One of the issues that crops up regularly in the world of short-term property finance is value; who assesses it, how is it calculated and who sets the rules.
In lending terms, the value of a property is critical to both the borrower and the lender, but each will have their own idea of what it is. The reason it matters, is because many property developers plan their budgets around the value they place on the property and often it doesn’t quite work out.
The value of the property is central to the amount that a lender like Signature will offer, which is typically a percentage of the value of any property being proposed as collateral for the loan and is usually anywhere between 65% and 75%.
This relationship between the loan amount and the value is explained by the acronym LTV, which stands for loan to value, but that’s where things start to get more complicated, as it all depends on the value and how it’s calculated.
It’s true that most property developers will clearly have an idea of the value of their property, but it’s usually based on what they paid, how much they have invested since and the prices they see for similar properties in the area – they may even get an estate agent to value the property.
But again it’s not as simple as that and like most alternative finance providers, we require a valuation undertaken by an independent third-party, who is typically on our panel of valuers – this ensures we can call on local expertise in all parts of the country.
The valuers will have the appropriate experience working with similar properties to the one in question and will have passed our strict due diligence process. The valuation, often referred to as a RICS Red Book valuation, is undertaken in accordance with strict professional body guidelines.
Waiting to sell
When we receive the valuation for a property it will generally be a figure known as the ‘Open Market Value’ (OMV), which is best defined as the value of a property if it was placed for sale on the open market with the owner prepared to wait to realise the best price.
This is the figure Signature uses in the LTV calculation we touched on earlier. But it is not the same for every lender and some will use a lower figure known as the 90 or 180 day value, which can skew the LTV calculations for the borrower.
The terms refer to the likely impact on the value of the property if it was re-possessed and the lender sells it quickly, within 90 or 180 days, to recover their losses.
It could be argued that lenders using these lower figures appear to have little confidence in their borrowers or the lending decisions they make, which can of course be caused by a lack of financial resources and the need to bring funds in quickly.
The basis for the LTV calculation is not always made clear by lenders, who typically focus attention on a high LTV, without publicising it will use the lower 90 or 180 day valuations, which are often 10-20% lower than the OMV price.
Right at the start
Borrowers will only become aware of any valuation problems and associated LTV calculation issues after the valuer completes their report, which means the cost has already been incurred by the borrower, before they are sure if the LTV calculation works for their deal.
It pays to read the small print and establish if the lender is working with OMV or 90/180 day valuations for the properties against which they are being asked to lend; it could save you a lot of time and money.
Find a lender like Signature, who offers good LTV ratios against OMV, backed by a commitment to always do what we say we will. And remember, 98% of our deals complete on the terms we issued at the start, as we help developers unlock the potential in property.