How much is your buy-to-let flat really worth?

Looking for an investment property? Then make sure you get an independent valuation, says Graham Balchin

The UK economy continues to improve, driving up house prices and pushing more people into the rental market as mortgages become less affordable and lenders harder to please. This in turn is strengthening the buy-to-let flats market as more people, particularly in the south of England and the Midlands turn to residential property as a good long term investment. But is it?

There is no doubt that the right property in the right location can be a nice little earner. But this is not necessarily the case if buyers don’t do their homework properly. And even if they do, investors can still get their fingers burnt. The National Landlords Association (NLA) estimates that of those landlords with a portfolio of four or less properties around a quarter are only breaking even or making a loss.

Also, as the Association of Letting Agents (ARLA) points out, the risks of buy-to-let are exacerbated by the ups and downs of the property market itself. The majority of buy-to-let mortgages are on an interest only basis, to be repaid when the property is sold, so if house prices drop and your property is worth less than the mortgage on it, you would have to fork out the extra cash to repay this portion of the debt by the end of the mortgage term or if you wanted to sell the property.

In order to minimise these risks it is vital to ensure your flat is a good long term investment so, as well as considering the likely rental income you can expect, a good starting point is to make sure the property you buy represents good value for money. A wise purchaser will obtain an independent valuation in order to ensure the flat is worth the price paid. This seems to be common sense, especially if the buyer has no direct knowledge of the local housing market. Many people, especially those living in the relatively expensive south east of England are tempted to buy in towns and cities elsewhere in the country which they perceive as offering better property prices. However anecdotal evidence suggests that every year, despite a lack of knowledge of the location in which they are buying, thousands of flat buyers ignore the obvious dangers and don’t bother to get an independent valuation before they sign on the dotted line. If the buyer does obtain their own valuation the advantage is clear. If it subsequently turns out that they have paid too much, the buyer may be able to recover the over-payment from the valuer.

Unfortunately, the true value of a flat is often difficult to determine because valuing a property is not an exact science. Different valuers may have a range of opinions as to the value of a particular flat and hence a claim against a valuer will only succeed if the court is satisfied that (a) the valuation process was negligent and (b) the valuation figure falls outside what is regarded as a reasonable margin of error.

Obviously, the best outcome is to only pay the right price for the flat. Carrying out some research by looking at sold prices of similar flats in the same location is a good idea. A lot of property price information going back over the last 15 years is now freely available online from websites such as Zoopla. When buying property outside your local area it is sensible to pay for advice as to value (and rental yields if it is an investment property). A lot of buyers have been tempted to invest in new flats in city centres many miles from where they live. Often these flats appear cheap but in many cases they have been hugely over-valued. Buyers should never assume that just because the lender is willing to fund their purchase that the flat must be worth the price being paid!

Don’t forget . . .

Buyers may only be able to claim compensation from a negligent valuer if they have paid for and obtained their own valuation. To be able to rely on a valuation the buyer should make sure that they see it and that it is addressed to them. If it is just a mortgage valuation addressed to the lender, in many cases they may not be able to rely on it.

Always use an RICS qualified valuer who must carry professional indemnity insurance and follow an official complaints procedure. Don’t be tempted by offers of cheap valuations from limited companies which are not legally obliged to carry insurance cover; you may find you have no comeback if your valuer proves to have been negligent.

Graham Balchin is a solicitor in the professional negligence team at Bolt Burdon Kemp