Report card

“Home reports have certainly saved the surveying profession from penury. I think the jury is still out on whether they are good for the public.” (Janette Wilson, convener, Conveyancing Committee, the Law Society of Scotland)

A year into home reports, while most solicitors agree that the state of the property market and the wider economy is the dominant concern, feelings about the reports are still running strongly.

Some have been won over, believing they add a degree of transparency and help deals go through more quickly. Feedback however indicates a majority view that they act as a drag on the market by deterring people thinking of testing the level of interest in their house, are distrusted by many clients, and fall short of achieving their stated objectives.

It is worth recalling at this point the principal justifications for bringing in the home report. First and foremost was the desire to see buyers receive meaningful information about the condition of the property for which they were offering; and it was a cornerstone of this exercise that the report should be independently prepared by the surveyor, though commissioned by the seller, and made available to all prospective purchasers. Further benefits anticipated were the avoidance of artificially low upset prices, and an end to multiple surveys on the same property by different offerers. So how does experience to date measure up?

Lenders buying in?

The first and perhaps most important point is that the answer depends very much on which solicitor you talk to. The differences in accounts of how the system operates are striking.

Take, for example, one of the principal areas of complaint, the continuing reluctance of some lenders to accept the reports (RBS was named by more than one respondent).

Mike Sinclair of Aberdein Considine in Aberdeen, and Ken Thomson of Thorntons in Dundee, both report only limited problems with lenders, though Thomson adds that this cannot yet be taken for granted.

But in Perth, Graham Gibson of Kirklands claims he has “yet to come across a case where the lender was willing to accept the home report”. Often it is already out of date for lenders’ purposes (unusually, he cites a six week cutoff point compared with the general experience of 12 weeks’ currency); in any event, he adds, “my experience has been that when a purchaser has been successful they want to get a separate valuation for peace of mind/mortgage valuation purposes”.

An ESPC survey of member firms found 80% experiencing some lender problems, the mode answer being “25% of the time”.

Janette Wilson thinks lender issues are currently “the main problem”, with some regularly demanding either an updated or an independent valuation because of the age of the report, the surveyor not being on their panel, or a high loan-to-value ratio.

Kennedy Foster of the Council of Mortgage Lenders in Scotland claims there has been no major change so far as lenders are concerned: they will generally accept a valuation provided the surveyor is on their panel and it is not more than three months old. “There may be exceptions if a property or borrower is perceived to be higher risk and lenders always reserve the right to commission an independent valuation… These are decisions for individual lenders”.

He adds however that throughout the development of the home report, the CML indicated that it could be an issue that when the report was commissioned, the identity of the purchaser and lender would not be known. So even if, as he points out, most of the major surveyors tend to be on lender panels, his comment of “no major change” has to be qualified in that important respect.

Worth a second look

It follows that many purchasers still end up funding at least a mortgage valuation, and not only for that reason. “Sellers are reluctant to pay for refreshed reports”, reports Graeme McCormick of Conveyancing Direct, Glasgow. “The cost normally falls on the purchaser, depending who blinks first.” Mark Hordern at GSPC reports some exceptions: “Some sellers will cover the cost of a refreshed report in order to secure a sale, and some buyers insist that they do so as part of an offer.”

What about purchasers choosing to instruct their own survey in any event? This attracted the whole spectrum of responses. Despite Gibson’s experience, Thomson and Hordern say this is rare; and in Edinburgh, Chris Hardie of Lindsays says most purchasers accept the report. Even so, 78% of ESPC members say that a second survey is instructed “occasionally, i.e. 10-39% of the time”, and half of these are because the purchaser wants an independent survey. Paul Carnan in Glasgow reckons there is a further survey in a third of cases, while McCormick puts the figure at 50%, when lender requirements and purchaser lack of confidence in the seller’s report are taken together.

Another development can only increase the chances that a purchaser will wish to have their own valuation. While there appear to be few cases of sellers going to the length of instructing more than one home report and selecting the most favourable, various solicitors report the emergence of the “beauty parade” – requesting a desktop valuation from say three firms of surveyors and then instructing the home report from the one providing the highest figure. Ron Hastings of Kelso indeed calls for the practice to be stamped out, by requiring disclosure of other valuations obtained within the previous three months.

