It’s a challenging time for property valuers, with an uncertain economy and ever-demanding lenders, many feel like they are running a fine balancing act.
This is particularly the case with construction finance as valuers are asked to not only value the site but also the future value of the project. This can be challenging at the best of times however at the moment some valuers are reaching for a crystal ball.
Of course, valuers try and cover themselves with disclaimers and who could blame them?
Regardless, if a loan goes bad and the lender loses money due to what they feel was an incorrect valuation the valuer can really be up against it.
The meat in the valuation sandwich
The truth is few legal challenges against valuers are successful, however even a challenge can be damaging as this can have ramifications on their Professional Indemnity insurance and premiums can go up significantly. Worse still, if a challenge is successful the valuer may lose their cover altogether, essentially ending their career.
It’s important to accept that a valuation is really an opinion; hopefully a researched and educated opinion, but an opinion none the less. If three valuers were sent to the same property, there would almost certainly be three different outcomes. In most cases the differences in value would be small and within acceptable parameters but there are cases where valuers get it wrong and getting it wrong can mean losses for lenders.
Before I continue, please let me assure you this article is in no way a dig at property valuers: for the most part they do a great job under often challenging circumstances. On many occasions a valuer is the meat in the sandwich. On one hand they’re acting in the interest of the lender, but still try to manage the expectations of a broker and borrower; given the often-conflicting motivations this can be a difficult balance.
Keeping lenders happy
Another challenge for a valuer is keeping a referrer such as a lender happy so they continue to use them.
This often involves making sure the valuations are on the conservative side, but not so conservative that they kill the majority of deals. A valuer will soon get his marching orders if a lender feels they are being too tough and it’s affecting their volumes.
Some lenders want their cake and eat it too; a valuation that protects them from an equity perspective but is also high enough to write the loan. Clearly the two things don’t always line up and this can be very difficult for a valuer to manage.
Often the person ordering the valuation is an employee of the lender who might even be paid a commission for successful deals, so it would be fair to say they are often motivated to get the deal done.
For the valuer, it’s often not until there’s a problem does the valuation come under scrutiny and while the lender may have been happy to settle the deal initially, they can be quick to look for people to blame when things don’t go the plan. As a result, the valuers can easily find themselves being the focus of an investigation.
Time pressure on valuers
The busier someone is the more likely they are to rush things and make mistakes, valuers are no exception. Some valuers are expected to conduct multiple valuations each day.
This often involves driving long distances along with spending time to research the property as well as review comparable sales evidence and compose the report, often under time pressure from their employer, the lender and broker. Under such pressure it’s easy to miss things or even to take the odd shortcut.
I have witnessed a number of valuations with significant errors such as the wrong suburb being used as comparable sales or not noticing a piece of land was actually land locked. I’m sure such errors were not made purposely however it’s situations such as these that can cause real problems for lenders and valuers alike.
For a lender, who are often under time pressures of their own, it can be tempting to skim a valuation report and focus only on the page that nominates the outcome and this can be a recipe for disaster.
The point is valuations are not a perfect science and valuers are often pulled in many directions in an attempt to keep everyone happy. In the majority of cases there are no issues however every so often, despite the best of intentions, mistakes are made, and these mistakes can result in losses for lenders and serious ramifications for valuers.
Like I said, it can be a fine balancing act!