Loan Security Valuation

Question 1

What are the key points of the RICS Guidance Note Risk, liability and insurance, 1st edition 2021?

Answer 1

• Liability caps - RICS recommends regulated firms use liability caps where legally permissible to ensure fair allocation of risk and reward between members and clients
• Third party reliance - make clear in the advice that their advice may only be relied upon by the named client
• Terms and conditions - 3 terms that should be considered from a risk perspective in the context of every instruction that a surveyor undertakes: scope of work, basis on which the fee will be calculated and the liability cap
• PII - ensuring correct PII cover

Question 2

What section in the Red Book refers to secured lending?

Answer 2

VPGA 2 - Valuations for secured lending
VPGA 10 (UK Supplement)

Question 3

What factors affect risk for loan security?

Answer 3

• Levels of demand
• Age and condition of properties
• Investment property - tenant covenant strength and rent
• Location
• Micro and macro-economic conditions
• Alternate use value

Question 4

When might a property not be suitable for secured lending?

Answer 4

• Short leasehold interest
• High flood risk
• High contamination risk
• Structural problems
• Property is uninhabitable

Question 5

What does the Red Book VPGA 2 state about conflicts of interest?

Answer 5

Valuers must declare any potential conflicts of interest - personal or professional - to all relevant parties

Question 6

What 5 broad areas does VPGA 2 cover?

Answer 6

a. Conflict of interest
b. Taking instructions and disclosures
c. Basis of value
d. Special assumptions
e. Reporting and disclosures

Question 7

What must you include in a secured lending report in accordance with VPGA 2?

Answer 7

a. Disclosure of any previous involvement or any arrangements agreed for avoiding a conflict of interest
b. Comment on suitability as security
c. Whether any deleterious materials have been noted
d. Comment on any flood risks or historic contamination
e. Past, current or future trends and volatility in the local market

Question 8

What is a liability cap?

Answer 8

A contractual agreement that a client can only make a claim up to the amount agreed, even if the law would otherwise award a greater sum in damages.

Question 9

How would a lender recover their loan if things go wrong?

Answer 9

• Receivers steps in as middleman between creditor and debtor
• They facilitate the payment of the loan through sale, collection etc
• Chose the best method of debt recovery

Question 10

How does PII work for secured lending valuations?

Question 11

What is contained within a secured lending instruction?

Answer 11

• Property
• Bank
• Bank’s Customer
• Loan details (LTV - term)
• Red book basis
• Timescales
• Environmental report
• Fee

Question 12

What is a service level agreement (SLA)?

Answer 12

• Agreement defining the level of service you are expectant of
• Lays out metrics by which service is measured
• Includes remedies or penalties should it not be achieved

Question 13

What does VPGA2 say about dealing with conflicts?

Answer 13

• Must disclose any previous involvement within the last 2 years, with borrower or property
• Valuer’s decision whether to accept instruction
• Should there be a conflict, arrangements to manage this should be made

Question 14

What does VPGA2 say about reporting procedure?

Answer 14

• Valuer must provide in addition to standard valuation proced