Valuation and Sale of Residential Property

David Mackmin

• Publisher: Estates Gazette
• Year: 2013
• eBook ISBN: 9781135334253
• Topic: Derecho
• Subtopic: Derecho de la propiedad

Valuation and Sale of Residential Property is aimed at all those studying for a qualification or already practising as residential valuers, surveyors and estate agents. It provides valuable information on all elements of the home sales process, enabling professionals to give advice on market value, the best means for sale, condition and financial arrangements. Topics covered include:

• determinants of value and provision of the valuation
• agency, auction and taking instructions
• mortgage valuation and survey
• legal process and types of tenure
• investment and return.

The author considers these topics against a background of wide legislative change and draws on the standard guidelines set down by the RICS and NAEA. This third edition, written at a time of rapid change in the home-selling market, details the processes and procedures for dealing with this ever-evolving market. Whatever your level of seniority, this book will help you stay ahead of the game and present sound advice to clients at any stage of the process.

Residential Property and the Determinants of Value

1

Legal title

The first aspects of a property to be considered by the layman are usually the location, the appearance and the physical condition. Where it is, what it looks like, its accommodation, services and condition are all important factors when considering value, but for the valuer the most important initial considerations are legal. This is because it is the legal title to property with all its encumbrances that is bought and sold. ‘Every man's home is his castle’ summarises most people's aspirations for home ownership, to own something which is theirs and which is defensible against all-comers. In practice, the main line of defence is title; if the title is in any way limited, then solid walls may not prove to be the best defence.

In England and Wales the titles to be valued will either be freehold or leasehold, but it is also possible to own no more than an interest for life in a particular parcel of land.

The legal term for a freehold interest is fee simple absolute in possession. This just means that the whole estate, or any part of the estate can be transferred by the freeholder at any time, either during the owner's lifetime or on their death by will or under the rules of intestacy. A freeholder has the right to occupy and use the land, create lesser interests out of it such as long leases, periodic tenancies and life interests. In theory the Crown owns all of the land so a freehold interest is the closest that a person can come to absolute ownership of land. This is illustrated by the fact that if a freeholder dies without making a will and without any living relatives to inherit the land, then the title will revert to the Crown.

Although the freeholder has in theory absolute rights in perpetuity to the land, to everything above the land and to everything below the land, those rights are subject to a number of common law rights and statutory rights of one form or another. Common law rights include the lawful rights of others. Thus others may enjoy rights of way over the property or be entitled to rights of light if they hold adjoining property and to rights of physical support.

Civil and military aircraft may enter an owner's airspace subject to certain limitations. All gold, silver and coal belongs to the Crown who grant licences for the excavation of such minerals. Items of historic interest that are found on land may also belong to the Crown, but compensation can be paid to the owner of the land on which the items are discovered. Water in the form of ponds and lakes can be owned, but the ownership and use of other bodies of water is strictly controlled. Ownership of river frontages may or may not include fishing rights and the riparian rights of others must be respected.

Two other title restrictions require special mention. First, on transfer of title it is possible for an owner to impose on a purchaser specific restrictions known as restrictive covenants. From a valuation viewpoint the most important are those covenants that restrict the use: development may be restricted to a specific number of houses, occupation restricted to family occupation, use may be restricted to public open space, and there may be restrictions on parking of caravans. These restrictions may remain enforceable for many years, but the right to enforce may be lost if the person enjoying the benefit of that covenant has permitted breaches to occur. In other cases it may be necessary to apply to the Lands Tribunal under the Law of Property Act 1925 for the restrictions to be modified or discharged. Clearly such restrictions may hold values up where they help to maintain an environment, but they may also depress values where they prevent the land being used to its highest and best use in today's market. Thus land suitable for building 10 houses may be restricted to one house by a covenant created in the 19th century.

Second, it was possible for a freehold title to be made subject to a rent charge. This entitled a party with no legal interest in the land to receive an annual payment. The Rent Charges Act 1977 prohibits the creation of new rent charges and contains provisions for the gradual extinguishment or voluntary redemption of such charges as currently exist (see Appendix IA). Rent charges will cease to exist from July 2037.

In addition what a freeholder can do with land is restricted by the general law. The most important of those relating to use and development of land are contained in the Town and Country Planning Acts, Environmental Protection Acts, Public Health Acts, Housing Acts, Highways Acts and the Building Regulations, together with those that protect residential tenants such as the Rent Acts, Housing Acts, Landlord and Tenant Acts, and the Leasehold Reform Act.

Overriding the freeholder's rights are those of the police, who may legally enter upon land for purposes of law enforcement, and those of central and local government and statutory undertakers who may have powers of compulsory acquisition which may be exercised in accordance with any vesting legislation or through statutory powers of acquisition.

