Pitfalls in a seller's survey
The possible pitfalls in having a seller's survey as a way to eliminate multiple surveys of the same property
Tucked away within the recent housing green paper Investing in Modernisation: An Agenda for Scotland’s Housing, were three short paragraphs seeking views on how to amend the house buying system in Scotland and “in particular, on the proposal to require sellers to commission a survey and valuation and make this available to all prospective buyers”. While only constituting a minor part of the green paper, these three paragraphs could have wide reaching implications for all those involved in the buying and selling of residential property.
The proposal to introduce sellers’ surveys is by no means a new one. In the mid 1980s a Secretary of State’s Expert Committee, established to consider the issue of multiple surveys and valuations, looked at the question of sellers’ surveys. Then in 1990, when the Law Reform (Miscellaneous Provisions) (Scotland) Bill was going through Parliament, Donald Dewar, at that time a member of the Opposition, tabled an amendment which, had it been passed, would have effectively introduced sellers’ surveys in Scotland. And now, with the coalition pact committed to the principle of sellers’ surveys, the issue is back again on the political agenda.
The decision behind the proposal to amend the house buying and selling process would appear to lie in the much publicised problem of so-called “multiple surveys” where purchasers are faced with paying for several surveys before they succeed in buying the property of their dreams. Where property markets are buoyant, multiple surveys can indeed be a problem and the RICS in Scotland would be among the first to acknowledge that it does seem unfair that consumers may have to pay for several valuations or surveys before succeeding in buying a home.
However, are multiple surveys as commonplace as we are led to believe by the media and by politicians? According to the results of a research project published by the Scottish Consumer Council in 1988, as many as 93% of house purchasers had no more than two valuations before succeeding in buying their property. Admittedly this research is now somewhat dated; however, it was conducted at a time when the housing market was particularly buoyant, i.e. in similar conditions to the current Edinburgh market. Moreover, evidence put forward by chartered surveyors now, albeit anecdotal, would suggest that multiple surveys generally continue to be restricted to certain hotspot markets, namely Edinburgh and the West End of Glasgow.
Nevertheless, although multiple surveys may not be prevalent throughout Scotland, the very fact that there is potential for them to exist in buoyant markets should be addressed. The solution proposed in the green paper, and supported by the governing coalition in its Partnership Agreement, would be to require the seller to commission a survey and valuation before putting the property on the market and make this report available to all prospective purchasers. The RICS in Scotland has considered this proposal in considerable detail and has submitted a considered response to the Government.
There are of course a number of advantages of such a system. If compulsory sellers’ surveys are introduced, purchasers will be provided with more information than is typically the case under the current system. While purchasers can at present commission a full survey, those who do are unfortunately the exception rather than the rule. At the present time the vast majority of house sales (around 90%) go ahead on the basis of a Scheme 1 Mortgage Valuation which merely indicates the surveyor’s opinion of the value of the property for a specific purpose, e.g. its loan security value, and comments only on those factors material to the valuation. A Scheme 2 Survey and Valuation, on the other hand, refers to an examination of the property intended to provide information on, inter alia, its value for a specific purpose but also on its general situation and condition with particular reference to any defects and the remedial work required to make these good. Given that only about 10% of purchasers actually commission a Scheme 2 Survey and Valuation under the current system, the introduction of sellers’ surveys would ensure that all prospective purchasers would have as much knowledge of the property’s condition as possible, thus enabling them to make better informed and more confident offer decisions.
The requirement to supply a report may also encourage better maintenance of the nation’s housing stock; having commissioned a survey and established that there are problems, the seller may be encouraged to remedy those defects before putting the property on the market. In view of the deteriorating tenemental stock in particular, such a move would be of significant benefit.
Alternatively, a seller, after determining that there are defects in the property, may not decide to remedy them. However, given that he is aware of their existence, he will be better placed to set a more realistic asking price, which will take account of the property’s condition, thus avoiding protracted negotiations at the point of offer or indeed the withdrawal of interest.
Finally, it must be acknowledged that the introduction of sellers’ surveys may reduce the risk of multiple surveys, i.e. there may be only one inspection per property. However, this may not necessarily be the case as is explained below.
While the advantages listed above may constitute a pressing case in favour of sellers’ surveys, there are also a number of potential problems which may arise if such a system were introduced. First and foremost, the buyer’s contractual relationship with the surveyor would no longer be a direct one. It may, therefore, be difficult for the surveyor, because of a potential conflict of interest, to provide actual advice to a potential purchaser. Under a system of sellers’ surveys the report provided by the surveyor would be an objective condition report with all elements of subjectivity excluded. Effectively this would remove the opportunity for the surveyor to advise a purchaser that he should not proceed with the purchase. This could have legal implications for the surveyor, who may be very exposed to serious liability if there is no vehicle by which he can convey his true feelings to a prospective purchaser. From the purchaser’s point of view, he is left with a statement of condition without any conclusion being reached. It is questionable how useful such a report would be to the ordinary member of the public who has no knowledge of property. The surveyor could be faced with a number of unsolicited calls from prospective purchasers wishing to find out more about a certain defect which the report has highlighted. The surveyor, having been commissioned by the seller, may not be in a position to provide additional advice without compromising his contract with the seller. Requiring prospective purchasers to commission their own surveyor to provide them with the necessary additional advice, could, however, prove fairly costly.
