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Negative Equity - The Asbestos Perspective

Many of us will be aware of what negative equity is, particularly concerning property values. Here is the dictionary definition;

noun: negative equity

     potential indebtedness arising when the market value of a property falls below the outstanding amount of a mortgage secured on it. 

That's clear; the value of the property has reduced, and the amount owed on that property now exceeds the value. In general, this is a situation that occurs when the property market, for numerous reasons, suffers a downfall in value terms, or alternatively when mortgage or lending rates rise significantly, aligned with lower property values. 

In simple terms, one owes more than the value one will achieve upon the sale of that property, leaving a deficit, or negative equity situation, which one would always seek to avoid.

What if the negative equity commenced before the property was purchased? 

How is this possible, given the numerous specialists involved in procuring property on behalf of their clients? 

What steps can be taken to prevent such a situation from arising?

Many properties are purchased without a loan, but even those which are purchased with the aid of a loan are capable of having immediate negative equity; i.e. the price paid is more than the ultimate sale price. 

The valuation of a property is based on many factors. Once valued and purchased, it is hoped that the value at the start of the transaction will rise, and allow the owner to realise a profit from the eventual sale of that property. Of course, whether a loan was provided or not, you'll want to protect your investment.  

What could influence the value of a property aside from its' condition, location, and use?

Asbestos is a product that was used heavily between the 1880s and 1980s and should be assumed to be contained in all properties built pre-2000.  The financial effect asbestos can have on the value of a building is potentially catastrophic. 

For example, a commercial property purchased for £300,000 could conceivably have sprayed coatings and linings throughout, potentially costings £50,000 or more to remove. Could you have factored this in?  Could you have obtained advance knowledge of this financial risk?

Aside from that cost, there is the disruption to the business, the need to move production or services elsewhere whilst removal works are undertaken and the subsequent reinstatement cost for the products which were made with asbestos, and installing new products in their place.

Typically, asbestos materials will be significantly more expensive to remove than standard building products. A building containing asbestos will be more difficult to sell on, and more problematic to adapt. It is therefore entirely possible that having bought a commercial building without an Asbestos Management Survey the value could be adversely affected by asbestos being contained within it.  This is in addition to the fact that adapting it will also be expensive and disruptive to the business.

The second issue to consider is Underinsurance.  The sale value of a property is of course not related to the cost to rebuild it.  The Association of British Insurers (ABI) believe that around 80% of all commercial properties are Underinsured.  One of the reasons for such high levels of Underinsurance relates to inaccurate information about the construction materials which were used. 

Underinsurance could result in the Insurer paying out the Sum Insured; the maximum they are legally and contractually obliged to pay, leaving you with a substantial shortfall for the removal of asbestos which you may not have known about, or factored into the equation. 

Rebuilding values are calculated using the information collated from professionals who will know that asbestos can adversely affect the value of a property.  Many lenders ask for an Asbestos Management Survey report prior to releasing funds.  Quite often, this type of transaction, and the request for the asbestos survey report, is left to the last minute. The tendency is to procure the lowest possible cost for this survey, rather than interrogate the quality and purpose of it.

Lenders will almost always reject non-UKAS Accredited asbestos surveying reports. It is therefore critical that you compare Apples with Apples.

Obtaining a quotation for, and instructing an Asbestos Management Survey is relatively straightforward and relies on some key property information being provided, such as the property address, type of building, age, size, use, and accessibility to all areas. The Management Survey is only the start of the process, however, and additional elements, such as training (depending on the nature of your business) and monitoring of asbestos materials may be needed. 

As a consequence of the manner in which Professional Indemnity insurers view asbestos, most valuation surveyors have a paragraph in their valuation reports which protects them from complaints specific to asbestos.  Typically, their report will contain a disclaimer, or statement, to the effect that the purchaser should seek professional guidance relating to asbestos. 

It would therefore seem appropriate, both from the perspective of the Duty to Manage Asbestos and the prospect of negative equity, to obtain an Asbestos Management Survey prior to purchasing a non-domestic property.  This process of instructing an asbestos Management Survey will be crucial not only because the report is needed anyway, but also because you might be persuaded not to buy a particular property based on the findings of that report.

What about the domestic sector then?

Increasingly, house purchasers are wanting to know if the home they've bought is going to be a safe place to live, albeit conveyancing solicitors and mortgage providers are only rarely looking to obtain asbestos information as part of their lending criteria.  It isn't a major factor for most lenders and there is no Duty to Manage in terms of normal use of a privately owned home. 

That said, you would probably want to know if you were buying into potentially expensive asbestos removal works in the future.  Equally, your ability to adapt your home might be affected by unknown asbestos materials including loose-fill attic insulation, asbestos cement water tanks or roofs, and, of course, textured coatings containing asbestos materials.

Whilst the legislation at present doesn't include domestic properties in terms of the Duty to Manage, it's worth remembering that any works you undertake to a pre-2000 constructed domestic property (including adaptions, extensions, or demolition) will have to have a Refurbishment Survey prior to that work taking place.  If you knew the property had asbestos materials in it before you bought it, you might have considered avoiding that property, or negotiating a reduced price. 

The message is simple; it is possible that you will unwittingly stumble into negative equity by virtue of not knowing everything about the property you're planning to buy.  One of the factors which could influence the value of any property type is asbestos.

Contact us for impartial and prompt assistance on any survey type and for any type of property.

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