Freehold property also includes improvements to the land such as buildings and those things so attached to the land that they are held to be fixtures and so part of the land. The distinction between personal property that is movable and personal property which has been so attached to the land as to become a fixture is often very fine and has given rise to a branch of law known as the law of fixtures. In the residential market it has become the custom for questionable items to be listed as being included or excluded from the sale. The valuer will take the obvious fixtures into account in a valuation as they may add to the value of the property. Clearly an item such as a central heating boiler is a fixture, but it is less certain whether a built-in hob and oven in a kitchen will be classed as a fixture. When in doubt the valuer should make it clear in a valuation report which items have been included in the valuation of the property.

Until the passing of the Leasehold Reform Act in 1967 it was quite common practice for residential property to be sold on a leasehold basis and in the case of blocks of flats, house conversions, sheltered housing or whenever property management may be a major issue it is still common practice to sell on a leasehold basis with a share in a specifically created management company which owns the freehold.

In September 2004 a new form of land tenure was introduced. It is called commonhold and it is a way of owning freehold land. It is intended to be an alternative to the leasehold system for multi-owned, interdependent properties with common parts. Its most obvious application is to blocks of flats and apartments, but it could be used for developments of houses or mixed use buildings where there are communal areas. A commonhold association must be formed as a private company limited by guarantee. This owns the common parts and all individual unit owners are members of the association and so they can control those common parts. The individual unit owners will own the freehold of their unit.

A leasehold estate in property will be for a definite term. This is an important value factor. Traditionally such leases in residential property have been for terms of 99 years or 999 years. But in addition to the covenant to pay rent there may be covenants to repair, insure, pay local taxes, to clean, to maintain grounds and gardens or to meet some or all such costs through a service charge levied by the landlord. In most instances these covenants impose a contractual requirement on the leaseholder to undertake everything that one would expect from a reasonable freehold owner of residential property. However, a freeholder has a choice of whether or not to paint the property, to clean the windows and to maintain the garden; the leaseholder will not necessarily have that choice. Further, the leaseholder may be specifically restricted in terms of the use and enjoyment of the property. There may be covenants about music after 11.30 pm, about hanging out clothes to dry, about erecting TV and radio aerials and satellite dishes and a requirement to obtain the freeholder's consent for all alterations and for any sale (assignment) or further sub-leasing of the property. A licence fee may have to be paid to the freeholder whenever the freeholder's consent is required under the terms of the lease

A valuer when instructed to prepare a valuation must be satisfied by inspection and enquiry as to the nature of the title to be valued and any restrictions or other encumbrances that attach to the title. However, because of the time-limits imposed upon the valuer by many clients, valuations are often prepared on the basis of an unencumbered freehold or on the basis of minimum information relating to a lease. A valuer is valuing on the basis of information supplied and will naturally reserve the right to review that valuation if that information is subsequently found to be incorrect. Nevertheless valuers are trained to observe and should therefore account for the obvious, such as signposted public footpaths, unmade and un-adopted roads, shared driveways and shared areas in blocks of flats.

As tenure is one of the specified matters under the Property Misdiscriptions Act 1991 so it is important for agents to clarify how the property is held — freehold, leasehold or commonhold.

Characteristics of property

When considering the determinants of value most valuers will take account of or have regard to a number of important characteristics of property.

First, property has a fixed location, it can only be used at that geographical location and therefore its value will depend upon the market's attitude toward the benefits of owning a property at that specific location. Second, property in the sense of bricks and mortar has a long life so that any sum paid today to acquire property has to be a fair reflection in current value terms of future benefits over many years including, in the case of a freehold, the legal right of ownership in perpetuity. Third, property is purchased with relatively large amounts of capital. The availability of credit through a proper mortgage market and the costs of such credit are fundamental factors in the residential market. Fourth, total supply of certain types of residential property cannot be increased, at best it is only possible to build in a similar style, but similarity of appearance might not compensate for historic location and copies are rarely of the same value as originals. Additionally total supply can only change over a long time period. In the market-place a number of behavioural observations can be noted.

1. The typical residential buyer responds in a fairly conventional and conservative manner to what he or she sees.

2. Conformity is important. The value of a superior property surrounded by inferior property will tend toward the value level of the inferior properties, while an inferior property surrounded by superior properties will tend toward the value level of the superior properties.

3. The typical buyer will be well aware of the price of substitute properties and hence the maximum market value for any given property will be fixed by the price level of substitute properties offering the same utility.

4. Areas tend to go through four stages of the urban cycle namely: growth, stability, decline and renewal. Value and rate of change in value will differ according to the stage of the cycle currently reached. Similarly different areas, because of their point in the cycle, attract different buyers. This in turn is a recognition that value is a reflection of future benefits of ownership and clearly depends upon, say, the state of decline of an area.

5. Value and cost are rarely the same. In part this is linked to the economic laws of increasing and decreasing returns, the effect being that the input of capital into a particular property at a point in time may result in a more than proportionate increase in value — increasing returns. At a later point the returns will barely match the cost, and beyond that point the returns in the market value sense will be less than the cost. It is often thought that money invested in bricks and mortar must be safe, with the result that all too often residential owners alter, enlarge and improve property at considerable cost which is not reflected by changes in values. Again the principle of conformity means that the typical buyer will not acquire a superior non-conforming property at a price greatly in excess of the level for the area.

