First Published 10/06/23
Head of Sales Brian West talks about the importance of valuations
It’s hard to believe that over 15 years have elapsed since the start of the infamous Credit Crunch of the late noughties! In the frenetic boom years that immediately preceded
this seismic shock and subsequent deep recession, many lenders, in an ultra-competitive market, sought to streamline their processes and procedures.
One manifestation of this streamlining saw many lenders place an increasing reliance upon automated valuations models (AVMs). This trend started at the lower end of the risk curve, typically on low loan-to-value (LTV) mortgages and further advances. At the time it undoubtedly helped ease delays caused by a shortage of valuers. In specifically selected cases, where there was enough comparative data to yield robust results, AVMs worked very well. However, as is typically the case, reliance upon this new technology quickly exceeded its limitations.
Ultimately, in 2008 and 2009, many lenders paid a heavy price for their excessive use of AVMs. The effects were particularly keenly felt in areas such as Northern Ireland, where massive boom quickly turned to painful bust. Not surprisingly, AVMs all but disappeared as a valuation tool for nearly a decade.
AI looms large...
It’s only in recent years, with technology racing ahead, that AVMs have steadily begun to regain market share. The valuation process is set to become ever more automated, with
the inexorable growth of artificial intelligence (AI) providing ever more accurate local data analysis, blockchain storing the full details on increasing numbers of new-builds, and drones replacing the traditional drive by with the fly by! Today’s valuers can call upon continually improving technology, but in an era of increasing regulatory focus and against a backdrop of seemingly endless macroeconomic and political uncertainty, prudence would suggest that several basic conditions should be satisfied on all loans.
As a specialist short-term and development lender of over 17 years standing, vast operational experience tells us that carrying out a detailed and comprehensive valuation report should always underpin any lending transaction. Irrespective of LTV, this is the way to ensure maximum protection for us, our borrowers and indeed our funders. Put simply, a Royal Institution for Chartered Surveyors (RICS) survey backed by professional indemnity (PI) cover can highlight any number of potential anomalies with a property, while the surveyor’s commentary can also give an invaluable insight into the potential borrowers, which no desktop appraisal can ever provide.
Surveying is a complex process requiring a multitude of calculations, the review of many documents, including planning applications, Land Registry information, and much more besides. At Saxon Trust, the strength of the relationship we have with our valuers
is akin to that which we have with our solicitors and our borrowers. Beyond providing us with the two key aspects of a valuation, namely the value of the property we are
loaning against and confirmation that the structure is strong and durable, an internal inspection offers so much more.
Of course, obvious defects will be highlighted such as dampness, wiring issues and structural damage – often wrought by overly enthusiastic DIY fanatics! Where appropriate the surveyor can, and very often will, recommend that a more detailed specialist report is obtained. Less obviously, the experienced surveyor with a trained eye can pick up on the signs of Japanese Knotweed even in the depths of winter, and with a trained ear, on the noise disturbance from a large infrastructure project nearby.
Future challenges
No desktop assessment is ever going to give you an insight into the mind of a potential borrower or the likely internal condition of a property if you are forced to repossess it.
Technology is advancing rapidly, and AVMs have undoubtedly improved massively in recent years, but it’s important to realise that more interesting challenges will emerge. For instance, the issue of privacy and data ownership will become more acute as AVMs employ increasing amounts of image processing to extract the soft features of a property. The future will provide plenty of fuel for debate. At Saxon Trust we believe that the pressures of an unpredictable and hugely competitive market to innovate should never compromise
the integrity of risk and underwriting processes. We will continue to instruct full internal inspections as a cornerstone of our process, secure in the knowledge that our valuers
are also embracing change and new technologies.
Meanwhile, they do so secure in the knowledge that technology can assist them, but it won’t replace them, particularly on complex, nonstandard appraisals. As an industry, we need to value our valuers....