see step 2).
Step 2: Divide the price of the comparable home by square foot
Take the price of the comparable and divide it by the number of usable square foot (which means excluding garages, sheds and so on). This gives you the price per square foot for the comparable. Compare this price per square foot with the property of the home of interest.
If there is a significant divergence where the home of interest on a per square foot basis is much more expensive than that of the comparable - it is likely you may face a down valuation. In this scenario best to bid on a square foot basis which is that of the comparable and multiple it by the square feet of the home of interest to give your total offer price.
Now it is worth noting that if the comparable is in a much worse condition than that of the home of interest then an adjustment should apply (e.g. if major renovation works are required then an adjustment of maybe £70 to £150 per ft²) can apply.
Example:
There is a home (in an average liveable condition) with an asking price of £900k with 1300sqf. but a comparable sold within the last 4 months but in an awful state was sold at £600k with 1500sqf. then you can give an offer price based on the following:
Comparable per sqf is £400 but requires works of £70 to £150 per sqf giving a total sqf rough price of £470 to £550.
The home of interest is £692 per sqf.
If we use the comparable for the home of interest then a reasonable offer price could be £470 to £550 x 1300sqf. giving an offer price between £611,000 to £715,000.
https://www.hometrack.com/products/valuation-solutions/automated-valuation-model/
https://www.gov.uk/search-property-information-land-registry