Comparable Method & AVMs Flashcards
What are the SIX steps used when collecting comparable evidence?
- Search and select comparables (agent’s boards, online databases)
- Confirm / verify information with a party directly involved in the transaction
- Assemble comparables in a schedule
- Interpret comparables using hierarchy of evidence
- Analyse comaprables to form an opinion of value
- Report value and prepare file note
What guidance did the RICS release on using comparable evidence?
RICS Comparable evidence in real estate valuation, 1st edition, October 2019
What are the THREE categories of evidence outlined in RICS Comparable evidence in real estate valuation, 1st edition, October 2019?
Category A: direct comparables
Category B: general market data
Category C: other sources
What is the hierarchy of direct comparable evidence outlined in the RICS Comparable evidence in real estate valuation, 1st edition, October 2019?
- Contemporary, completed transactions of near-identical properties for which full and accurate information is available (may include the subject property)
- Contemporary, completed transactions of other, similar real estate assets for which full and accurate information is available
- Contemporary, completed transactions of similar real estate for which full data may not be available
- Similar real estate being marketed where offers have been made but a binding contract has not been completed
- Asking prices (with careful analysis)
What is the hierarchy of general market data outlined in the RICS Comparable evidence in real estate valuation, 1st edition, October 2019?
- Information from published sources or commercial databases
- Other direct evidence (e.g. indices)
- Historic evidence
- Demand/supply data for rent, owner-occupation or investment
What is the hierarchy of other sources outlined in the RICS Comparable evidence in real estate valuation, 1st edition, October 2019?
- Transactional evidence from other real estate type and locations
- Other background data (e.g. interest rates, stock market movement and returns which can given an indication for real estate yields)
What is the hierarchy of evidence and why does it exist?
- Open market lettings
- Lease Renewals
- Rent reviews
- Third Party determinations
- Sale and leasebacks
- Inter-company transactions
The hierarchy of evidence exists to place different weight on different type of transactions as some may be agreed under special conditions such as a sale and leaseback
Why is a rent review ranked below a lease renewal?
Because both parties have to agree to a rent whereas a lease renewal they don’t have to agree
What should you bear in mind when looking at auction results for comparable evidence?
Care needs to be taken when using auction comparables as there may be a special purchaser or an insolvency sale. The sale price is gross of costs.
What is meant by lotting and how should you deal with it when analysing your comparable evidence?
Lotting is a process that is commonly required when valuing larger rural estates or urban land holdings, or industrial units.
Assuming individual lots are capable of being sold separately the valuer will need to access whether there would be a difference between the value of the estate sold as a whole and the sum that would be realised if sold in individual lots.
The number of potential purchasers for large property holdings is usually lower than that for smaller units. This might mean that the value of the estate if it is to be sold as a whole is lower overall.
The use of comparable evidence must reflect the assumed circumstances of the sale.
What are automated valuation models (AVM)?
AVMs are a form of computer modelling and part of the science of valuation. They are viable where there is sufficient, accurate data which facilitates higher quality valuations and reduces exposure to litigation.
RICS Automated Valuation Models (AVM) Roadmap June 2021
What are the benefits of using an AVM?
- AVMs can reflect statistical analysis or nuances that may not always be observed by valuers
- Efficient in terms of time, money and resources
- Creates a level of certainty
- Removes the human element in relation to fraud risk
What are the challenges of using an AVM?
- The property is not physically inspected, so the assumption of average condition may be inaccurate or the property may have unique physical characteristics
- A reliable AVM requires a large amount of accurate market data, which is not always available
- Little consumer transparency, particularly in the residential market where consumers do not clearly understand the difference between a survey and a valuation
