This article explains shared ownership valuations for buying, selling, staircasing and lease extension. It also looks at what shared owners can do if they’re not happy with a valuation.
What is a home worth? One answer is that any home is worth whatever someone is willing to pay for it. There’s some truth in that. But, for various reasons, it’s an over-simplification at the best of times. Things get more complicated in the case of shared ownership, where there is likely to be more than one purchase transaction for the same home, whether purchasing additional shares, lease extension and/or simultaneous sale and staircasing.
Shared owners in homes with building safety remediation issues face additional complexities, which are explored in this feature: Shared ownership, the building safety crisis and nil valuations.
Shared ownership valuations
The Royal Institution of Chartered Surveyors (RICS) regulate surveyors in the UK. In theory, this should ensure both independence and consistency. But property valuation is – arguably – as much of an art as a science. In negligence cases, a valuation margin of 10% may be considered reasonable.
It doesn’t help that property valuations are required by a range of individuals and organisations with sometimes divergent interests.
Housing associations and shared ownership sales prices
Once the sales price of a new-build shared ownership home has been established, the value for every future transaction – staircasing. lease extension or selling – is set by RICS valuers using a standard methodology. But housing associations set the initial sales price.
Pricing new homes is difficult generally. So how do housing associations set sales prices for new-build shared ownership homes? Typically, they would seek advice from one of the larger surveying firms – perhaps Savills or JLL – and from internal sources of expertise at the commencement of a new scheme to establish indicative prices for planning and budgeting purposes. This is the starting point for setting the sales price when those properties eventually come to market.
Of course, the wider economic context and/or property market could have shifted in the meantime. Housing associations would review comparable sales both online and via discussions with local estate agents. The final sales price would take into account a range of factors including construction costs, any white goods or services provided, and mortgage lenders’ requirements
But, as any accountant will tell you, developing pricing strategies and tactics is not just about costs. There are a great many factors which drive pricing decisions. Not least that if sellers pitch too high they get fewer takers resulting in slower sales; and if they pitch too low they get ‘too many’ takers.
Tip for first-time buyers – bear in mind it may be possible to negotiate a lower purchase price for a shared ownership property.
“I got the price of my shared ownership flat reduced by £30,000 before committing in 2005”.Kirsty, shared owner, Moat Homes
Mortgage lenders and shared ownership valuation
Mortgage lenders are primarily interested in whether their investment (in your shared ownership mortgage) is safe. If the worse came to the worst would they lose money? Any lender’s mortgage survey will be in line with their own criteria for lending.
First-time buyers and shared ownership valuation
Of course, valuation can be a double-edged sword for any home owner.
First-time buyers want (or need) low valuations. The same applies to valuations for staircasing or lease extension purposes. But most people will want a high valuation when they come to sell that same home….. This is perhaps particularly true for shared owners given the positioning of shared ownership as a ‘step on the housing ladder’. Many shared owners hope to make a gain on sale to put towards their next home.
Estate agents and shared ownership valuation
An estate agent’s job is simply to obtain the best possible sales price. This may be higher or lower than a RICS valuation, for reasons discussed below..
Buying a shared ownership home
What does ‘affordable’ mean?
Shared ownership is often described as affordable housing. But what does ‘affordable’. mean? The main focus of Government and housing associations is access to home ownership. Affordability is generally defined as an affordable mortgage deposit. A deposit on a part-share will inevitably cost less than a deposit on 100% of that same property. But ‘affordable’ is not necessarily the same thing as ‘cheaper.’ It’s worth checking if the grossed up (100%) sales price of a new-build shared ownership home is higher than otherwise comparable resale properties.
Shared ownership and market mechanisms
“The usual market mechanisms which help regulate property prices may not work as well in the case of shared ownership. Because the market is made up of buyers purchasing part shares, differences in value may have less effect than in the wider property market. For example, someone buying a 25% share in a flat worth £400,000 might be tempted to pay £20,000 extra. But in the open market buyers might never pay £480,000 for that property”.Richard Murphy (MRICS, RICS Registered Valuer,) Richard John Clarke Chartered Surveyors
The Homes Owners Alliance point out that: “new-build properties include an extra premium on the sale price that, like a new car, depreciates as soon as you move in“. This applies to shared ownership as much as to any other type of property. There are some good reasons for this, of course. A new home is likely to come with guarantees and warrantees, and should be well-presented with no wear and tear. But such benefits may not entirely explain new-build premiums.
A new-build premium means that a quick onward sale by a shared owner could – unless property prices are rising rapidly – result in a lower valuation than the initial purchase price. (Which begs the question why affordable housing schemes focus on new-build homes; a question which there simply isn’t space to address here….).
Lease length and valuation
Of course, not all buyers purchase new-build shared ownership homes. Some buy a share of a resale property. In this case, it’s important to take account of lease length and, in particular, the number of years remaining until the all important 80-year threshold (after which lease extension becomes substantially more expensive).
