Info zone – Property overvaluation

Hotel owners Michael and Julie Lothe decide to retire. Their accountant tells them that the summer of 2000 would be a propitious time to sell from the tax point of view, so they approach a nearby firm of chartered surveyors who specialise in valuing and selling hotels, and who are marketing a larger hotel nearby.

Michael and Julie are impressed by the professionalism of the senior partner who visits them, and his valuation of £950,000 for their property seems reasonable.

However, they are advised to obtain a second opinion and approach two of the national hotel agents. One values the hotel at £1.4m, while the other puts it at £1.5m. Convinced that these consistently high figures must be right, Michael and Julie commit £1,500 to a marketing budget and put the hotel up for sale with a national agent at £1.5m.

After eight months, no firm interest has been received. They finally instruct their first adviser, feeling somewhat wiser but £1,500 out of pocket.

There is no legislation covering the accuracy of valuers' reports and recommendations, so as the law stands, undervaluing or overvaluing property is not a criminal offence

This case study is a work of fiction and the names, characters and incidents portrayed in the article are fictitious. Any resemblance to actual persons, living or dead, events or localities is entirely coincidental.

What the law says

Estate agents are governed by the Estate Agents Act 1979 and the Property Misdescriptions Act 1991, together with associated statutory orders.

These acts cover such issues as honesty and accuracy, clarity of the terms of the agency agreement, disclosure of personal interests, absence from discrimination, obligation to tell clients about the offers received and keeping clients' money separate from their own.

There is no specific legislation to cover the accuracy of valuers' reports and recommendations, this being a matter of private contract. Written complaints can, however, be made to the company which is thought to have provided inaccurate or misleading valuation advice, or if the valuer is a chartered surveyor, a written complaint can be made to the Royal Institution of Chartered Surveyors.

Be aware

Commercial agents need not be qualified or experienced in any way in order to practise in the business. The level of knowledge and experience of individual agents will vary and should be probed. Consider whether your interests would be best served by instructing a chartered surveyor.

Ultimately, the question of any litigation should be the subject of legal advice. This particular article has sought to provide practical guidance rather than detailed legal advice on this subject.

What the expert advises

Andrew Boulter is partner of Underwoods Chartered Surveyors and head of the Licensed and Leisure Department

Michael and Julie's experience can serve to provide a salutary lesson for hoteliers who may be seeking to take advantage of a rising market and to realise the value of their hotel asset(s). It is notoriously difficult for valuers to be precise about hotel values in a steeply rising or falling market (witness the Queens Moat Houses debacle of the early '90s).

Vendors expect their agents to obtain the best possible price, and in a rising market they would also expect the advice which is provided at the outset to reflect the benefits of any increases in value which might be anticipated during the marketing period. However, vendors need to be aware that commercial agency is highly competitive.

Michael and Julie were influenced by the fact that they received similar advice from two reputable national hotel agents. They should perhaps also have considered that these two may well have been aware of competing against each other in seeking to attract this instruction.

As the law stands, undervaluing or overvaluing property is not a criminal offence. Valuers who are chartered surveyors are governed by the Royal Institution of Chartered Surveyors and the advantage of employing a chartered surveyor is that they are subject to disciplinary action by the RICS following a formal complaint.

I should point out, however, that there are many highly professional able agents who are not chartered surveyors.

There are two particular precautions which the Lothes could perhaps have taken. First, they could have asked the valuer to provide evidence in support of his valuation figure - ie evidence of other hotels in the area which had recently been sold (as opposed to evidence of the asking prices of other hotels on the market). If a valuer is not prepared to produce evidence in support of his valuation then its accuracy may be called into question.

Second, the Lothes could have asked the agent to bear part of the cost of the marketing budget. The disadvantage of this arrangement is that the agent may be tempted to skimp on the marketing exercise and to get the property sold merely in order to cover his share of the marketing cost.

Perhaps the best advice is to have a good long chat with your proposed agent to tease out the depth of his or her knowledge and experience and the support that there may be for the valuation figure.

Contacts

Andrew Boulter FRICS
Tel: 01604 404060
ab@underwoods.co.uk

Royal Institution of Chartered Surveyors, 12 Great George Street, London SW1P 3AD
Tel: 020 7222 7000