Loan Security Valuation (Submission) Flashcards
What is a conflict of interest?
A situation in which an individual’s ability to act in one role is, could be, or is seen to be impaired or otherwise influenced by their involvement in another role or relationship.
You mention here that you followed VPGA 2 in carrying out loan security valuations, what does that state or include?
- Dealing with conflicts of interest
- Reporting procedures
Is there anywhere else where guidance can be found on loan security?
UK supplement
Can you talk me through some of those reporting procedures in VPGA 2?
As well as the minimum requirements of a valuation report:
- Must report if the property is suitable for mortgage purposes
- Any circumstances which the valuer is aware of that could affect price
- Comment on any environmental considerations
- Disclosure of any COI identified or arrangements agreed
- Where a special assumption has been used - any material difference between the report value with and without the special assumption
When carrying out a loan security valuation, what might differ from a normal red book valuation?
- Must report if the property is suitable for mortgage purposes
- Any circumstances which the valuer is aware of that could affect price
- Comment on any environmental considerations
- Disclosure of any COI identified or arrangements agreed
- Where a special assumption has been used - any material difference between the report value with and without the special assumption
Can you talk me through the different types of debt finance?
- Unsecured business loans
- Secured business loans
- Mezzanine finance (senior debt and equity)
- Overdrafts
- Bridging loan
What is debt financing?
Debt financing involves borrowing money from a lender, to inject funds into your business.
Wilbraham Mansions - explain to what a special assumption is?
Assuming something to be true and accepted as fact even though it is not true
Why is it important to check for a conflict of interest before accepting an instruction?
- It’s important to check to ensure fairness, objectivity, and to maintain integrity and to remain impartial
- Ensure that you are upholding RICS ROC and Bribery Act 2010
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How would you ensure the provision of high-quality valuations?
- By strictly adhering to the standards and guidelines outlined in the ‘Red Book’
- Keeping updated with market conditions
- Undertaking continued professional development
- Conducting thorough property inspections
- Remaining impartial and honest throughout
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Why is it important for lenders to receive high-quality valuations?
High-quality valuations are important for lenders as they provide a reliable basis for lending decisions and they help lenders identify potential risks.
How would you help lenders make an informed decision about the security of the loan provided?
- Ensure that you state whether the property is suitable for loan purposes
- Outline the strengths and weaknesses of the property
- Detail the market commentary
- Explain the valuation approach adopted + reasoning
- Explain any circumstances of which the valuer is aware could affect price
What is the current Bank of England base rate?
5.25%
In your example of Wilbraham Mansions, why did the Bank ask you for a valuation with a restricted marketing period?
They Bank wanted to understand the value of the property, if their client defaults of repayments. Then the bank would need to sell the property quickly.
In reference to VPGA 2 ‘Valuation of Interests in Secured Lending’, how do you ensure adherence to this application in your valuation?
- Ensure I carry out thorough conflict of interest checks
- Ensure that I include the minimum requirements of the Red Book valuation report but also ensure that include additional information required for a secured lending report e.g. ensure that I inform the client of the suitability of the property for mortgage purposes
Wilbraham Mansions - What was the assumption made during the valuation?
- Assuming full and immediate vacant possession
Wilbraham Mansions - What were the strengths and weakness of the property?
Strengths:
- Located within the sought after central London area of Chelsea/Belgravia border
-Situated within an attractive mansion block, with a resident
porter and lift access
- Good bedroom to bathroom ratio (3:3)
- Finished to a good specification inclusive of high quality kitchen and bathroom fittings
Weaknesses:
- The flat is situated on the less sought after first floor
- No access to additional amenities
Wilbraham Mansions - What was the special assumption made during the valuation?
The special assumption was that the property needed to be valued with a restricted marketing period of 3 months
Wilbraham Mansions - How did you prepare the Terms of Engagement for this valuation?
I prepared it line with VPS 1
Can you talk me through the Wilbraham Mansions valuation?
Checked competence, independence (no conflicts of interests), terms of engagement
Purpose: Loan security
Basis of value: Market Value
Desktop & Statutory Due Diligence checks before inspection
Inspected & measured
Searched, verified, collated comparable evidence & spoke with local agents
Adjusted comps
Reported on Value
Advised client on the Market Value of the property with and without the assumptions and special assumptions
CHECK WITH SERENA
Wilbraham Mansions - How did you establish the Market Value with and without the special assumption?
- I established the Market value of the subject property without the special assumption through comparable evidence and discussions with agents
- For the establishing the market value with the special assumption, I adopted discount of 10% of the Market Value without the special assumption.
- I came to the discount of 10% after having made discussions with a variety of agents about the value of a property alike the subject if it had to be sold in a restricted marketing period of 3 months.
How would you advise a client if a property was subject to a statutory tenancy?
- Value the property with FVP
- Deduct 25%-30% (which is based upon market norms)
Eaton Terrace - What are the main characteristics of a Georgian property?
- Sash windows
- Strong symmetry to the building, as well as the window and door placement
- Balanced interior layout
- Hip roofs, sometimes with dormers
- Grand entrances - often embellished with pediments, arches, and columns
- High ceilings, window headers, and crown moulding
Eaton Terrace - How did the property’s listed status impact on your valuation?
- All the comparable were listed too
- Didn’t really impact the valuation as the comparables were also listed
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Eaton Terrace - Did the condition of the property affect its valuation and if so, how?
Yes, the condition of the property did affect the property’s value as the other similar sized and type of properties in the area sold in far better condition.
Therefore, I had to adjust my comparable evidence to arrive at the subject property’s the property’s value.
I calculated the cost of redecoration and repair considering the current condition of the property, and then deducted it from the potential market value to arrive at the final property valuation.
