Conventional Valuation Methods And Their Application

Question 1

Name the conventional methods of valuation?

Answer 1

1) Comparative Method
2) Investment Method
3) Residual Method
4) Profits/Accounts
5) . Contractor’s/Depreciated Replacement Cost (DRC)

Question 2

What are the contemporary valuation methods?

Answer 2

Contemporary valuation methods are where discounted cash flow methods are used. (DCF)

Question 3

What makes a property transaction comparable to the property being valued?

Answer 3

If there are similarities in:

1) Physical Characteristics
2) Location
3) Use
4) Tenure (and lease terms if appropriate)
5) Time scale

Question 4

How many comparables are needed to produce a valuation?

Answer 4

Could be more than three. Maybe as many as it takes to get to the correct valuation figure.

Question 5

What is the longest time period before a valuation date that a transaction could be accepted as being comparable?

Answer 5

Say 3 to 5 years

Question 6

What do you understand by the expression of weighting of comparable evidence?

Answer 6

By make adjustments to the comparable evidence.

Question 7

What do you understand by the expression of hierarchy of evidence?

Answer 7

The hierarchy of evidence is as follows:-

1) Recent sales/lettings
2) Similar properties
3) Similar size (residential)

To be completed.

Question 8

What is interpolation of comparable evidence?

Answer 8

Interpolation is calculating a value that lies between two extreme points.

Question 9

What is extrapolation of comparable evidence?

Answer 9

Extrapolation is calculating a value that lies outside two extreme points.

Question 10

What is the purpose of zoning?

Answer 10

To carry out valuations of shops based on net internal area.

Question 11

What is the standard Zone depth?

Answer 11

Common zone depth is 6.1m or 20ft.

Although London May use 9.14m (30ft)

Question 12

How would you arrive at the Market Rent the first floor of a retail unit?

Answer 12

The first floor area is calculated as a tenth (1/10).

Question 13

How would you arrive at the market rent of a retail unit with a return frontage?

Answer 13

Options are:

1) To zone back from both frontages.
2) allow a percentage uplift say 5%
3) . All of the unit could become Zone A if both frontages have an even pedestrian flow.
4) . A percentage reduction for loss of shelving and display racks.

Question 14

How would you value a shop unit for review rent with frontages on two roads I.e. it is a through unit?

Answer 14

Can result in halving back from both frontages at the same or different Zone A rate(s).

Question 15

How would you determine the Market Value of an investment property let on Internal Repairing terms?

Answer 15

By using the investment method and making allowance for External repairs, insurance and management.

Question 16

What factors make up the all risks yield?

Answer 16

The factors that make up the all risks yield are:

1) . The construction (age, design, specification)
2) . The tenant covenant strength
3) . The rent (market, over-rented, under-rented)
4) . Unexpired lease term
5) . Other lease terms
6) . Anticipated rental growth (location)

Question 17

What is the market capitalization rate?

Answer 17

The market capitalization rate is the yield

Question 18

How would you value a green-field site with planning permission for residential development?

Answer 18

By using either a residual valuation or discounted cash flow method.

Question 19

Describe how you would carry out a residual valuation?

Answer 19

GDV (Gross Development Value)

Less All costs including interest and developers profit

= Land Value

Question 20

What costs did you deduct (are deducted) in your/ a Residual Valuation?

Answer 20

1) . Demolition
2) . Construction
3) . possible contamination
4) . Finance
5) . Contingency
6) . Agents/legals (professional fees)
7) . Acquisition costs
8) . Developers profit

Question 21

How did you calculate (would you calculate) developers profit in your / a Residual Valuation?

Answer 21

Can be either a percentage of total costs or a percentage of GDV.

Question 22

What are the usual acquisitions costs of a development site?

Answer 22

Legal Fees including VAT and Stamp Duty Land Tax.

Question 23

What is a ransom strip?

Answer 23

A piece of land that provides access to a development site.

Question 24

What is random value?

Answer 24

Ransom value is normally 1/3 of the increase in value of the development land resulting from the access.

Question 25

What does the case of Stokes v Cambridge mean to you?

Answer 25

A CPO case of farmland (12.6 acres)

Agreed that Planning permission for industrial development must be assumed.

Subject to satisfactory access and provision of estate roads.

Land which could provide satisfactory access was a track (0.7 acres)

Value of land deferred for 3 years circa £68,000

Less developers profit 15% plus costs of roads, sewers, fencing, consents and contingencies plus existing use of land l.

Increase in value due to access circa £30,000

One third circa £10,000

Open market value of land circa £20,000

Question 26

What is the Profits Method also known as?

Answer 26

The profits method is also know as the accounts method.

Question 27

Name three property types that would be valued by the Profits Method?

Answer 27

Golf Course

Cinemas

Casinos

Hotels

Public houses

Question 28

Why are certain properties valued by the Profits method?

Answer 28

Because there is no direct comparison method or investment method which is possible.

Question 29

Explain the basic approach to the Profits Method?

Answer 29

Turnover excluding VAT

Less

1) Purchases
2) Wages
3) Heating/lighting
4) Repairs/Decoration
5) Insurance
6) Rates
7) General Expenses

= Net Operating Profit

Question 30

What valuation checks can be carried out on a valuation produced by the Profits Method?

Answer 30

1) Capitalization of the gross turnover excluding VAT
2) The adjusted net profit by the return on capital.
3) unit prices per seat
4) price per bedroom (hotels, rest homes, nursing homes)

Question 31

When is the contractors method used in practice?

Answer 31

As a method of last resort used for specialized properties.

Question 32

What is another name for the Contractor’s method?

Answer 32

DRC (Depreciated Replacement Cost)

Question 33

Explain the basic approach to the Depreciated Replacement Cost Method.

Answer 33

Cost of MODERN building

LESS Depreciation

= Net Replacement Cost

PLUS Site Value

= Value as Existing

Question 34

Explain what is included in a Reinstatement / Replacement Cost For Insurance Purposes?

Answer 34

1) Demolition
2) Shoring up and weather-protection of adjoining buildings.
3) Rebuilding in accordance with current Building Regulations.
4) Professional Fees

Question 35

How would you value a property for which there are no comparables?

Answer 35

Check to see if in investment method can be used.

Resort to residual if valuing land

Profits method for leisure properties

Final resort is to use the contractor’s method/DRC method.