Why Some Properties Refinance Well and Others Don't

The plan most investors are taught is simple. Buy below market value, refurbish, add value, refinance and recycle your cash into the next deal. It is how most portfolios grow from one property to ten.

Most of the time it works. Valuations come in where you expect them, give or take a thousand pounds either way.

But not always. Down valuations do happen, and when they do, the money you were relying on for the next purchase stays locked in the property.

So why do some properties refinance well and others do not? And what can you actually control before the valuer arrives?

The honest answer is blunt. Most down valuations are not caused by the property. They are caused by a valuer who does not understand the area, picks the wrong comparables, and values the property incorrectly.

The most common cause: comparables, not condition

We have seen a valuation come back roughly £85,000 below expectation. It came in at £195,000 against an anticipated £280,000.

When we examined the report, the surveyor had not used a single HMO comparable. The properties chosen were four or five streets away, in a different postcode, and were not even on the Land Registry. They were a different size and a different type. Meanwhile, sold comparables on the exact street within the previous six months had been ignored, as had identical properties three streets either side.

The detail that makes the point: we had sourced three properties on that same street. Two valued exactly as predicted. One did not. The difference was the individual valuer.

Rushed inspections make this worse. We have been in a property where the valuer was in and out in under five minutes. Where a valuation is provided free as part of a mortgage product, the surveyor is often paid very little to carry it out, and the work can reflect that.

Lenders have their own reasons, and they are not always about your property

A valuation is only part of the picture. The lender's own position matters too.

We have seen cases where a lender already held significant exposure in a street or an area and wanted to reduce its risk, and indicated to the valuer that a lower figure was needed.

The practical response is to avoid stacking your portfolio with one lender. If you are still deciding how to hold the properties in the first place, our guide to buying UK property as an international investor covers the structure side. If you buy two properties on the same street, use two separate mortgage companies, and keep the lender appropriate to the tenant profile you are building.

An underwriter can also change the terms mid-process. We have had a lender move from 75% loan to value down to 65% because its criteria changed. You can ask for an explanation, but lenders set their own rules. The options are to move to another lender, take the product on offer, or wait six months and go again if you do not urgently need the money out.

Check the lender will accept the property before you pay for a survey

Some lenders will simply refuse a property, and that refusal can cost you.

On a recent refinance of a property valued at around £800,000, our broker flagged that the underwriter at the proposed lender had become cautious about the location. On investigation, the issue was a pub across the road.

Rather than proceed and risk a refusal, a restricted loan to value or a down valuation, we pulled out of that lender before paying roughly £3,500 for the survey, and went to a lender we knew would accept the property.

That is the lesson. A short conversation with your broker about the property itself, before any money is spent, is worth more than hoping the valuation lands.

The refinance starts before you buy

The decision that determines whether a property refinances well is usually made at purchase, not at valuation.

Before we buy, we check:

• Construction type. Standard or non-standard, and whether lending is available on it
• Tenure. Whether the leasehold terms are acceptable
• Use class. Whether the planning class is correct for the intended use
• Tenant profile. Who the property is for, and which lenders are comfortable with that
• Comparable evidence. Whether the evidence exists to support the end value
• Layout. Whether the finished layout will actually make sense
• Rental demand. Whether local demand is genuinely strong

One thing we deliberately do not focus on at this stage is the interest rate. Mortgage rates change daily, and a product available today may be gone by Friday. Instead we work to a range of up to 7% and stress-test the deal to find the break-even point, so we know where the numbers stop working.

What a valuer actually needs to see

Valuers work from evidence. The closer and more recent that evidence, the better.

• Comparable sales as close to the property as possible. Valuers will typically look within half a mile, and will sometimes go back as far as two years where recent sales are limited
• Similar condition, size, layout and use class. Comparables in a different condition or size are where valuations go wrong
• Rental evidence. Tenancy agreements demonstrate demand. We prefer to refinance once a property is fully tenanted, so we can show real agreements rather than assumptions
• Letting agent evidence of comparable rents, where the property is not yet let
• Construction type confirmed, with supporting documentation

We prepare the comparables ourselves and hand them over on the day. If you can make the valuer's job easier, do it.

Non-standard construction

Non-standard construction is becoming more common, particularly timber frame on new builds, because it can be erected quickly and in almost any weather.

The categories matter. Steel frame is generally manageable. Prefabricated concrete houses, many built in the 1950s and not built especially well, cause the most difficulty, though some types can still be financed.

We check construction type before even viewing a property. You will not be offered a non-standard construction property unless it sits within parameters where lending is available.

Overspending does not create value

Specification should match the market, not your taste.

Put simply: you do not put a £20,000 kitchen in a £50,000 house. In that property, a kitchen costing around £3,000 is appropriate.

Premium bathrooms and designer choices in areas where tenants will not pay more for them do not return the money spent. Fit the specification to the demand.

Layout can add value, or destroy it

A good layout improves rentability and protects resale value. A poor one does the opposite.

We were recently asked to quote on a refurbishment for a seven-bedroom HMO and said immediately that it would have valuation problems, because two of the rooms did not meet size standards. That creates difficulty on both rentability and regulation.

In our HMOs, rooms are kept close to 10 square metres and will not go below around 7.5 square metres, excluding the en-suite, so rooms do not feel claustrophobic.

Usability matters too. Separate washers and dryers rather than a combined unit. Sensible bed positions, because nobody wants to sleep under a window. Adequate natural light.

In standard buy-to-let the picture differs. Older terraced houses often have a small third bedroom, and provided it exceeds the single room standard, that is normal for the area and lenders treat it accordingly.