The suggestion may not be practical. Some, like McCormick, do not get involved in arranging home reports, and would have to rely on the client’s honest disclosure. But if the tactic is widespread, it could explain why McCormick has yet to see a valuation obtained by a purchaser exceed the home report valuation, whereas in several cases it has come in at less. And with an Edinburgh solicitor (otherwise in favour of the reports) reporting a potential difference of up to 25% between one valuation and another, and Janette Wilson having seen a case where a second surveyor produced a valuation £40,000 higher than a first, in a falling market, the seller appears to have little to lose.

Paul Carnan believes it is not always borne in mind, as he says it should be, that the home report valuation is still only one person’s opinion. Referring to surveyors being selected for their favourable tendencies, or being persuaded to revise valuations upwards, he comments: “I see nothing wrong in this provided prospective purchasers are aware that the valuation in the home report is merely a valuation, provided by the seller’s choice of surveyor: it is not ‘the’ valuation. Other surveyors may have a different opinion.”

All the same, it must represent a serious undermining of the original concept of an independently prepared report. Lindsays’ Hardie says his firm discourages clients from instructing more than one report, as “To do so on a regular basis would undermine the credibility of our selling service and the fact that the home report is entirely objective and therefore more reliable from the point of view of the purchaser and his lender.” One might think, however, that evidence that different surveyors can still come up with significantly different valuations of the same property will in itself work against such acceptance.

Douglas Crombie of Craigens, Aberdeen does report the sort of experience the promoters must have been hoping for: “The immediate availability of information on the condition of a property, essential and non-essential repairs, and most importantly a valuation (which incidentally the majority of buyers and indeed lenders have accepted without question), coupled with a realistic asking price, has allowed buyers (1) to very quickly obtain mortgage lending approval, and (2) thereafter to offer with confidence at or around the asking price/valuation figure.”

Market factors

On the subject of price, GSPC’s Hordern does not detect any consistent trend, but observes that it is already clear that home reports are not preventing buyers from offering above valuation. Mike Sinclair in Aberdeen reports many properties now achieving more, some up to 10%.

To be fair, it has never been claimed that the system would itself lead to fixed prices, and it is clear that local market conditions and/or demand for the particular property continue to have the dominant influence, even if the home report may provide a weighting of its own.

Hordern continues: “On the other hand, we see properties… selling for less than the home report valuation. In some cases, sellers are effectively suggesting that their home represents great value by showing that their current asking price is lower than the home report valuation.”

Upset prices reflect this benchmark role. Hordern adds: “Home reports have certainly encouraged most selling agents to advertise homes for sale at or close to their home report valuation. This is particularly true in areas where prices are under pressure and sellers are using the home report valuation to justify and support their asking price. However, there have been signs recently that some estate agents are returning to the policy of advertising homes for sale for less than the home report valuation.”

Hardie agrees that home reports have at least eliminated the artificially low upset price – and can also put a damper on inflated expectations as to price.

In Ken Thomson’s experience the valuation has been acting as a guide price: a fixed price at the valuation figure “is often treated almost as an invitation to offer below that price…

In competitive situations, people may still pay a premium to secure a property”.

Janette Wilson has recent experience of sales “where in a competitive situation with a closing date a price well in excess of the home report valuation has been achieved”; and to Graeme McCormick “It hasn’t made a blind bit of difference. Where there are closing dates or competition, prices achieved are often 5% to 10% over valuation. If there is no competition it just depends on negotiation as it always has.”

Relevant also to impact on the market is the complaint by several solicitors that home reports have a depressing effect because, as was predicted, clients don’t want to go to the expense of obtaining a report just to test the market. The delay in being able to market a property also causes frustrations – two to four weeks for some.

A cost to absorb

Nearly everyone agrees that home reports mean more work (the ESPC finding is 89%, though Hardie is one exception). The sheer length of some reports is astonishing. An Edinburgh solicitor records one of 41 pages – counterproductive, as the clients didn’t want to wade through it all. Carnan has seen one of over 70. “Clients are increasingly turning to their solicitor for interpretation and advice”, he adds. “Standing the time involved to read and digest the content of such reports and then to give advice thereon, I do charge.”