RICS guidance notwithstanding, it appears that different firms may have different approaches when it comes to taking lease length into account for the purposes of valuation. One surveyor told me: “For the purposes of our valuations anything over 80 years is a long lease; ie the value of the property has not dropped. Leases under 80 years will have a lower value”. But another had a more nuanced view: “The valuer needs to know the lease length to do a valuation and shouldn’t make assumptions as there is no need these days. Previously Land Registry information wasn’t as readily available as it is today”.
The cross-subsidy scheme and potential conflicts of interest
Housing associations face a potential conflict of interest in setting sales prices for new-build shared ownership homes. On the one hand, shared ownership is positioned as a Government-backed affordable homes scheme delivered by not-for-profit housing associations. But, on the other hand, housing associations rely to some degree on shared ownership sales to generate income for social rented housing (the cross-subsidy model).
Initial rent is calculated as a percentage of the sales value. This also potentially creates self-interest for housing associations to set a higher rather than lower sales price. There is a strong argument for transparency on the part of the sector. Unfortunately, this is not always forthcoming as evidenced, for example, in the response by the National Housing Federation to a Shared Ownership Resources Open Letter on the question of whether rent generates surpluses for housing associations.
Valuation: staircasing and lease extension
Any registered valuer should arrive at roughly the same valuation using the same methodology. This applies regardless of the nature of a transaction: staircasing, lease extension or sale.
“The value for all transactions after the initial sale is set by chartered surveyors using the same methodology. Ultimately, we don’t need to know the reason for the valuation in order to value a property. Often people need a valuation in order to decide what they want to do. For example, if they feel the value is too low to sell, they may decide to staircase instead.”
“Unfortunately, if a surveyor overvalues a staircasing valuation then someone is buying at a higher rate than they should be and when they come to sell it they are left with a nasty shock. That’s why it’s important to be sure that your surveyor understands shared ownership and valuation”.Armen MIrzoian (MSc IMC, RICS), Senior Surveyor, Copeland Yussuf LLP
RICS valuers have a professional obligation to act as an independent expert regardless of who is paying the valuation fee. (Usually the shared owner rather than the housing association).
However, some shared owners have expressed concerns about requirements to use housing associations’ recommended valuers. They fear conflict of interest where those valuers act for housing associations as well as shared owners, or gain commercial benefit from participation in recommended panels.
Valuation: selling a shared ownership home
Shared ownership leasehold contracts generally specify an 8 week ‘nominations period’ to give housing associations an opportunity to find a buyer who meets affordability criteria. (NB. for homes funded by the Affordable Homes programme 2021-26, the nominations period has been reduced from 8 weeks to 4 weeks). If the housing association can’t find a suitable buyer, the shared owner will usually be given permission to sell on the open market via an estate agent.
A high sales price benefits sellers (so long as it isn’t high enough to deter potential buyers). It also benefits estate agents if they are working on a commission basis. Estate agents operate in a highly competitive market and will be keen to solicit business. They might initially propose a higher sales price to entice a client in. It’s not unusual to find that the estimated selling price comes down once the contract with an estate agent has been signed. Or perhaps later on if required to attract viewers and ultimately a buyer. For this reason, an initial estimated sales price may be higher than a valuer’s assessment.
On the other hand, it’s possible an estate agent’s valuation could be lower than the sales price required by the housing association, say, if the housing association’s surveyor doesn’t take adequate account of a short lease… or perhaps higher specified rent than local comparable properties (arising from contractual annual rent increases). This could be problematic if the housing association has a policy of requiring any shortfall between the sales price and the valuation to be paid over to them.
I’m not happy with a valuation. What can I do?
Richard Murphy, of Richard John Clarke Surveyors, offers the following tips.
- Knowledge is power, It’s extremely helpful to understand what the valuation should be BEFORE commissioning an independent RICS valuation. Armed with this information you can decide how to proceed if the valuation isn’t in line with your expectations.
- You could do this by approaching an independent surveyor with experience of shared ownership for a desktop appraisal, making sure to specify the lease length. A desktop appraisal would be cheaper than the full valuation report. You could expect to pay around £240 including VAT.
- Talk to experienced local estate agents about the prices comparable flats or houses are selling for.
- Research asking prices of local for sale properties. Take into account relevant factors such as price per square foot, location and condition. But be aware that property portals may not include lease length in property details.
- Check sold property prices in your area on Rightmove.
- If you are staircasing, or extending your lease, and the valuation is lower than you expect, that’s a bonus. Or if a valuation is higher than you expected, you can send your evidence to the valuer to see if they are prepared to adjust their assessment.
- If you are selling, and the valuation appears high, the market will decide. The property may not sell quickly or, indeed, at all. In this case you will need to be aware of your housing association’s policy on paying over any difference between the valuation and the selling price.
- If the valuation appears low, and if your priority is a higher price rather than a quick sale, you can again make representations with evidence to the valuer.
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