One bad apple don’t spoil the whole bunch

Like most professions, there may be a few poor surveyors, but when valuations turn sour is it fraud, negligence or just changing prices? Marcus Radcliffe of Gateway Surveyors reports

The issue of fraud in the valuation market has been written about with a certain amount of gusto over recent months with some allegations, or at best allusions that there exists some dark, brooding conspiracy for mis-valuations.

I’m afraid that I find it hard to see much evidence for this but perhaps it is the nature of the beast that in an environment such as we have seen over recent years, with house prices falling, there is an inevitability that a lower subsequent valuation must be seen to be ‘someone’s’ fault. I’d like to explore this a little more deeply, not to put forward the case that there is never an element of blame, but to understand better the likelihood and potential circumstances surrounding a reduced surveyor valuation.

I’ll look more closely at the purpose of a valuation but it must be remembered that a valuation is a judgment on a particular day in a particular year and that it is merely an opinion, albeit that of a professional. Perhaps it is for this reason that there seems a greater willingness to begin legal redress should something look awry. This seems especially prevalent in the repossession sector when houses are almost inevitably sold for less than their original lender valuation.

There is no doubt in my mind that lenders should quite rightly question a valuation should a property sell for significantly less than it was previously valued but it seems wrong to make an assumption that in every case some impropriety has occurred. I’ll look more closely at the circumstances around valuation but a quick example of valuation discrepancy could occur quite simply where the original valuation instructed was a drive-by, or even worse an AVM, and a subsequent, internal inspection revealed several items that brought down the value of the property.

Surveyors’ role
Let’s start with who is actually being paid and what they’re being paid to do.

Nine times out of ten the surveyor will be acting for a lender when preparing a mortgage valuation report. Now, at this stage you could ask, should the surveyor be acting for everyone including the buyer, the seller and the lender? Does he/she have a duty of care to all parties relying on the valuation? In most circumstances the lender will reveal the valuation to the buyer but it is fair to say the buyer often believes they have paid for a survey, not a valuation. The mortgage valuation is designed to protect the lender and verify the security of the loan in terms of bricks and mortar. The buyer seldom understands this and often has little or no recourse to the surveyor.

However, for scheme 2 surveys the surveyor does agree terms and conditions with the buyer and the buyer has full recourse to the surveyor where errors are made. There is certainly an argument that this should be the case with the mortgage valuation too.

Additionally, it’s interesting to note that the valuation figure the surveyor declares has not been plucked out of the air but is based on the estimated value provided by the lender in the majority of cases. The surveyor is in effect therefore tasked with verifying that this is a realistic and achievable figure at that moment in time. In cases when a valuation is for a repossession property, no estimated valuation is given and there is an argument that a professional valuer should be capable in every case of providing a realistic figure based on their experience, knowledge of the local area and comparable evidence, not an estimate from the lender. After all, the value at a specific moment in time is simply that.

The valuation
This raises an interesting point and the crux of the article; the valuation, like many magazine articles, is correct ‘at time of going to print’. The surveyor will provide the lender with their advice as to whether the property offers an acceptable level of security at the moment in time that the evaluation is carried out. However it is unwise, and some would say unfair, to fail to recognise that life and the economy moves on. An accurate valuation in month one may not be realistic in month seven should the housing market suffer a collapse (or boom) during this period. This raises another interesting point; surveyors do not get sued for “inaccurate valuations” should house prices rise significantly during a boom period so why is legal action taken so readily when they fall? I am of course speaking about cases when a professional surveyor has documented evidence of site notes and comparables that can demonstrate that at the specific point in time that the valuation was done, the valuation was right.

I’m afraid that there is rarely one size fits all for property prices movement. Any number of issues can have had a negative impact on the price of a property over the short term, none of which were evident when the valuation took place. This could be such things as flooding, the granting of planning permission for a by-pass, the construction of a wind farm or travellers moving in at the end of the road! Perhaps the only way to protect the valuation is to offer a similar type ‘shares’ warning stating that ‘property prices can go down as well as up’.

Suing culture
What has changed for many sectors of the market, and indeed the country is a growth in the suing culture that our cousins from across the pond seem to have kindly shared with us. Now in our ‘if there’s blame, there’s a claim’ world it seems that you start with a claim and then look around for someone to blame. This suing of surveyors seems to have gained momentum due to the number of surveying businesses going into administration and thereby releasing their liability by not providing run-off cover. I can understand the stance of lenders who have effectively been left high and dry with no insurance on their assets.

In cases where there is a discrepancy between previous and current house price valuations there are two basic questions that need to be established:
• Has the surveyor been negligent?
• Has the surveyor acted fraudulently?

Negligence
The issue of negligence is a fairly simple one if we consider the job that the surveyor has been paid to do and apply some basic judgment over what is reasonable; an important legal term. If only a basic valuation has been commissioned I would argue that should the buyers move in and lift the previously nailed down carpets to discover dry rot, it would be unreasonable to expect the surveyor (within the remit they were given) to have uncovered this and to suggest that any negligence has occurred.

