I recently attended a seminar provided by a commercial bank involved in lending to large farms and estates. As a rural surveyor in a room of landowners, I soon realised that while the lending process was clear in their minds, the process and requirements of valuation were not.
There was some discussion about the mystery surrounding this and it soon became apparent that it was an area that people took for granted, or it was an afterthought to the request for finance.
Usually the first that the rural surveyor knows of a requirement to provide a valuation for lending is a request from the bank which is providing the loan. At this stage, depending on the lender, we may be provided with only sparse information which may not include the customer’s name or address but an indication of the location, size, and type of land and property required to be valued. This can be the first hurdle for the surveyor as in order to quote accurately we require detailed information on the size and number of dwellings, area and type of ground, as well as any unusual factors such as telecoms, renewables, or sporting rights.
The bank does not merely ask the surveyor for a figure in the valuations, although this is one of the most important elements; most large commercial banks now send terms of business with their requirements and these can run to 30 pages detailing the required content of the valuation report. The report, with appendices, can easily run to 100 pages and more.
The days of rural surveyors writing a one-page letter to the bank to say that the subject is worth ‘one million pounds’ are long gone.
The possible scope of inspection and size of report is a crucial consideration in the valuer’s mind when quoting for the work. The time and labour involved in producing a report that meets the lender’s requirements can often run into days or even weeks, so valuation quotes often run into the hundreds and sometimes thousands of pounds.
Once a valuer has been chosen and instructed there is usually a timescale for the production of the report, ranging from 10 days to a month, so the valuer will book a visit to the property as soon as feasible.
The inspection normally lasts at least half a day and includes an internal inspection of any dwellings, measurement of buildings and an inspection of as much of the land holding as physically possible to understand the nature of the security being offered.
In the case of farms and estates, it is important for the valuer to prepare for the inspection. We often find it prudent to prepare a schedule of land which may be gleaned from sales particulars or the land holder’s IACS map. This allows the valuer to inspect and report on each field parcel individually considering land use, type, grade and, of course, condition and value. If there are dwellings, the inspection will consider their type, age and condition, as well as the layout and facilities.
The valuer is not looking for a show home, but I always advise landowners to ensure that their maintenance is up to date and as far as possible the property is tidy inside and out, since we are required to take photographs.
The current and potential land use is one of the interesting factors revealed by an inspection which may not have been apparent on any sales particulars or IACS map. The valuation considers the property as inspected at the date of valuation, but many lenders will ask about alternative uses so that they can protect themselves against changes of value over the lifetime of the loan. A current hot topic is ground suitable for planting which can uplift hill ground or rough grazing from a lower to a higher value if the necessary consents are obtained.
In addition, whilst it is not pleasant to consider the bank having to step in and sell, the valuer is asked to look at the options for lotting parcels of land. Some of the more complicated valuations we have carried out for banks include a request to consider the potential for disposing of dwellings with or without some land.
The valuer’s report should detail the entire story of the farm or estate in the context of its location, size, type, and land use. The bank also requires environmental searches, flood reports, whether it is likely there is any asbestos, the presence of invasive plants, made up ground which may be liable to subsidence and the risk from ground penetrating radon gas.
In addition, the bank requires commentary on tenure, planning, alternative uses and development opportunities, access and highways, Energy Performance Certificates, and the rateable values or council tax bands where appropriate. The valuer considers all these factors and then uses the key principles of valuation to provide a figure. This is based on a comparison with the sale of similar properties and may also use other methods such as cash-flow or depreciation to value specialist buildings or income streams.
We are also asked to provide commentary on national and local market conditions. The bank will also seek an insurance reinstatement value to allow them to cross-reference with the landowner’s insurance schedule to ensure they are adequately covered in the event of a claim.
Finally the valuer is required to comment on whether the property is suitable as a security and to provide a market value and market rent, the latter in case the bank has to take possession and rent out the property. In some cases these may be the only figures that the bank’s customer is interested in, but the full valuation report will be scrutinised by the relationship manager and the bank’s underwriters to assess if the holding is suitable for a loan on the terms proposed.
If you are considering applying for security for lending, it is worth noting the following:
- Only provide as much security as required and do not include residential properties unless absolutely necessary. This will simplify the security process and keep residential dwellings in your tenure rather than handing control to the lender.
- Ensure that the holding is as well-maintained, neat and tidy as possible for the valuer’s inspection. A trained valuer can see through the usual farm and estate flotsam and jetsam and a working family life so it need not be immaculate but it helps if the property looks cared for.
- Be able to lay your hands on information for the valuer when required. Copies of title plans, tenancy agreements and planning permissions are often hidden in the depths of farm or solicitors offices. Having copies available will minimise delays.