Financial aspects of failure to complete on off-plan purchase

[laperla]

I have found myself in a very difficult situation and I'm looking for some advice. Please take it easy with me as I'm extremely stressed! Looking for the nearest and highest bridge to jump off! Not quite but my situation isn't ideal either.

18 months ago I exchanged contracts for an off plan property. Sale price was approx £250k. Paid £25k deposit. Property due for completion in Autumn 2006.

Firstly the property has been brought forward to completion next week. I was informed of this around the 12th of June (giving me a month to sort the finance out). I have found it incredibily hard to source finance in time for the completion date. I have found a mortgage however and had an offer in principle. Everything was going according to plan until today!

Today the survey report has come back. It has valued the property correctly but the surveyor has made a written comment on the report that though he values the property at £250k he feels that the resale may not acheive this in the current market.

This is now being looked at by the underwriters and I should hear tomorrow. But it doesn't look good to me.

The deal is an 85% mortgage. So with the £25k I've already put down as deposit I am now looking at another £12,500 plus stamp duty etc so say £15k. Thats ok, I have this money. But should the underwriter take notice of the surveyors comments then I may be asked for a lot more money that I don't have. And I'm going to be stuck. Also for each day that I'm over the completion day I will face a penalty of 4% over bank rate.

So I'm now looking at the worst case senario. i.e. not completing and having to forfeit my £25k deposit. Unfortunately my solicitor says that it isn't as simple as that. I am tied in to buy the property and make up any difference in sale price. So if I don't complete and the developer sells the apartment for say £150k I will have to pay £100k less the £25k deposit. Plus the daily penalty interest described above. Plus a few other costs too. You get the picture.

Hopefully this will all go through but if I get bad news from the mortgage company tomorrow then I need to make some tough decisions.

Advice gratefully sought.

[SteveP]

It has valued the property correctly but the surveyor has made a written comment on the report that though he values the property at £250k he feels that the resale may not acheive this in the current market.

A surveyor values property in accordance with the rules set out in the RICS Valuation and Appraisal Manual (otherwise known as the Red Book). The open market value is the price the surveyor thinks the property would achieve on the day of the valuation assuming an arms length transaction, a willing buy, a willing seller and a reasonable period for marketing beforehand. So what you have claimed above is incompatible with the Red Book. In other words his valuation should be what he does think a sale on the day of valuation would achieve in the current market.

What I suspect might be the case, given that this is an new build, is that the comparable evidence he has suggests that similar properties have sold for that kind of gross sum but have been sold for that sum with the benefit of additional incentives (the usual marketing stuff, mortage paid for x months, solicitors fee paid, other things thrown in with the deal). These would bring the real value down somewhat.

In any event, all you can do is talk to the valuer to find out what he means and then go from there.

[laperla]

Hi Steve,

I'm still waiting to see his report. The agent has said that he has stated the value as £250k but made a comment that the resale may be less than this. The mortgage company have asked to clarify this comment and the surveyor has said that he made the cmment because there is a lot of other new builds going up in the same area (Liverpool waterfront) over the next few years.

There were no incentives whatsoever to purchase this property (i.e. deposits, mortgage sub or whatever).

I've asked for a copy of the report. Even the mortgage bloke has said this is unusual and rang the surveyor to see if he would remove his comments. Apparantly he has valued mine at £250k (which is the selling price) but he valued another one that was sold for £285k at £240k because the rooms were smaller than ours. This was the same development.

[SteveP]

So his valuation appears fine, but he has made comments about how the future market may be different because of an increase in supply.

Well I have so say that sounds fair to me. It is unusual for a valuer to comment about future prices, but not unheard of. Remember the valuation of for the lender so that they can judge whether the property offers adequate security for the loan. He must tell the lender of anything he thinks is material.

The valuer is almost certainly under no obligation to you. He isn't saying its not worth what you are paying. He isn't saying it will lose value. He is merely highlighting that the local market has particular risks so that the lender knows that, should they need to reposses and sell in the future, they may (only may, he can't say without a crystal ball) find values have fallen.

It is for the lender to decide whether to lend you money. It is possible they might accept a 2nd valuation, but in any event it is the lender you will need to talk to.

[laperla]

Steve, thanks for your reply. It is very helpful, at least I can understand the situation. The mortgage agent has said that the underwriters will now make a decision. Just doesn't look to good to me!

[Mevs]

Hi Laperla

I've come across a similar issue on a new build apartment in a different area. The crux of the issue is that with continuation of new build programmes the new build apartments are more attractive to new investors and owner occupiers and as such achieve a premium, which is not replicated on secondary market sales. Your apartment will be 2nd hand once you've bought it, irrespective of whether somebody lives in it or not. Personally I think the premium is not warranted in the first place but developers are achieving them all over the place. You need to take advice from your solicitor and gather as much information about the development as you can (try local sales & lettings agents) - I wouldn't be surprised if you weren't the only person in the same situation. The other issue I came across was a massive oversupply of 2 bed apartments in the area I was looking at, which killed the market both for resale and letting. This may also factor into the valuer's thinking.

Good luck
Mevs

[laperla]

Thanks. My mortgage agent tells me that I am not the only one in this position and also that many people are struggling to find finance before completion.

The problem I fear is that we have all been wearing rose tinted glasses to make a quick buck and resell the poperty before or shortly after completion as that was what we were told by the developers.

I would like to put this down to a valuable and expensive experience and walk away from the 25k deposit because I think the apartments are over valued in the current climate with no good news on the horizon. But I'm worried they will come after me for more.