With the growth of claims against surveyors carrying out valuations for residential mortgages what, if anything, can be done to minimise the possibility of error?
The short answer is to spend as long on each mortgage inspection as one would for a full inspection. However, that is not possible for all the rehearsed reasoning relating to fees. At the heart of the matter is the continuing debate over the meaning of the word “value” under the Building Societies Act 1986, and whether this is any different to the many expressions used on prescribed mortgage forms or that defined in the Mortgage Guidance Notes issued by the professional societies or as generally understood by the profession in the phrase open market value.
Second, there is the question of whether the fact that a mortgage inspection is known to be a limited inspection (a) has any effect on the valuer’s duty of care and/or (b) effectively allows the valuer some latitude as to what he or she might be expected to note and to reflect upon in formulating an opinion. Increasingly, one senses that, in the court’s view, an opinion of value given by a qualified surveyor for mortgage purposes is to be interpreted in the same way as when given for any other purpose.
Value is a market phenomenon and will therefore be affected by changes in the marketplace, but, given a level of values at a point in time for an area, the value of a property will be directly in line with prices achieved in the marketplace for readily comparable properties. If, however, there are serious defects in title, not common to the market, it will have a lower value, and if there are serious physical defects or locational defects it will also have a lower value. How much lower will depend on the cost of rectification (where that is possible) or the amount that the marketplace traditionally discounts for that particular level of defect. In the latter case valuers need supporting market evidence.
It is well known that value depends on three factors — location, location and location. What is currently forgotten is that that adage developed in a period of excess unsatisfied demand for commercial property. Previously it had been customary to consider value as dependent on quantity, quality and position. To reduce error, therefore, the valuer is required to take more care in the measurement of those factors.
In the residential market the valuer must pay particular attention to the legal, physical and economic factors or forces. In the case of mortgage valuations, the legal element is assumed or defined by the instructions. Nevertheless, the surveyor has to be watchful for obvious encumbrances such as rights of way, which, if noted, must usually be reported to the lenders. There does, however, remain some doubt as to where the dividing line of responsibility lies between the valuer and the lender’s solicitors, After all, how many solicitors have a sufficient knowledge of values to be able to know when to refer back for a revaluation having read the details as to title? Who is to say whether a surveyor should, or should not, have reflected a particular title defect in the valuation — even though valuing on the assumption of an unencumbered freehold?
Economic factors are rarely raised as issues in negligence claims. But here also the valuer needs to be wary. Phrasing on report forms such as “taking into account all relevant factors including future saleability …” must be open to a wide variety of interpretations. If house prices tumble overnight as a result of some perfectly logical economic explanation, should the valuer have had the foresight to allow for this in the valuation or the report; would, or could, he be negligent for failing to foresee a probable downturn in values?
However, the current dilemma of the profession relates mainly to physical matters — witness the debate over the “heads and shoulders” guidance note. Identical, or near-identical, houses should be worth the same sum of money, but the one with model railway tunnels cut into the rafters, or without adequate fire walls, or with seriously fire-damaged timbers has to be worth less. There would, therefore, seem to be as strong an argument for looking in accessible roof spaces as for looking upstairs! This seems to be the view adopted by the professional societies in their guidance notes but unfortunately they do not go far enough.
After all, even if the surveyor in the Smith v Bush case had carried out a head-and-shoulders inspection, the view of the chimney breast might have been totally obscured from the hatch by the cold-water tank. Here, as in all matters, the courts must consider the question of reasonableness. This leaves the surveyor with the unanswered question of what can reasonably be expected of a surveyor carrying out a “limited inspection”. To the mortgage applicant the fee seems excessive for what he or she expects will be a very limited inspection. “He was only there for 10 minutes,” is a familiar cry.
One look at many mortgage report forms would tell most applicants just how short such an inspection could be, but it cannot tell the valuer how much time needs to be taken to answer fully what may appear to be very simple questions. So what can valuers do to reduce the possibility of claims while still showing some kind of acceptable return for the work involved?
First, it seems essential for this level of professional work to be left to the most experienced valuers in the office. These are limited inspections and if carried out by valuers with limited knowledge of residential property within a given geographic area, then certain defects may be overlooked. Unfortunately, logistics dictate that all valuers must start somewhere, and therefore some inspections will have to be carried out by the less experienced. Experience is important because it sharpens the valuer’s sixth or seventh sense, which tells him or her that something is wrong even when it is not obvious on a preliminary inspection.
In order to protect the less experienced it becomes essential to adopt rigorous office procedures. The workload must be distributed sensibly, there must be careful supervision and reports must be checked by a senior valuer. But, more fundamentally, serious attention has to be paid to the tuition of young valuers during their two-year period of professional training and beyond by encouraging all staff to take CPD seriously.