In that he is in the minority, as most respondents say the current highly competitive market means they are unable to pass on the cost of the work.

For Graeme McCormick the extra is in renegotiating the price when purchasers’ valuations come in at under the home report figure. “We just absorb the cost and the vituperation.” Janette Wilson claims that a web-based system such as the Society’s service provided by Openhouse should reduce the extra work: “you don’t have to assemble all the bits yourself”.

Gibson, however, says that by referring the client direct to the surveyor, “the client gets a quicker service and we do not get involved in doing (unbillable) work”.

Scope for improvement?

What about the main point, then, of providing better information? This, it appears, is bound up with the level of trust in what is offered. In Carnan’s words, “the home report is not meeting this need effectively because of the disconnect between the time of valuation and the time of offer, and because it is perceived as being the seller’s report and, consequently, not to be trusted”.

The thrust of other responses is that if clients are being given more information, whether they appreciate it depends on their willingness to accept the home report at face value; and while this applies in many cases, in a considerable though difficult to determine percentage it does not.

The question then is whether the level of acceptance will rise or fall due to the external influences at work.

What happens next? The Scottish Government’s promised review will take place in three stages. First, a scoping exercise is underway to identify relevant data streams, including quantitative data from Solicitors Property Centres and Registers of Scotland. The Society has pressed for a focus group of solicitor estate agents as a useful source of qualitative data.

An interim review will then assess any refinements required to improve the way the reports work – a fine tuning exercise to be based on the first year’s data, and due to complete by next summer (some delay is predicted). The Society failed in a bid to include consideration of removing the compulsion element, or abandonment of the whole scheme; this would only destabilise the market, said the Government.

The full evaluation of whether home reports have achieved the Government’s policy objectives will not take place until five years have elapsed. “It remains to be seen how the impact of home reports on the condition of housing will be measured”, says John Scott, secretary to the Society’s Conveyancing Committee, who has been heavily involved in the monitoring work.

To Graeme McCormick it is “one of the biggest flaws in the scheme” that no national register of home reports has been created: this could have provided a historic condition report on a property, and valuable information on the quality of the housing stock. Indeed, as things stand, one wonders how any change in the level of information available to purchasers, particularly as to whether defects have been revealed that otherwise would only have come to light after purchase, is to be assessed.

Scott adds: “The political reality is that home reports will be with us for the foreseeable future, well beyond the Holyrood elections in 2011, unless there is a groundswell of public opinion against them. If you have any clients who are seriously unhappy about the new system I suggest that you ask them to direct their complaint to their local MSP!”

What can be said with some confidence, on the feedback reported here, is that theory and practice in relation to home reports are currently some distance apart, and it remains to be seen whether effective measures can be devised to narrow the gap.

The system in practice

John Scott of the Society’s Professional Practice Department reports:

“Your feedback so far indicates that some favour the new system, finding home reports an effective marketing tool for sellers and a source of useful information for prospective purchasers. However many remain highly sceptical of the benefits. Several aspects are causing particular concern:

• Discouragement of potential sellers from entering the market, due to the cost of obtaining the report.
• Delays in initial marketing of properties, caused by the requirement to obtain the report first.
• Circumvention of the Act, e.g. where selling agents postpone the commissioning of a report until a purchaser is lined up.
• “Beauty parades”, where a selection of desktop valuations is obtained and the single survey is then ordered from the surveyor providing the highest.
• Delays in concluding missives, while purchasers’ lenders approve the single survey.
• Rejection of the single survey by lenders, particularly when provided by a firm of surveyors not on their panel, and insistence on a separate mortgage valuation at the purchaser’s expense – multiple surveys?!.

“I raised all these points at both the stakeholders’ meeting and the meeting with DTZ [who are carrying out the initial stage of the Government review]. It is clear that the Government is sensitive to at least some of them. It has been encouraging Trading Standards to take a more proactive approach to enforcement of the legislation, and has contacted CML on the lender issues.

“We shall continue to represent your views on home reports to the Government at every available opportunity. In addition we may carry out our own research to gauge their effect.”