Survey or not survey. That is the question
Whether you are buying a flat or a house, a shop or an office, one of the first questions we are often asked is whether you should get a survey, and if so what kind and how much will it cost.
Ultimately, this is a commercial decision for you. We can never tell you what to do as there are pros and cons to all the options. However we’re always happy to give some guidance and hopefully the following will help.
For those of you who are new to the property market, a survey is undertaken by a surveyor. That might sound obvious, but sometimes people believe that a report from an estate agent might be good enough. There are some very knowledgeable and experienced estate agents out there, but a proper survey can only be undertaken by a surveyor. As with most professionals, surveyors fall into a number of categories (such as quantity surveyor or land surveyor) but for the purposes of buying or selling property (residential or commercial) you should have a property surveyor, and if you want it to be done properly, we’d say it should be done by someone who is registered with the Royal Institution of Chartered Surveyors so that you can be certain that they have the qualifications, training and experience (as well as hopefully insurance!) to satisfy their professional requirements.
If you are purchasing your property using finance (such as a mortgage or bridging loan) your lender is going to insist on you having at least a basic survey. The mortgage company will probably organise this for you, and the cost is usually included in their arrangement fees. Whilst this is called a survey, it will often be no more than a cursory glance at the property itself. The main purposes of a basic survey are to ensure that the property really does exist (ie that there is no mortgage fraud going on) and to confirm that the price you are paying is appropriate.
The lender wants to make sure that you are not paying over the odds, because it affects them too! Although you will probably be putting in some money of your own, and you may feel that it’s up to you how you spend that money, the mortgage company will be giving you a mortgage in return for a charge over the property. This means that if something were to go horribly wrong and they have to sell the property to get their money back (it’s rare but it does happen) they want to be certain that there won’t be a shortfall. Mortgage companies lend based on the Loan to Value ratio (referred to as the LTV). Whilst lenders criteria can vary from company to company and other factors (such as the state of the property market, your credit rating and earning potential) few companies will agree to an LTV of over 90%. This would mean that the most they would lend you is 90% of the value of the property, and you put in 10%. So, if you have budgeted on the basis that you can borrow 90% of what you think the property is worth, and the surveyor comes back and says its’ worth less, this could affect the terms on which you can get a mortgage.
So, let’s say that you are buying a Property for £200,000, but the survey says it’s only worth £150,000. If you were planning to borrow £100,000 (so you would have been putting £100,000 in yourself), this equates to an LTV of 67%. Most lenders would be likely to be happy with this. So long as this is within their lending criteria and they are satisfied that as there is still £50,000 difference between the amount that they are investing and what the property is worth, in their favour, they will be willing to proceed, but this is at their discretion and they may change the terms, such as increasing the interest rate you will be paying.
However, if, in the same scenario, you were borrowing £140,000, on a valuation of £150,000, then the LTV is less over 93% so there is much more risk for the lender and so there is a much higher chance that they will be unwilling to proceed on that basis.
At that point, your options are:
- Renegotiate the purchase price, if the surveyor thinks it’s only worth 75% of the amount you’ve offered, you are unlikely to want to pay over the odds.
- Put more money in yourself,
- Persuade the mortgage company and/or the surveyor that they have made a mistake. This is very hard to do, as they will have based it on factual information, but mistakes to happen.
- Go to a different lender, such as one that is willing to agree to a higher LTV>
No doubt you will have a mortgage broker who can advise you on how to go about all of this, but if you did need any input from us, just let us know.
As the basic survey really only deals with the valuation of the property, it is possible that you will decide that you want a more detailed survey undertaken. It is unlikely that this will be at the request of the mortgage company, and so won’t be part of the mortgage package. You will be asked to pay extra if this is what you want, or this is something you can choose to do yourself if you are buying without funding.
A more detailed survey will still give you a valuation but will also involve inspecting the property and identifying any potential issues. They might look for problems with the property such as evidence of flooding, damp or subsidence. They can refer you to any works that are likely to need doing to the Property in the near future, such as roof problems, or poor workmanship in extensions or renovations. This can enable us to ask the vendor more questions about works that have been done or might need doing, so that you are less likely to encounter any problems with the property after the purchase has gone through.
If the survey does identify any problems, you will also have the option of talking to the surveyor who can explain to you the consequences of what he has identified (although they may charge you for this) and you may be able to use it to renegotiate the price of the property. The property will have been valued on the assumption that it’s in good condition, other than any defects that are obvious to the naked eye. If no one knew at the time that, for example, there was a subsidence problem, that is going to take £10,000 to remedy, then this will not have been taken into account in the price. Armed with your survey, you can advise the seller of the problem, and suggest that either they get the works done (it may be covered by their household insurance) or you are willing to do it, but you want (for example) £15,000 knocked off the price as you are buying an unknown problem. The surveyor may estimate that the works will cost £10,000 but it’s always possible that it will cost more, and you will have the inconvenience of living through the works. Much will come down to negotiation, and how keen you are to buy and they are to sell.
Hopefully there won’t be anything seriously wrong with your property, and your transaction can now proceed without the need to renegotiate the terms. We’re here to help you with this every step of the way.
Disclaimer – our articles are designed to give you guidance and information. There is no substitute for proper direct advice, particularly as everyone’s circumstances are different. If anything in this article may affect you, please contact us for advice that is specific to your circumstances.