Vendor surveys have the potential to benefit both sellers and buyers by smoothing and speeding up the property transaction process as well as avoiding sale collapses, says Paul Spaven
As the market starts to get moving, many of us are keen to see how the sector has changed and if the industry will make the most of opportunities to improve processes.
At the early stages of recovery, almost every property that comes to market will generate significant levels of interest. Traditionally, high levels of interest lead to protracted transactions and with the majority of assets being sold to raise cash and reduce borrowings, this is something that sellers will want to avoid.
As building surveyors we have traditionally been called upon by investors to carry out pre-acquisition surveys of properties once an interested party has been through an initial negotiation process with the current owner. However, we have been noticing a shift in ‘responsibility' in that we are now being called upon by the existing owner to carry out a vendor survey prior to the property even going to market.
Speaking to leading property investors, owners and lawyers, it is clear that this is being driven by the desire of the sector to streamline the transaction process and reduce the number of deals that collapse at late stages. Mark Cruddas, an investment manager at global real estate investment manager PRUPIM, says: "Vendor surveys are not suitable for every fund or asset, but they can have a valuable role to play in making the transaction process run more smoothly.
"When executing an investor's mandate to sell property, they offer both speed and transparency, and can prevent unwelcome delays and price chipping further down the line."
When preparing a property for market a vendor should already be making sure that all paperwork is in order and available to prospective buyers. The vendor-led due diligence approach simply takes this a step further by collating all information together, alongside a detailed building condition report.
For the vendor there is the opportunity to achieve maximum value in the shortest possible timeframe and demonstrate a proactive attitude to getting the property into good health for the buyer by taking a two-stage approach.
At the first stage the vendor can identify any potential deal breakers and highlight items that might need further investigation and, if possible, resolution by using a managed and co-ordinated team to carry out: surveys of the building and the building services; an initial environmental assessment; specialist reports and testing of the building physics; and title reviews.
This detailed analysis allows the vendor to make an informed judgement on the need for corrective action or management to improve the sale value of the asset, such as renovation or repair works, serving schedules of dilapidations on tenants to record their disrepairs or instigating statutory body researches to explore the environmental risk rating. Even matters such as retrospective licences for alterations can avoid future problems and delays.
The second stage is to review the initial survey, taking into account the new information, and produce a comprehensive package of fully warranted and assignable reports, including Energy Performance Certificates, that can be provided to the purchaser and funder. The reports will show an improved market proposition as a result of the time and effort expended to deal with the issues arising and identified in the first stage. This will also need to ensure that any gaps between the various disciplines are plugged so that the final vendor's report provides buyers with a complete review of the property or portfolio.
Cruddas adds: "Some institutions are unwilling to go down this [vendor surveys] route, as you can incur unnecessary costs as some purchasers will require their own particular surveying practice. So you need to ensure from the outset who the potential investors will be, and marry up this process accordingly."
Sale and leaseback
It is likely that the recent increase in large-scale sale-and-leaseback transactions is helping to fuel the shift towards vendor-led due diligence. Sale-and-leaseback deals are seen by property owner-occupiers as viable ways of releasing capital without increasing or jeopardising banking covenants, while still being able to occupy their buildings and continue to run their businesses as normal. It also allows for the potential of keeping part ownership of their assets by looking at fractional deals.
When there are many interested parties vying for a property, pre-acquisition surveys can cause considerable disruption to the occupiers because each party will send in their own surveyors, valuers, engineers and other specialists. The solution is for the vendor to instruct one detailed and warranted survey and provide it to all interested parties.
It is clear that there is still some scepticism from a number of institutional buyers. However, many are beginning to accept the facts presented by the vendor as long as it is clear that the surveys have been carried out by a completely independent and reliable source. It is essential for the reports to be clear, concise, neutral, objective and factual.
Equally, there needs to be no conflict of interest from the findings of the survey. Under the RICS code of conduct, a surveyor is obligated to point out anything which might create a professional conflict of interest. It is always advisable to use a surveyor from a firm that was not the incumbent responsible for carrying out the owner's original survey or subsequent asset management, and has no pecuniary interest in the sale of the property.
The inclusion of the letter of instruction to the survey team in the report will also add to transparency of the process, showing that they have been instructed to give a full account of the condition of the property.
One of the most time-consuming and expensive elements of a transaction comes when a deal stalls or breaks down following the results of buyer surveys, when inevitable negotiations over price occur. By carrying out surveys of the property before it goes to market, owners are able to begin the process with a realistic value set, based on full knowledge of the asset's condition. For the investor this provides the chance to make an early judgement on whether or not this is an investment opportunity worth pursuing.
In the end, though, there is still a role in the market for the traditional approach of pre-acquisition surveys instructed by the buyer, especially when it comes to small single assets.