5 Methods and PII Flashcards
Tell me what the 5 methods of valuation are.
- Comparable method
- Investment method
- Profits method
- Depreciated replacement cost / contractor’s method
- Residual method
Tell me about how you would value a building using the comparable method of valuation.
Comparable:
* Search and select comps
* Confirm / verify details
* Assemble comps in schedule
* Adjust comps using hierarchy of evidence
* Analyse comparables to form opinion of value
* Report value and prepare file note
Tell me about how you would value a building using the investment method of valuation.
Investment:
* Rent received or market rent
* Multiply by years purchase
* Note: importance of comparables for rent and yield
Tell me about how you would value a building using the profits method of valuation.
Profits:
* Annual turnover
* Less costs and purchases to get gross profit
* Less working expenses to get unadjusted net profit
* Less operators remuneration to get adjusted net profit
* This is EBITDA which is capitalised at yield to get market value
* Cross check against comparable sales evidence
Tell me about how you would value a building using the contractors method of valuation.
Depreciated Replacement Cost:
* Value of land in existing use (assume permission exists)
* Add current cost of replacing buildings plus fees, less discount for depreciation / obsolescence / deterioration
Tell me about how you would value a building using the residual method of valuation.
Residual:
* Calculate GDV (valued at current date using proposed scheme)
* Deduct build costs (abnormals, preliminaries, fees, contingency)
* Deduct marketing costs
* Deduct finance costs
* Deduct developer’s profit
* Output = market value of the land
How do you decide which valuation method to apply? When and why would you choose one of these methods?
- Comparable = most widespread method to assess market rent or market value. Challeges include lack of up-to-date evidence, existence of a special purchaser, lack of similar evidence
- Investment = used where thete is an income stream to value i.e. tenanted
- Profits = also used for income-producing properties, but typically referred to being specialist properties i.e. hotels, golf courses, petrol stations
- Depreciated replacement cost = used for owner-occupied or specialist property that is rarely sold on the open market i.e. oil refineries or airports
- Residual = used for land property with development potential
What is a years purchase multiplier?
The multiplier of the net annual income to determine the capital value
Give me an example of a good covenant and how this might impact a valuation.
Covenant strength is the market’s view of the quality, suitability and strength of the tenant’s covenant
What is PII?
Protects surveyors, clients, third parties against negligence claims when there is a breach of duty of care and a claim for damages arises
Why do surveyors need PII?
- Rules of Conduct states that work has to be covered by adequate and appropriate indemnity cover
- Mandatory for surveyors working in practice
- Firm protected from financial loss if it faces a claim it cannot meet
- Clients protected from loss a firm cannot meet
- Firms member is protected against claims from liability to pay damages
Tell me about the RICS requirements in relation to PII.
Policies must be underwritten by RICS approved insurer
* £100k or less turnover = £250k minimum PII
* £100-200k turnover= £500k minimum PII
* £200k or more turnover = £1m minimum PII
What is the SAAMCO cap?
If negligent, the valuer is liable for the amount by which the property was overvalued, but not the full loss of the lender on a failed transaction which may arise from a drop in the property market
Under the SAAMCO cap, is a valuer liable for losses due to a downturn in the market?
No, just the amount by which the property was overvalued
What would you do if you received a notice of a PII claim from a client or their solicitor?
