The commonsense approach to buy-to-let rental estimates – analysis

A much-complained-about scenario often relates to a lender’s refusal of an application in the buy to let market after the surveyor’s rental estimate comes in at lower than expected price by the buyer.

London-based Perception Finance managing director David Sheppard has found this a particular issue. He is concerned that while surveyors are experts at structurally surveying properties, they may not have the knowledge about local rental markets.

“It’s often a contentious issue,” he says. “Buy to let surveyors are being asked to quote monthly rental figures but it’s not their area of expertise. There needs to be a better way that the industry can supply a rental figure than relying on someone who is not an expert in that. We need to find a way to address this, while accommodating all the changes to stress tests.”

Sheppard would like to see lenders find another source for their decisions.“Lenders are the ones that need the information,” he continues.

This concern about a lack of expertise is rejected by Royal Institute of Chartered Surveyors (RICS) UK valuation director Fiona Haggett.

“A valuer shouldn’t be doing a rental income estimate unless they are fully competent to do it,” she says. “If they are not aware of what the yields are for properties of that type, they shouldn’t be capitalising a rent. The RICS Valuation Professional Standards red book is very clear – you act within your competencies. If you are a residential valuer and feel you’re not competent to capitalise a rental value and apply the right yield, then you should turn down the commission if you feel that is the appropriate way to value it.”

However, Haggett admits that there are “huge issues” in the market in deciding the borders of expertise between residential valuers and commercial surveyors. When it comes to buyer disputes concerning valuations given to lenders, she adds that this has been a “perennial problem”.

“A valuer is required to know their markets and give a realistic figure for that property and there is always a difference between expectations and perhaps what valuations comes up with,” she continues.

“Some lenders will accept a challenge and others won’t, but the approach is that this is a valuation done for the lender, therefore it’s not for the client.

“Just because the valuation doesn’t come up to expectation doesn’t mean it’s wrong. I’m not saying it’s always right, because we’re all human, but it could be the fact that someone is overpaying.

This view is supported by Legal and General Surveying Services managing director Steve Goodall, who believes valuers and surveyors are more than capable of conducting this type of work.

“For mainstream lending on normal owner-occupier type properties, it is well within the scope of day-to-day work to provide an opinion of market rent,” he explains.

“There are however areas of complexity, specifically housing of multiple occupancy, and portfolio buy-to-let lending where the reporting expectations of lenders, for example in matters of safety compliance for occupation, inevitably evolve. We have surveyors who can provide this level of knowledge and insight,” he adds.

Typically, when conducting these types of valuations, surveyors will prepare rental comparables and aim to provide an objective opinion of market rent. Where L&G is concerned, this is usually based on a six-month assured short-hold tenancy on an unfurnished basis.

“Surveyors and valuers do not really calculate expected monthly rental income levels,” Goodall continues.

“The surveyor is providing an opinion at a point in time that the lender is then using to underpin a calculation of expected rent. The Prudential Regulation Authority is attempting to address any weakness in this by, for example, looking at wider locale.

“The PRA is understandably concerned with understanding whether the accepted opinion of market rent is a sustainable one,” he adds.

It is the regulator which compels lenders, in its guidance, to use a “suitably qualified independent valuer” to help assess whether the income derived from the property is sufficient to support the monthly interest mortgage payments.

The Council of Mortgage Lenders (CML) notes that this definition is not necessarily restricted to RICS surveyors.

“Lenders need to satisfy themselves as to who they regard as ‘suitably qualified’ to provide valuation advice to them, and this is a matter for them as individual lenders,” it says.

“And professional firms will be using data insights from various sources to reach their opinion.”
In line with that, automated valuation models (AVMs) are increasingly being used by lenders to supplement valuers and surveyors – often allowing them to take in a wider range of data quicker.
But whether it is done through human assessment or computer modelling, there is one priority.

“From a lending risk perspective, lenders have at least as strong an interest as brokers in ensuring that the professional advice they rely on from valuers, whatever their qualification, on which to base their lending decision is an accurate representation of market conditions and prospects, and based on a full consideration of the variable factors involved,” the CML adds.

Bearing that in mind, brokers may be best managing clients expectations and where necessary, collecting evidence of rents actually achieved, rather than what is advertised in the estate agent’s window.