This is easier said than done if the mortgage fee has to cover the valuation and cost of taking trainees out on inspections. This cost is such that some firms of surveyors will now employ only qualified surveyors. The problem of this is that those currently qualifying may not have received very much exposure to the world of residential mortgage valuations. There is even a potential risk, or at best embarrassment, in letting younger valuers or those with limited experience of this market undertake the safer instructions such as final inspections.
Even a full two years’ experience in the residential field will not expose a valuer to all the peculiarities of properties in an area. Indeed, it takes the experienced valuer some time to discover the different peculiarities of a new area should he choose to move for promotion or career development. The tradition of father and son or man and boy has disappeared, and the knowledge that was previously handed down must now be recorded if one is to avoid that knowledge escaping from a specific practice.
Such records need to be systematically kept if they are to be of any use. Sadly, for too many years dead filing was considered to be an adequate system. Today it would seem sensible to build up a data base on a simple computerised system, to record very basic data relating to the area covered by a particular surveying practice or regional office of a building society.
The simplest of such records would register, by town and street, essential data extracted from sales records (for values); and from survey reports, mortgage inspections and housebuyers’ reports, important physical and environmental factors. It is also wise to check and note information relating to planning matters and other issues reported in the local press.
Under each street will be recorded information such as soils and subsoils, mining operations, liability to flooding, services available in the road and the name and address of the area supplier or authority. Further information can be added from experience and press releases. This might include a general description of the type of properties in the street, their date or period of construction, in the case of new estates the name of the developer, and other notes to indicate the kind of problems that valuers have encountered with properties in that street such as the absence of adequate fire walls in roof voids.
After the general data, each property sold or inspected can be listed in numerical order. Against each number will be noted basic coded information about accommodation, sale price etc, and major defects that were noted at the time of any survey or sale. The press news can be added on an “as and when” basis, such as planning permission being granted for an extension or news of a fire at no 36.
The object of such a data base should be obvious and its main benefit is in warning valuers before they visit a property of some of the points they might need to be looking for. Again the valuer with, say, 10 years’ experience of the market in an area will know most of the essential matters held on store, but the trainee will not and nor will the most experienced valuer moving to that area. For some valuers records are still just too much trouble when the important issue is to get on and earn fees: for them one can only hope that their seventh sense and memory are good enough for this consumer society.
A question that one tends to ask as one gets older is “how much experience is necessary before one can undertake valuation work entirely on one’s own?” Two years is probably not enough, but can a firm afford to continue to watch younger valuers for five years. An interesting consumer questionnaire might actually ask (a) whether mortgage applicants would prefer their mortgage inspection to be undertaken by a valuer with two years’ experience or with 15 years’ experience, and (b) would they be willing to pay extra for the greater experience?
Currently it would seem to be wise, where staffing permits, for every report to be at least read by one other valuer in the office. Indeed, would Smith v Bush have been avoided if there had been a cross-check — a photograph plus a comment about the removal of chimney breasts might have prompted a question.
Alteration works themselves pose problems for the valuer but these are no greater in their degree of uncertainty than the original building itself. Most major alterations are clearly visible and should be drawn to the applicants’ attention if for no other reason than to prompt them or their solicitors to check that they were carried out with all necessary consents.
The many and varied report forms in use coupled with the various instructions that accompany them demand considerable care by the valuer when completing the answers. The various disclaimers are there to try to protect the valuer but they can be rendered less useful if the valuer uses the wrong phrasing; for example, to state that a property had been found to be structurally sound would suggest that in a previous existence the valuer had been trained as a kamikaze pilot.
Some valuers find it useful to use their own aide-memoire to check that they have not forgotten anything before packing the ladder back in the boot and driving off. Again, these are never foolproof because of the variability of residential property, nevertheless they can help the trainee. A useful aide-memoire is one prepared for final inspections to remind the valuer to check such items as services, fixtures and fittings and that the property has been cleaned and prepared for the new homeowner. Clearly, the inspection is a very crucial part of the exercise, and it is absolutely essential for the valuer to develop as far as possible his or her own systematic approach which allows for everything to be inspected, noted as necessary and completed in as economic a time as possible without any diminution in the level of care exercised. One rule should always be to see that this can be achieved in daylight.
A mortgage valuation is far more than a simple inspection to confirm that the asking price or agreed purchase price is within an acceptable range of that which one would oneself have suggested for the property. It is a valuation and as such must reflect all factors that might reasonably affect value — the legal, economic and physical. To reduce risk may require more time, more supervision and more tightening-up of office procedures. The courts have already issued clear warnings to those who lose sight of their professional responsibility to their profession, to their clients, to their partnership or employer and, within reason, to third parties most immediately affected by the giving of a professional opinion. The short answer seems to be that to reduce risk of error or omission will require the valuer to take time to do the job properly — no more and no less is needed.