Turning to the property itself, it must be acknowledged that the condition and value of a property can change significantly; an inspection only serves as a snapshot of the condition of a property on a particular say and its relevance diminishes over time. For example, a £500 defect, if unattended, may over a period of time become a £2000 defect. Accordingly, it is unlikely that a surveyor’s Professional Indemnity (PI) insurers will cover the surveyor after a certain period of time, not is it likely that lenders would accept a valuation which had been carried out several months previously. The RICS in Scotland considers that a survey would only be valid for a maximum of three months before needing to be updated. While this may not be a problem in buoyant markets, in slower market areas, which constitute the majority, sellers may have to pay for several surveys or updates. This simply transfers the problems of multiple surveys form the buyer to the seller and it is questionable whether this can be viewed as intrinsically any fairer than the present system.
Multiple surveys may indeed become an even greater problem and may arise in areas where they have not previously existed. While the RICS in Scotland would argue that chartered surveyors, in view of the high standards of professionalism and integrity they are required to meet, not to mention the fact that they will be legally liable to both the buyer and the seller, will provide objective, reliable surveys, it is possible that the discerning purchaser will continue to commission his own survey. If this were to happen, the increased costs for sellers would not be offset by decreased costs for purchasers and the objective of the entire exercise would have failed.
The cost of a seller’s survey is in itself a matter of concern. While making the surveyor legally liable to both the seller and the buyer will increase consumer protection, it is likely to lead to higher premiums for PI insurance which would have to be passed on to the consumer, thus affecting the cost format of the report, the RICS in Scotland considers that a seller’s survey could cost in the region of £500 - £600 (one reason why chartered surveyors should really be in favour of sellers’ surveys). While it could be argued that this cost will be offset as purchasers will not have to commission and pay for several surveys before succeeding in buying a home, in those areas where multiple surveys were not previously a problem, the introduction of sellers’ surveys would simply be an added expense to the already expensive process of moving home. In addition, the cost of a seller’s survey would be relatively much higher for those selling properties at the lower end of the scale.
Yet another concern raised by the RICS in Scotland is the possibility that the requirement to provide a seller’s survey many make some properties extremely difficult to sell. A less that favourable report may deter prospective purchasers from even viewing the property. At present, prospective purchasers will view a property, having looked at the sales particulars which generally portray the property in the best light possible. Even if they subsequently establish that there are defects, they may have “fallen in love” with the property itself having actually viewed it and may therefore be more willing to find out how the defects can be remedied. In tenemental blocks the problem could be blighted; if properties are on the market for a considerable length of time and are obviously proving difficult to sell, prospective purchasers may be deterred from viewing other properties in the block. If this were to happen, the housing market could seriously slow down; alternatively, the drop in supply could result in an increase in property prices.
Finally, like any other professionals, chartered surveyors have fees to consider and the RICS in Scotland would question when the seller would have to pay for the survey. If the seller is required to pay up-front before the property is sold, this could place a significant financial burden on the owner, particularly in the case where the owner is having to sell the property due to financial hardship. On the other hand, there is a risk that the surveyor may find it difficult to secure payment if they provide an unfavourable report. In addition, if the surveyor is not paid until the property is sold, there could be significant delays resulting in cash flow problems for surveying firms. Indeed, where the seller is faced with negative equity it could be the case that the seller would not have sufficient funds form the sale of the property to cover the cost of the survey.
In view of the number of disadvantages listed above, it may appear that the RICS in Scotland is diametrically opposed to the introduction of sellers’ surveys. However, it must be stressed that the RICS in Scotland is not opposed to change in principle. What we would emphasise, however, is that change must bring with it tangible benefits. If such a fundamental change is to be made to the house buying and selling system it is essential that careful consideration is given to all the pros and cons of any new system so that any pitfalls can be overcome. For example, thought must be given to introducing a time limit after which any survey would have to be updated; the contractual relationship of the surveyor will have to be reviewed; the scope of the survey itself will have to be considered; thought will have to be given to the inclusion or otherwise of valuation; and major educational programme will be necessary so that purchasers learn to rely on a survey they have not commissioned and sellers become aware that the surveyor is not working for them.
What we would certainly not want to see would be the introduction of even more problems than already exist. In this respect, the RICS in Scotland believes that consideration must be given to alternative means of overcoming the problem of multiple surveys. After all, if it is the case that multiple surveys could be viewed as using a sledgehammer to crack a nut. The existing system of house buying and selling in Scotland is considered to be the envy of many countries throughout Europe so perhaps we should be looking at ways of “tinkering” with what we already have. Ultimately, what we may have to acknowledge is that no system is likely to be perfect and we should therefore be aiming to achieve the best possible solution which is equally fair to all consumers, both buyers and sellers alike.
Lynne Raeside, Head of Policy Unit, Royal Institute of Chartered Surveyors in Scotland