The myths surrounding the "Discount off RICS!"
Brett Alegre-WoodChairman, YPC Group
Hi everyone,
Brett has asked me to write about some of the frustrating things I am finding as I search for properties which are suitable for our clients. I have to say that many of the things that are happening in the market at the moment are enlightening to say the least.
Recently I've been getting offered a lot of these '...discount off RICS' type deals.
The '...discount off RICS' type deal refers to a set percentage discount (say 25%) from the valuation that gets carried out on behalf of the lender by a RICS surveyor.
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It's one thing me being offered these deals but its another when I actually see other investment companies promoting them, sometimes even selling them and taking clients money in return for a deal that is 95% of the time undeliverable.
It comes down to the fact that there will always be a price/level that will make the deal un-transactable.
Manchester Flat - 30% off RICS Valuation... is it really???
Let me give you an example; last week I was offered a Manchester city centre development from one of our contacts. The deal was '30% discount off RICS' and attached to the email was a spreadsheet detailing the prices/ discount etc. They were 2 bed/ 1 bath units priced at Â?200k by a local agent (down from an original list price of Â?225k) with a 30% discount. So the developer was expecting to receive around Â?140k.
The problem in this scenario, besides the obvious overvaluation, was that the developer was so sure that Â?200k or thereabouts would be the RICS valuation that he hastily agreed to the '30% discount from RICS' deal. Now to anyone else they would have very quickly jumped on this as on the face of it, it seems like a great and fool-proof deal - but you would have just been wasting your time. Knowing the area well our due diligence suggested a RICS value of Â?145k, which we actually got backed up by a Colleys Surveyor (they are members of the RICS and the choice of many lenders at the moment). Knowing what the valuation will come in at before committing to anything we let the developer know that they would be realistically looking at Â?101,500k - 30% discount from our RICS valuation of Â?145k and Â?38,500 less what they were expecting, their response; 'the bank will simply not allow me to sell at that level - sorry but no can do'.
Again, as always - Thorough Due Diligence is required...
It is for this very reason that it is so important to simply know what the RICS valuation will come in at before moving forwards with any deal and communicating this to all parties. Ie thorough Due Diligence must be done and you should not rely on the developer accepting the discount from whatever the valuation comes in - its just unrealistic.
This is why we carry out a RICS valuation on every development we take on prior to releasing it to our clients.
Often these deals will not have come directly from the developer and in some cases the developer hasn't even been aware of any kind of deal being negotiated. In these situations, you have most likely got a company promoting and selling the units at a certain set 'discount off RICS' with the hope that once all the units are sold they will be able to negotiate the discount. Again, 95% of the time the deal is undeliverable and this 'discount of RICS' is just a myth, yet again.
Regards,
James De Souza
Director of Property
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