What are the pros and cons of listed building?
- Listed buildings are often historic and the costs would be too high to duplicate it, it may also not be possible to duplicate the building
- Maintenance and repairs are going to be costly, there will be a restriction on materials that can be used.
Eaton Terrace -What strengths and weaknesses did you identify in the property?
Strengths
- Situated in prime Belgravia
- Eaton Terrace is a well-regarded address
- Attractive period house providing extensive family living
accommodation
- Good sized garden plus terrace
Weaknesses
- Eaton Terrace is a moderately busy residential road
- Arranged over many floors, with no lift
- Relatively narrow floorplate
- Relatively dark north east facing garden and terrace
- We would anticipate most incoming purchasers to undertake
some redecoration / refurbishment works
Eaton Terrace - How did you integrate the lenders’ specific requirements into your valuation?
- I ensured that the lender’s specific requirements were discussed prior to commencing the valuation and agreed and recorded in a signed and returned terms of engagement.
- I ensured that I followed these requirements throughout the instruction
Eaton Terrace - What was the Market Value and £psf?
- Around £8.5million
- £1,900 psf
Principal Place - How did you arrive at the conclusion that the market for the high-rise property had softened since 2020?
- Conversations with agents (“flat market has been
relatively subdued over the past 12 months”) - The increase in supply in other similar high-rise blocks, more choice for buyers
- Demand for flats in more urban areas fell during the pandemic and nowhere was shift this more acute than in London.
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Principal Place - Why did you conclude the property at Principal Place was suitable for loan security purposes?
- No structural issues
- Still provided collateral to bank
CHECK WITH PHILLIPA
Principal Place - Why might a property not be suitable for loan security purposes?
- A property that is not habitable
- A property that is too small
- A property in shell condition
Principal Place - Are you able to tell me what lenders view is on new build property differently to older stock and if so why?
- Lenders tend to adopt a lower LTV ratio
- Understand the new build premium and understand when someone moves in they will lose 5%
- As it will immediately lose value
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Principal Place - What factors contributed to the shift in buyer preference for private outside space?
- After the pandemic and lockdowns, factors such as increased desire for privacy, importance of outdoor living space
Principal Place - What are the strengths and weaknesses of this property?
Strengths:
- Luxury residential block
- Prominent location with excellent access to
amenities
- Finished to a good specification inclusive of
comfort cooling and high quality kitchen and
bathroom fittings
- Access to extensive onsite facilities
Weaknesses:
- Located on the doorstep of a busy junction
- Obstructed aspect directly onto a neighbouring office block
- No longer in new build condition
- No demised parking
Principal Place - What evidence supported your advice to the client that the property value had fallen?
Comparable evidence from the most recent resales in the subject block as well as resales locally
Principal Place - How did you establish whether this building would need an EWS1 Form?
- After my inspection of the property, I consulted the EWS1 form decision tree in the RICS Guidance Note: Valuation of properties in
multi-storey, multi-occupancy residential buildings with
cladding 1st edition, March 2021 - The building was constructed of a reinforced concrete frame construction, with curtain walling infill of glazing and metal panels, set beneath a series of flat roofs clad with a high performance
membrane - It was over 6 stories
- It also had balconies stacked vertically
- I came to the conclusion he building required a ESW1 Form
CHECK WITH SERENA
Principal Place - What was the outcome of the ESW1 Form?
The qualified professional confirmed that the building has a A2 status, “where external wall materials are unlikely to support combustion, there is an appropriate risk assessment of the attachments confirming
that no remedial works are required”. We are therefore satisfied that the building meets the necessary requirements.
Principal Place - What was your opinion on Market Value?
- Around £1.2million
- £1,400 psf
Principal Place - Can you elaborate on the current ‘unfavourable’ market conditions surrounding the high rise market?
There is an oversupply of flats in high rise blocks in the area, less demand due to shift in buyer preferences at the time. These factors have created unfavorable market conditions.
Principal Place - What impacts does the increased supply of new build accommodation in the area have on properties like the one you evaluated?
The increased supply of new build accommodation in the area has created more competition, which could potentially decrease the value and demand for the subject property.
Principal Place - What is curtain wall glazing?
An external wall cladding type comprising a frame or grid fixed to the face of a structure, usually at floor levels, with glass infill panels, with or without spandrel panels
Moore House - Can you explain how you identified the cladding on the building as ACM or similar combustible materials?
- Visual inspection
- Consulted RICS Guidance Note Valuation of properties in multi-storey, multi-occupancy residential buildings with cladding 1st Edition 2021
Moore House - You say that you advised your client that the property was not suitable for loan security because it did not have a satisfactory ESW1 form, why?
As without the satisfactory ESW1 form, the impact on Market Value is
unclear due to the unknown outcome of the EWS1 form, the cost and time to remediate any issues and ultimately the liability on the leaseholder.
As there is currently no satisfactory EWS1 form for the subject block and therefore demand will stem from cash purchasers only.
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Moore House - Can you provide more detail about the EWS1 form requirement and its significance?
- Follow RICS Guidance & decision to assess whether one is required:
- The criteria considers: height of the building, type of cladding + how much of it there is on the building and the presence of balconies and combustible material
- The EWS1 form provides the owner of a property with a way to assure a purchaser or mortgage provider that the fire resistance of an external wall system of a residential building has been assessed by a suitably qualified person.
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Moore House - Once discovering no EWS1 form was in place, how did you communicate this information to your client?
I communicated this clearly and immediately with my client
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Moore House - How did the impact of no ESW1 form affect the overall valuation of the flat?
The property was deemed unsuitable currently for loan security
purposes
Moore House - What is ACM?
Aluminium Composite Material