However, I’m equally firm on the point that should the surveyor be aware that there is something wrong with the property or the surrounding area and not noted it in the report or taken it into account when coming up with the valuation they have indeed been negligent and have a case to answer. Surveyors have a duty to report on things they are aware of that will have a detrimental impact on value.

Where the grey area does exist, which I mentioned earlier in this piece, is the assumption of fault. If a property is valued for a remortgage or purchase and down-valued because the internal inspection has revealed a number of problems are we now assuming that the surveyor was negligent? What about the earlier example whereby the original valuation was based on only a drive-by? What about the vendor that has stripped the radiators and kitchen to raise money and fend off repossession? Is it reasonable to expect the valuer to have made some reference to something they could not possibly have been aware of and was not present at the time of original inspection? Equally, the surveyor cannot currently be deemed negligent for not accessing such ancillary information as the local searches information, for example. I’m afraid that it seems too easy to say that if the property has dropped in value then the surveyor was negligent first time around.

I do believe one question that does need to be asked is what is a realistic number of jobs a surveyor can do in a single day and still ensure the very highest standard of professional service. Are the pressures of margins and productivity healthy in what is such an important part of the lending and risk process? Has the drive for speed driven the level of accuracy down and resulted in surveyors becoming “estimated value confirmers” rather than risk assessors? Additionally, has the pressures on fees caused the surveying businesses to drive increased productivity merely to attain the same return? For negligence, read mistake. The surveyor had to get seven internal inspections done that day and turn them round in three days maximum or they would miss their bonus. We all need to understand what is driving this potential increase in lending risk and, coupled with the increasing growth of the litigation culture, ensure we are better placed to address these issues.

Fraud
There is no doubt in my mind that if two or more parties (broker, surveyor, solicitor, etc.) set out to defraud a lender then there are clear grounds for suing the surveyor. I’ve spoken already about some circumstances whereby a house valuation will alter for quite reasonable and innocent reasons but if a property is deliberately up or down-valued for the purposes of economic gain then surely fraud exists. The challenge for lenders in exposing this fraud is that should there be the appetite to defraud it is often very difficult for lenders to prevent and there is tremendous pressure on lenders’ internal checking mechanisms and technologies to detect and root out any unusual patterns.

Surveying firms themselves can also play their part and in our role as a panel manager we’re able, and committed to highlight any irregularities that we might see. This is not to say that on every occasion there is a case to answer as there are certainly examples of legitimate coincidence. One such recent example was flagged in the case of two properties in the same street, next door to each other and the same lender wanting both properties valuing. The purchase price and the advance on both were identical as was the applicant. It is unusual for all of the figures relating to a house purchase to be identical (even when they are right next door to each other) but it may well have been the case that the purchaser was merely buying two buy-to-lets. However, we felt it appropriate to alert the lender nevertheless.

The ability to root out fraud is never going to be easy. By definition fraudulent valuations are designed to bypass lender systems so it is imperative that all parties need to work closely together. There is no doubt that technology has an important role to play in being able to analyse large quantities of data to spot irregularities but computers haven’t totally replaced the human touch (well, not yet!) and vigilant valuation management is also a crucial element. This should be provided by a trusted partner firm and should become a vital cog in the lending process.

For those lenders with lower volumes of valuation instructions the benefit is increased when they establish a close partnership with a valuation risk manager. They should look to pick a firm that has the necessary skill set and resource to closely monitor valuations and offer knowledgeable interpretation of results.

Brokers
It has been argued that perhaps the incidence of fraud is more prevalent where the lender has allowed the brokers to package the mortgage application and left the choice of surveyor to that broker/packager. The assertion seems to be that in instances such as these, in an effort to maintain the relationship and retain the work, some surveyors may feel they need to be more generous with their valuations. I’m not sure that any evidence has been put forward in this regard but it may be an area that lenders can look at more closely if for no other reason than to satisfy themselves that this is not the case.

Also, it begs the question; how much fraud involves a surveyor (deliberately) fraudulently valuing property? Nothing is ever black and white and while I’m sure a number of deliberate frauds do occur, there are surely some that involve surveyors doing their job correctly, unaware that other third parties are behaving fraudulently.

Working together
It has not been my intention to make this article a rallying call for surveyors to take arms against unfair litigation, or even suggest that there is never a case for surveyors to answer. Like every established and trusted profession there will be bad apples in the bunch, but a handful of bad apples do not ruin the harvest nor lead to the felling of the orchard. I hope that we can move away from a knee-jerk attitude to litigation and establish a greater understanding of the job that surveyors do, and recognise that external macro-economic factors do have an impact on property prices.

As an industry I think that we need to explore these issues more fully with lenders as I believe that everyone in the supply chain wants the same thing. This will only be achieved by moving from the customer/supplier relationship to a partnership approach where the surveyor is seen as an integral part of the lending decision process and a member of the property risk management team.

Marcus Radcliffe is managing director of Gateway Surveyors