In summary, to have value, property must have utility and it must be scarce in relation to demand. For demand to be effective it must be supported by credit facilities which in turn are dependent upon ability to repay loans which depends upon general levels of income and other living costs. The property market must be seen as a dynamic place where the valuer tries to interpret the behaviour of typical buyers and sellers at a given point in time in a given location in order to give sound professional advice on values to clients.

Some of the more pertinent and typical factors are now considered in greater depth.

Market forces

American appraisers when discussing market value talk in terms of the interplay of the four forces that affect human behaviour: social ideals and standards, economic activities and trends, government activity and intervention, and physical or environmental forces.

Each of these is made up of many influencing components, some of which at a point in time may have a major impact while at others they may appear to be dormant. The likely effect of each component upon value can be analysed in the classic economic model where everything is assumed to remain constant whilst one variable is altered. In this way it is possible to demonstrate how, for example, a factor might result in higher values by raising demand in a static supply situation. The world and the market for residential property are, however, dynamic and the residential valuer needs to be active in the market-place to sense and to measure the impact of the interplay of these forces. For this reason the residential valuer may appear to be more interested in prices in the market-place than in the underlying market forces, nevertheless an awareness of those forces is an essential part of the valuer's expertise.

The market

The residential market is imperfect. There is no central market place as a result buyers and sellers are relatively uninformed and even their professional advisors, valuers and agents, only have a limited knowledge of what is available for sale and of what is happening in the market. Every house, flat, bungalow or other unit of residential accommodation is unique in some respect. Even a pair of semidetached houses differ as between right-hand and left-hand units. This makes the task of valuation much more difficult than in those markets where there are standard units or products such as stocks, shares, gold, apples and cars. It is further complicated by the fact that there is no acceptable unit of comparison. Residential property can occasionally be compared on the basis of a price per m² (or sq ft) of floor space, but issues such as the number of bedrooms, reception rooms, car spaces, circulation space, views and the like can all vary between properties of precisely the same floor area, thus making the total unit of accommodation the only acceptable unit of comparison.

In the past the market had seasonal fluctuations, with greater activity and steadier, possibly rising prices, in spring and early summer, a quiet period in August followed by a mini-spur in September. These seasonal movements are less pronounced today but can still be detected. They can be different in different parts of the country and significantly different between London and popular holiday areas such as the Lake District. They can be affected by significant changes in market forces such as a change in mortgage interest rates. In addition to seasonal movements, there are cycles of under-supply and over-supply and other movements of a migratory nature such as the desire to balance proximity to work with proximity to the country, and leisure activities with travel time and cost.

In most markets increases in effective demand against a fixed supply will lead to an upward movement in price. The upward movement in price encourages suppliers to produce more and for more suppliers to enter that market. In the residential market the response to such a shift in demand is slow. It is argued that planning controls impede the supply of land and hence the supply of new houses coming on to the market. Even without such controls there would be a delay caused by the inability of the house-building industry to raise productivity in the short run. It is difficult for the market to respond precisely to match an increase in demand in an area because land becomes available in sizeable chunks and house-builders tend to be market followers, not market creators. The result is that an increase in demand in an area may in time be followed by an over supply. The valuer's task is to interpret the state of the market in an area at a point in time. Currently the residential market in the UK is experiencing a period of continuing price growth which is seen to be a reflection of: people living longer, greater single occupation of property, migratory growth in population and increased demand by individuals and investment companies to acquire property on a ‘buy to let basis’. The residential sector has been identified by many, at least in the short term, as a safe place for capital.

Over a number of years changes in consumer preferences occur which can be incorporated in new home design but are more difficult to incorporate in the existing housing stock. These style changes can shift the demand and hence value patter...

Table of contents

• Cover
• Title Page
• Copyright Page
• Table of Contents
• Dedication
• Preface
• Introduction
• 1 Residential Property and the Determinants of Value
• 2 The Effect of Physical Factors on Value
• 3 Residential Property Valuation
• 4 Residential Agency
• 5 Taking on Residential Property for Sale
• 6 Sales by Auction
• 7 Selling New Homes
• 8 Mortgages and Mortgage Valuations
• 9 Other Residential Surveys
• 10 The Legal Process
• 11 Leasehold Residential Property
• 12 The Desirable Plot
• 13 Home Improvements
• 14 Investing in Residential Property
• 15 Valuation for Other Purposes
• Appendix 1 The Rent Charges Act 1977
• Appendix 2 The Nature and Use of Valuation Tables
• Appendix 3 RICS Residential Estate Agency Practice Statement (1997)
• Appendix 4 RICS Mortgage Valuation Specification
• Appendix 5 The RICS Homebuyer Survey and Valuation (HSV) Report Form
• Index