Leasehold issues, and the opportunity inside them

Leasehold can complicate a refinance. Where a lease has 80 years or less remaining, the value drops significantly, because lending becomes hard to obtain or expensive.

We treat that as an opportunity. A short lease allows a property to be bought well below market value. Extending the lease costs relatively reasonable money and forces the value up, after which the property can be mortgaged, sold or let.

Other leasehold factors worth checking: ground rents (rarely an issue now), service charges, restrictions and covenants, major works, and the management company running the building.

On blocks of flats, cladding remains a live issue following Grenfell. Some buildings do not have fire-resistant cladding and are working through insurance claims, and mortgages can be unavailable. This is not every building, but it is worth asking the question early.

Planning, use class and Article 4

Planning becomes significant with HMOs.

C3 is standard residential. C4 generally covers HMO use. A property with seven or more occupants moves into sui generis, which is where licensing and planning requirements become more involved.

Article 4 directions matter in both directions. Where an Article 4 area comes into force, existing HMOs can increase in value by 25% to 50% almost overnight, because new HMOs become much harder to create. Lenders view established HMOs in those areas more favourably too.

Where the right planning permission is not in place, a lawful development certificate may be an option. Sometimes consent is needed, sometimes it is not. The point is to know which, in advance.

Licensing

For HMOs, check whether the property requires a licence, whether all conditions meet licensing standards, and whether the licence is transferable. In some areas it is; in the areas we operate in it is not, so a new licence is required on purchase.

When we review an existing HMO, we check current fire regulations, building regulations and licensing standards, and whether the council has raised any issues. A poor licensing or management history can affect some lenders, depending on the underwriter.

How HMOs are valued differently from buy-to-lets

A standard buy-to-let is usually valued on comparable residential sales.

An HMO may be valued on bricks and mortar, or commercially. Which method applies depends on the property type, the area, the layout, the use class, the lender and the valuer.

A six-bedroom licensed HMO with no en-suites is likely to be valued on sold comparables, because it can easily revert to a family home. Six en-suites and a large kitchen make that reversion difficult, so the valuation is more likely to be commercial or mixed use.

On a commercial valuation, lenders look at:

• Gross rent
• Net operating income, after expenses
• The yield applied to that type of building in that area
• Demand
• Management intensity
• Comparable investment sales

Management intensity is worth noting if you are investing from overseas. A letting agent on the ground is a significant positive. A property managed remotely with no local agent is viewed as a negative and can reduce the valuation. We set this out in more detail for investors buying from Hong Kong and from Singapore.

Ask for more than you need

A practical point that surprises people: when you request a refinance valuation, ask for more than you actually want.

A valuer can only report up to the figure requested. We have been present at valuations where the surveyor said they would have valued the property higher, but could not, because the request capped them.

If you want £80,000, ask for £100,000. On the property we are currently refinancing, we have asked for £800,000 and expect to land at £750,000 in the worst case, which we would still be happy with.

Valuations are never guaranteed. Someone can have a bad day. But asking low guarantees you will not be offered more.

Prepare the property, and the paperwork

Before the valuer arrives:

• Finish the works and clear the snags
• Keep your invoices, and before and after photographs
• Have planning documents ready
• Have licensing documents ready
• Provide tenancy evidence
• Prepare comparable evidence

Where a significant refurbishment has been carried out, we recommend putting together a project overview document showing the before and after position.

Showing that you are organised and know what you are doing changes how the valuation is approached.

The bottom line

A refinance comes down to a short list: the right property, the right lender, the right deal structure, the right planning where it is needed, the right evidence, and realistic valuation expectations.

The right lender makes more difference than anything else.

And if a valuation does come back low, do not panic. Sit on it. The longer you are in property, the more you win.

Frequently Asked Questions

Why do properties get down valued?

The most common cause is a surveyor who does not know the local market and selects the wrong comparables, choosing properties of a different size, type, condition or location. Other causes include lenders reducing their exposure in an area, over-optimistic end values, weak rental evidence, unusual construction, poor layouts and small rooms.

Can I refuse a valuer?

Yes. If you know a particular firm consistently values poorly, you can ask the lender for a different surveyor.

Should I refinance before or after tenanting the property?

Where possible, after. Existing tenancy agreements evidence real demand and real income, rather than relying on assumptions.

How are HMOs valued compared with buy-to-lets?

Buy-to-lets are usually valued on comparable residential sales. HMOs may be valued on bricks and mortar or commercially, depending on the property, area, layout, use class, lender and valuer. The harder a property is to convert back to a family home, the more likely a commercial valuation becomes.

Does managing a property from overseas affect the valuation?

It can. On a commercial valuation, lenders assess management intensity. A local letting agent is viewed positively; a property managed remotely with no agent on the ground is viewed as a risk and can reduce the valuation.

What should I do if my property is down valued?

You can challenge it with better comparable evidence, or move to another lender. We have done both. In one case we moved lender rather than fight the report, and went from application to funds in roughly a month, achieving the figure we originally wanted.

Ready to talk numbers?

If you are planning a buy, refurbish, refinance project and want to know whether it will actually value up, we can look at it with you before you commit. We source, refurbish and manage UK property for investors based overseas, and we prepare the valuation evidence ourselves.

Book a call with our team

Please note: The figures, rates and rules in this article are included as examples of how lending and valuations work in practice, and they change. Lending criteria, licensing requirements and planning rules vary by lender and by local authority, and the tax treatment of a refinance depends on your own circumstances. Please speak to a qualified broker, and to a tax specialist or accountant, before making any decision.