Loan Security Valuation Level 1 Flashcards
What is included in a report for secured lending according to VPGA 2?
- Disclosure of Involvement identified in ToE or subsequently discovered, or arrangements agreed for avoiding conflict of interest. If valuer has no involvement, statement to that effect is to be made.
- Valuation Methodology Adopted
- If there is a Recent transaction of the Property, or provisionally agreed price disclosed, the extent to which that information has been accepted as evidence of value.
- Comment on the suitability for Secured Lending Purposes – bear in mind length and terms of the loan.
- Potential and demand for alternative uses, or any foreseeable changes in current mode of occupation.
- Disrepair or deleterious or harmful materials
- Environmental or economic designation
- Environmental issues – flood risk, historic contamination.
- Past, current and future trends – volatility in the market
- Current marketability of the interest and whether this is likely to be sustainable over the life of the loan.
- Details of comparable transactions relied upon.
- Sustainability and ESG factors – impact market influence
What is risk appetite?
About risk management
- Types of risk
- Amount of risk
- What return they want on their risk
- Do they have the funds to support if it fails?
Talk me through valuation
- Pre ample
- Competence
- Conflict
- ToE signed - Inspection
- Comps for Market Rent and Yield
- Report
- SWOT analysis
- Suitability for loan
- Advice to client
How did you advise to mitigate all weaknesses/threats outlined (for all)
What would you advise if the Experian check was high risk?
- Advise that an incoming purchaser may see it negatively
- Ensure they are comfortable with their risk appetite
- I have not had the experience in doing so, so I would check with a supervisor
According to VPGA 2 what are some examples listed in the Red Book that should be declined due to previous involvement?
- Longstanding professional relationship with prospective borrower/owner.
- If gain a fee from introducing the transaction to the lender.
- If there is a financial interest in the property
- When the valuer is retained to act in the disposal or letting of the completed development on the subject property.
How have you valued in accordance with UK VPGA 10?
What is the importance of Due Diligence for Loan Security?
Can provide an accurate valuation of the Market Value because you have:
1. identified risks
2. assessed market conditions
3. identified potential issues
Allows you to provide advise for lenders to make informed lending decisions
What types of due diligence are there?
Environmental considerations i.e Flood risk
Building safety (HRB/EWS1)
Planning
Repair and condition
Title and tenure
EPC
What is the definition of market value?
The estimated amount for which an asset or liability should exchange…
On the valuation date
Between a willing buyer and willing seller
Both acting knowledgably
In an arms length transaction
After proper marketing
Why is Market value the basis of loan security valautions?
What is largely adopted and stated within VPGA 2 (5 - bases of value and special assumptions) of the Global Red Book
What is a special assumption?
Do special assumptions need to agreed before instruction?
Yes - any special assumptions made in arriving at the value reported are to be agreed in writing with the client in advance and referred to in the report.
Does the special assumption need to mentioned in the report?
Yes - A comment must be made in the report on any material difference between the reported value with and without the special assumption
When might you report a special assumption alongside the Market Value?
- Planning permission has been granted
- New letting on given terms
- Special purchaser
- Unusual volatility in market to be discounted
- Lease or leases between connected parties to be disregarded
What is a special assumption?
A theory that is taken to be true and accepted as fact even though it is not true. E.g. planning consent/vacant possession.
Give an example of how impacts of due diligence may impact suitability of secured lending
If EWS1 was high risk it will impact value
- increased remediation cost
- difficulty securing finance
- impact on marketability
Impact lender risk
Give an example of how impacts of due diligence may impact suitability of secured lending
Incorrect planning permission may impact marketability
Increased costs incurred to get correct
What makes a good special assumption?
Relevant
Realistic
Valid
What wider impacts might be a threat to the loan security?
- Geopolitical impacts eg Ukraine war is having an impact on cost of materials/energy costs
- increased running costs impacting profit margins
Difference for Loan Security is why would you lend against it?
Essentially underwrites the due diligence
What are the 2 fundamentals that make a it suitable for loan security
- The ability to get their money back i.e Capital value covers the loan
- Needs to be let or good prospects of being let to generate income to service the interest of the loan
(you might not have the interest amount, but you want to (as a valuer) see that the property is being let.
Why is a high LTV concerning?
Because if you had to default on your loan and you needed to sell tomorrow ie in a distressed situation, you are probably not going to get the full value for it
Why is a low LTV good?
Less risk for the lender
Why do the banks lend money?
they want a return above the base rate
