What protection does a buy-to -let investor have if he or she buys a property on the strength of a valuation only to find that it is actually worth less than the valuer’s figure, both in terms of its freehold value and likely market rent?
This was the question behind a recent court case. The property purchaser needed a mortgage of £283,000 on a purchase price of £353,000. The mortgage lenders instructed a valuer to produce a report on the value of the property and the rent it might be expected to achieve. The valuer’s opinion was that the purchase price was reasonable and that the achievable rent was £2,000 a month.
The purchaser went ahead with the deal but only managed to obtain £1,100 a month in rent which left him with a shortfall against the mortgage payments of £1,440. Eventually the property was sold for £250,000. The prospect of rental income not covering your mortgage payments is a fear that may be shared by some of our landlord insurance clients.
It is important to note that in this case the valuer had not been instructed by the purchaser but by the lender. The question was, does a valuer owe a duty of care to a purchaser in this situation or is his duty owed only to the institution that instructed him? The Court held that in this instance the purchaser was an amateur investor who had relied on the valuation and so found in favour of the purchaser against the valuer. This was overturned on appeal when the Court of Appeal held that the duty of care did not automatically apply to buy-to-let purchasers rather than owner-occupiers. The Court expressed the view that buy-to-let investors were likely to be more commercially minded than people buying for their own occupation.
An appeal had been lodged to the Supreme Court but this has been withdrawn so the Court of Appeal judgment stands. Many valuers will be relieved and many landlords will be hoping they have paid the right price for their investments. If you are buying a property and are worried about the value it would make sense to have your own valuation carried out as well as a full survey.
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