Introduction

Sadly you often hear of banks asking for a valuation based on a “forced sale” or on the special assumption that the period allowed for marketing is restricted. More so, we have seen valuers providing valuation reports on this basis as a matter of course even if the bank hasn’t requested it. In both cases, for Chartered Surveyors using the RICS[1] Valuation Standards[2] (The Red Book) this is simply wrong.  Use of the term “forced sale value” was proscribed by the Red Book in the 1990s.  Furthermore, the Red Book has long stated that a special assumption simply referring to a time limit for disposal without stating the reason would not be a reasonable assumption to make, and therefore a breach of the standards.

In this article, we examine the reasons for this requirement and discuss the practicalities of responding to a bank request to provide a valuation on the basis of a restricted marketing period.

RICS Valuation Standards

The RICS’ stance dates back to problems that emerged due to the decline of UK property values in the 1990s following the popping of the 1980s balloon.  This not only saw a significant rise in insolvencies and sales by or on behalf of lenders, but also litigation around those sales. This litigation confirmed that a lender, or receiver appointed by them, has a duty of care to the borrower, any guarantors or other creditors.  They must act reasonably and obtain the best price possible in the circumstances. They are not free to impose arbitrary restrictions on the sale process without good reason.

Answering such a question also produces practical problems for the valuer.  First, is the stipulated time limit reasonable or not? Second, if it is not reasonable, what metrics can be used to provide a reliable estimate of the price that could reasonably be expected? Finally, is a valuation on this assumption relevant to any foreseeable situation which the lender may find themselves in, and the associated risks to lender and valuer of inappropriate reliance on such a figure.

Market Value

The starting point for a valuer faced with such a request is to consider whether, in the market conditions prevailing on the valuation date, the period stipulated is sufficient to allow for “proper marketing”. The IVSC[3]/RICS definition of Market Value does not specify a fixed period, simply that there has been time before the valuation date for proper marketing to have taken place, i.e. time to allow the asset to be brought to the attention of an adequate number of market participants and to conduct the method of sale that is most appropriate. There is no direct correlation between liquidity and price. Obviously if an asset is overpriced it will take longer to sell and if under-priced it will sell more quickly. That is not the issue. 

^[1]        The Royal Institution of Chartered Surveyors (RICS)

^[2]      A report prepared in accordance with the requirements of the RICS Valuation – Global Standards (which incorporate the International Valuation Standards) and the UK national supplement. 

^[3]        The International Valuation Standards Council (IVSC)

For a comparatively illiquid asset like property, nearly identical assets can take very different times to sell even when fairly (correctly) priced. To answer the question as to whether the specified period is sufficient for proper marketing the valuer needs to ignore any outliers, and consider whether the time period is adequate to do everything that is normally necessary for marketing and agreeing a sale, assuming no unforeseeable problems.

If their conclusion is that the period stipulated is sufficient, the valuer can simply confirm that this is sufficient to allow for proper marketing under the international definition of Market Value and report the value as such.

The problems start to mount if the period is clearly unreasonable. The removal of the condition of a proper marketing period invalidates other aspects of the Market Value definition, as either the seller is acting imprudently or is subject to compulsion. Market Value subject to an unreasonable marketing period is therefore an oxymoron and the term should not be used.  A new definition needs to be agreed with the client that adequately defines the estimated price achievable in the adverse circumstances that prevent proper marketing.

Market Value assumes that buyers and sellers are equally motivated to agree the most advantageous price to their position.  It is predicated on a world in which all market participants are equally informed and acting rationally and reasonably. In economic terms, it represents the equilibrium price.

The reality for individual buyers and sellers can often differ from this economic nirvana, which is perhaps one reason why some lenders look for an alternative figure. However, as soon as one moves away from the hypothesis under which all parties are equally knowledgeable, motivated and acting reasonably in their best interests, the valuer has problems.

In a scenario where a party to a transaction is assumed to be acting unreasonably, either of their own volition or because of external influences, how does the valuer judge how far from the established reasonable norm it would be reasonable to go?  Market Value can be observed and supported by market evidence or by replicating the decision making process of the hypothetical buyer or seller.  Once the anchor of reasonableness is gone, what metrics can be used?

If a seller is under duress, the price that they could expect and be willing to accept would depend on the consequences of failing to sell. There are circumstances when it would be reasonable to accept a heavily discounted price because the consequences of not doing so would be worse, but the valuer needs to know what these are to have any chance of giving an opinion on the reasonableness of that price.

It is for good reason that the IVSs[4] state that while a sale may be “forced”, unless the nature of and reason for the constraints on the seller are known, the price obtainable on a forced sale cannot be realistically estimated*, and why the Red Book, which adopts the IVSs, indicates that a special assumption which simply refers to a time limit for disposal without stating the reasons for that limit would not pass the reasonableness test[5].

^[4]           International Valuation Standard

^[5]           RICS Valuation Global Standards 2017 – VPS4 10.5

The final problem caused by trying to provide a valuation based on an unreasonably short marketing period lies in its relevance and the risks to both lender and valuer. If a lender is contemplating new or continued lending backed by the security of property, they are not normally contemplating a near simultaneous step to take possession or enforce their security in any other way. Consequently, any advice requested or given on what might be realised under such a scenario will involve speculation on the circumstances under which a sale may take place. That scenario needs to be carefully defined and highlighted as a special assumption to emphasise that this is not the actual situation prevailing at the valuation date.

In an ideal world, lenders would no longer request values based on arbitrary periods to agree a sale without good reason.  However, until the impracticalities and legal implications of such requests are more widely recognised any valuer who finds themselves being asked to provide such advice needs to tread very carefully indeed. They need to make it clear that even if they have agreed a potential recovery scenario and provided a valuation on a special assumption that this existed at the valuation date, the price achievable on any future date or under different assumptions may be very different.