How valuable are homebuyer reports?

Julian Roche is the chief economist at Cavendish Maxwell. Julian was an analyst with the UK Government. He later helped develop and launch the UK’s residential forecasting service with the firms that merged to become Global Insight. Julian subsequently developed derivatives in the City of London and established real estate futures contracts for what is now the International Commodity Exchange. He also ran a property development and management firm, before eventually serving as an international consultant and trainer to governments, central banks and notable firms including AXA, Citibank, DBS, Deloitte and Thomson Reuters.

Website: https://www.cavendishmaxwell.com/insights/

While homebuyer surveys have long been a common practice in the UK, Australia and New Zealand, its uptake is now slowly increasing in the UAE, especially among western expat buyers who understand their benefits

  

Since movement restrictions were lifted in 2020, the UAE property market has witnessed a busy period as investors and end users alike rushed to secure quality properties at attractive prices. A trend we have observed is the preference of buyers for ready properties over off-plan, given the uncertain economic environment and long wait times to see an off-plan project come to fruition. For buyers in the secondary market specifically, homebuyer surveys are particularly beneficial.

A homebuyer survey is a thorough inspection of the internal and external building elements, from fittings and fixtures to electrical and plumbing systems. The objective of the report is to give buyers a thorough understanding of the condition of the property they are keen to purchase. As the housing stock ages, properties may require a major replacement or overhaul of elements which may not be factored into the sales price.

Such surveys have long been a common practice in the UK, Australia and New Zealand. The uptake is slowly increasing in the UAE, especially with many western expat buyers who understand the benefits of the survey.

Homebuyer reports are a very small price for peace of mind. In the UAE, they cost approximately AED 1-3 per sq ft, depending on size, geographical location, and the level of mechanical, electrical, and plumbing (MEP) inspection. It generally is a tiny percentage of the total purchase cost and certainly not itself a determinant of the price.

The detailed report that the survey generates gives potential buyers not only an indication of the existing condition of the property but a budget cost to rectify defects, even on new homes, and therefore forms the basis for negotiations with the buyer. In practice, if the survey identifies work to be done, such as a new roof, replacement wiring or interior decoration, the report can at the least serve as a negotiation tool for the buyer. Evidence from multiple jurisdictions suggests that depending on market conditions, and hence the balance of power between buyer and seller, the cost of remedying defects prior to purchase can fall anywhere between 50-100 percent on the seller. From a valuation standpoint, the homebuyer report can be thought of as akin to an insurance contract.[1]

The impact of surveys on future value

Regarding the benefit of a homebuyer report solely in this ‘one-off’ or static way may however tell the whole story of the value proposition it offers. Behavioural economics suggests that what one might call the ‘audit trail’ of an apartment or villa will have a potential value impact derived from both refinancing and sales. Both mortgage valuers and buyers will undoubtedly appreciate the evidence of a previous report that always provides more detail than mortgage valuations, especially if it is combined with corroborated evidence that any work required has been done and relevant guarantees provided. A homebuyer report can therefore be thought of as an investment, akin to extending a lease or even a physical improvement. Examples in the UAE would be installing a swimming pool or properly landscaping the gardens and external areas. Putting in air-conditioning in an old house in Australia or insulation in the UK or New Zealand would be comparable examples.

It is too early, even for the UK, to produce statistical estimates of the value benefit of a homebuyer survey. To compare with a different market, such as that for second-hand cars, information is available. How much is the equivalent survey—a full service history of a used vehicle—worth? ICM Research in 2011 found that ‘a full service history can increase the value of a used car by 26 percent’[2]. In what might well be a pointer to the future for real estate, the ICM research suggested that without a full service history, one in three buyers would not even consider buying a vehicle. This should be a significant pointer for today’s buyers – omitting a homebuyer report now may have costly consequences when it comes to selling in the future.

Conclusion: a rising trend

The RICS HomeBuyer Survey[3], first introduced in the UK in 2009 and now available in the UAE from chartered surveyors, provides additional assurance to buyers beyond the mandatory surveys undertaken by mortgage providers.  As the secondary market increases as a proportion of overall sales throughout the Gulf and the property stock ages, the risks associated with a lack of due diligence increase, and the attractiveness of the homebuyer report is set to grow in response. It is not surprising that buyers are increasingly prepared to pay for better assurance of their future potential repair and maintenance expenditure.

However, in contrast to the vehicle market where service records are well-established, this value impact is not yet well understood. Homebuyer reports are therefore not yet costed on their full potential benefits. This information asymmetry may go some way to explaining why take-up of the homebuyer product has been steadily increasing among discerning buyers in the UAE market.

[1] Or alternatively conceptualised as a financial put option.

[2] AM Online (2011) Franchised service history valued by customers . 7 July 2011. Available at: https://www.am-online.com/news/2011/11/7/franchised-service-history-valued-by-customers/29976/ Retrieved 2 March 2021.

[3] RICS (2016) RICS HomeBuyer Report – Survey and Valuation. Available at: https://www.rics.org/globalassets/rics-website/media/upholding-professional-standards/sector-standards/building-surveying/homebuyer-report-survey-valuation-professional-statement-5th-edition-rics.pdf Retrieved 25 February 2021.

© Opinion 2021

Any opinions expressed in this article are the author’s own

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