Bank Valuation vs Market Value
During a property purchase, you'll encounter the terms "bank valuation" and "market value." Both aim to determine a property's worth but serve different purposes.
A bank valuation, conducted by a RICS valuer on behalf of the lender, assesses the property's suitability as loan security. The bank's primary concern is to mitigate its risk, ensuring that the property's value is sufficient to cover the loan amount if the borrower defaults.
Market value, on the other hand, reflects the price a willing buyer and a willing seller agree upon in an open market. It's influenced by current supply and demand, recent sales of comparable properties, and the overall state of the property market. Market valuations establish a reasonable purchase price for both buyers and sellers.
If a bank values a property lower than your offer, it can lead to mortgage offer reductions or even withdrawals, placing your purchase at risk. It doesn't necessarily mean your agreed price is wrong, but you'll need to renegotiate with the seller, challenge the bank's valuation, or look for a different mortgage product.
Challenging a property valuation
If the valuation is lower than your offer, obtain the valuation report from your lender to understand their reasons. Then, provide the following evidence:
- Recent sales data (sold prices, not asking prices) from reliable sources like Rightmove or Zoopla, demonstrating comparable properties in your area, focusing on similar size, condition, and location.
- If the valuation cites a defect like subsidence, proving the issue is nonexistent or less severe than claimed. This can be done through instructing an independent RICS surveyor for a second opinion.
Challenging a valuation is not guaranteed to succeed, and insufficient evidence will result in failure. Prioritise renegotiating the purchase price with the seller, as this is often the most effective strategy.
If the undervaluation is due to a defect, your mortgage approval will be conditional based on a specialist's confirmation that the issue is resolved or nonexistent.
Ultimately, you must decide whether to challenge the bank's valuation or renegotiate the price with the seller. Having a Home Survey will provide more detail than your bank's valuation and will help you determine if the seller is asking for too much or if the lender's valuation is unfair or incorrect.
In our recent survey, 16% of homeowners found defects; including 2% who were able to pull out of a bad purchase, 7% who were able to negotiate a better price, and sadly, 7% of homeowners who did not get a survey and discovered defects after the purchase.
12 of the 39 who remembered how much these defects cost to remedy spent over £5,000
Don't burn your money, book a survey.
How banks value properties
Banks determine a property's value by considering several key factors:
- Comparable Sales: Recent sales of similar properties in the area provide a benchmark for current market values.
- Property Condition: The current state of the property, including any defects or necessary repairs, significantly impacts its valuation.
- Market Trends: The valuer's assessment of the local housing market, including supply and demand, influences the final valuation.
Any defects identified during the valuation process can negatively affect your mortgage approval, requiring a specialist assessment to confirm the issue's extent. This is declared to the lender within the RICS valuer's Mortgage Valuation report.
A lower valuation than your offer doesn't necessarily mean all is lost. Since the lender is confirming the price they feel the property is worth, the report might serve as an indicator of the property's true market value.
This means you could renegotiate the purchase price with the seller based on an independent third-party professional assessment rather than an estate agent's estimate.
Why banks undervalue properties
No comparable sold property values
The most common reason for undervaluation is a lack of recent sales data for similar properties. This means the bank's valuer cannot confirm your offered price aligns with market evidence.
Lenders prioritise protecting their loan so they value properties based on actual sold prices , not asking prices or current market listings. This is because, if you default on your mortgage payments and they need to repossess the property, they can recoup most of their investment.
Property in poor condition
Properties with defects like damp, subsidence, or non-standard construction (e.g., part concrete builds) are often undervalued. This means that the 'doer-upper' you've had your eye on might not be mortgageable to your lender.
Lenders assess the property's value in its current state, not its potential after renovations. If defects are identified, a specialist's report is required to confirm the extent of the issue. The specialist could be a structural engineer for subsidence or a damp and timber specialist if the valuer suspected rising or penetrating damp.
The mortgage lender will note how much the property would be valued at if in good condition, and then state what the property is currently valued at in its condition now.
Lenders may offer a staged mortgage, releasing the full amount upon completion of necessary repairs to bring the property up to standard and a subsequent revaluation.
Negotiating with the seller
An undervalued property can disrupt a seller's plans, potentially affecting their onward purchase. It might mean they're now under budget for their next home and stuck on what to do next, leading to your offer falling through as well.
As the buyer, your job is to negotiate the asking price down to, or as close to, the lender's valuation. Present the valuation report and explain the impact on your mortgage offer. Focus on reaching a mutually agreeable price that aligns with the property's confirmed market value.
This means you could be out-of-pocket if you suddenly needed to sell and move again. Prioritise a factual, solution-oriented approach to keep the purchase viable.
Download a house price negotiation letter template, free from hassle.
- Instant download.
- Easy to fill in.
- Suitable for negotiating offers after survey.
- Templates for initial and final offers.
The templates will be attached to your confirmation email after payment. Please allow a couple of minutes for the email to arrive.
Advice for buyers
To avoid the risk of an undervalued property derailing your purchase, maintain a strategic approach. The best advice is to keep an eye on the property market and don't stop viewing new properties even once your offer is agreed.
This doesn't mean you have to put offers on other properties you find, but if something goes wrong with the property you like, it lessens the emotional impact of pulling out of the transaction.
Our brokers will present the best options available to you, for any type of mortgage, including:
- First-time buyers, home movers and buy-to-lets;
- Employed; self-employed or director mortages;
- Mortgages for non-UK residents or non-UK citizens;
- Bridging loans;
- Bad credit mortgages;
- Guarantor mortgages;
- Joint borrower, sole proprietor mortgages; and
- Absolute, Possessory, Good, or Qualified Title.
Andrew started his career in 2000 working within conveyancing solicitor firms and grew hands-on knowledge of a wide variety of conveyancing challenges and solutions. After helping in excess of 50,000 clients in his career, he uses all this experience within his article writing for SAM, mainstream media and his self published book How to Buy a House Without Killing Anyone.
Caragh is an excellent writer and copy editor of books, news articles and editorials. She has written extensively for SAM for a variety of conveyancing, survey, property law and mortgage-related articles.
