Mike Carpenter

Reliance periods for lending valuations and how to avoid unnecessary delays




A valuation, like a chunk of cheese, has a sell-by date. The 'reliance period' defines the period of time a valuation is valid for lending purposes.

It is important to understand what a reliance period is, how the valuer decides on it, and the knock-on effect if a reliance period is exceeded before a case completes.

The time limit imposed by a reliance period can lead to challenges for both lender and valuer. A good understanding of the property — together with effective and timely communication — is required to prevent this limitation from affecting the completion of a case.
 
Why do we have reliance periods? We have reliance periods because values change over time and property can decrease as well as increase in value. A valuation is based on evidence at a particular point in time; as new transactions come to the market, that valuation becomes historic and less reliable. It is, therefore, necessary to specify the period of time the valuation is valid for so the lender knows how long they can rely on a report for lending purposes. At the end of this period, the value will need to be reconsidered.
 
Who sets the reliance period? The valuer sets the reliance period based on various factors (see below). Although lenders may indicate how long they would like the valuation to be in place, it is the valuer who is responsible for making the final decision. Occasionally, professional indemnity insurers specify a maximum reliance period. In these circumstances, valuers’ hands are tied, and this may affect their ability to work for certain lenders.
 
What affects the reliance period? In a stable market, the normal reliance period is between three and four months. The time limit depends on many factors, but principally relates to the current state of the property market.
 
This, in turn, may be affected by:
  • supply and demand
  • buyer confidence
  • the state of the economy
  • political events
  • interest rates
  • uncertainty

Other factors:

Property type: The demand for any type of residential property can vary. For example, in Birmingham following the 2008 recession, there was a significant oversupply that took several years to recover. The higher a property’s value, the fewer potential buyers, and the market in this case can be more volatile. With commercial property, different sectors require different considerations. Industrial property throughout the Midlands and beyond is currently in short supply, while retail is generally very sluggish.
 
Condition: The condition of a building can also affect the reliance period. A building in poor condition will deteriorate if empty for extended periods, and a building that is not watertight will deteriorate more rapidly. These factors could potentially reduce the reliance period and will affect its extension.
 
Location: It’s a well-known fact that certain locations perform poorly at times of market uncertainty. Any extension of the reliance period in these areas will need to be carefully considered.
 
Vacant buildings: Vacant buildings are more vulnerable. Depending on type and location, a valuer may restrict the reliance period on these properties and be more unwilling to extend the period without further inspection.
 
Property value: The value of a property may not immediately seem a reason to adjust a reliance period, but higher-value properties can suffer in uncertain times simply owing to the reduced number of potential buyers. It follows that the certainty of a value will be reduced in volatile market conditions and the reliance period will consequently be affected.
 
Extending the reliance period: Very often valuers are asked to extend a reliance period owing to the transaction not completing within the time limit. This must be considered on a case-by-case basis and will depend on the factors discussed above. Clearly a property that is just outside its reliance period may be suitable for an extension without further consideration, but the longer the period, the more likely a valuer will require a reinspection.
 
The valuer has the following options:
  • Extend the period without further inspection or desktop assessment: This applies to properties in good condition, usually fully occupied and in areas where there is good demand. The property would need to be just outside the reliance period — a maximum of six months after the date of valuation in a stable market.
  • Extend the period with desktop assessment: This is usually used where a property is occupied, but it is in an area, or market, that is less stable. This would be chargeable and may be used up to six months after the date of the valuation.
  • Extend the period with drive-by inspection: This may be used where the property is fully or partly occupied and the market conditions or the area are more unfavourable. It may be used up to six months after the date of the valuation.
  • Extend the period with reinspection of the property: This is used for all properties that haven’t completed six months after valuation, regardless of condition, occupation or demand.
 
How to avoid delays: It is very frustrating to both the lender and valuer when a property is about to complete and it is realised that the valuation will be out of its reliance period by the time this happens. Very often we receive emails such as: “The case is about to complete in the next few days. Can the valuer confirm we can still rely on his report?”
 
This puts pressure on the valuer, especially if a reinspection is required — and urgently. This can be avoided by ensuring the following:
  • An awareness of when the valuation will expire: It is clear that the reliance period end date is often the last thing that is considered. As a consequence, there can be delays in completion and frustration all round.
  • Knowing how long ago it expired: A short period of time may be dealt with by a simple email. However, three or more months past the expiry date will require a drive-by or reinspection, and will therefore take longer to deal with.
  • An understanding of the property being assessed: An unoccupied public house is more likely to require a reinspection than an occupied one. A property in poor condition is more likely to require reinspection, regardless of how far it has exceeded its reliance period.
  • An assumption that a reinspection will be required: If it is assumed that a reinspection will be necessary, sufficient time can be set aside for this to be undertaken. In a busy time for valuers, a reinspection may need to be booked up to two weeks ahead.
 
When a valuer is asked to extend a reliance period, they will need to consider the factors above and deal with the request using one of the above methods. Where insurers have restricted the reliance period, the decision is out of the valuers’ hands and a reinspection will be necessary.
 
Why are extensions to reliance periods refused? The most common reasons why valuers refuse to extend reliance periods without a reinspection include:
  • the property is vacant and may have deteriorated
  • recent volatility in the property market
  • uncertainty in the UK economy
  • poor condition
  • poor location
  • changes in market conditions
  • insurers preventing them from extending the reliance period
It should be remembered that the above are typical case scenarios. Valuations are always a matter of opinion: one valuer may email an extension of a reliance period without inspection; another may require a reinspection.
 
TIP: Always assume a reinspection is required and allow sufficient time for this to be completed.
 
 

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