Valuation Flashcards
1
Q
Tell me what are the 5 methods of valuation.
A
Comparable, Investment, Profits, Depreciated Relpacement Cost, Residual
2
Q
Tell me about how you would value a building using the profits/contractors/investment/comparable/residual method of valuation.
A
(Comparable) Terms of engagement, research, inspect, adjust evidence, give heirarchy of evidence
3
Q
What is PI Insurance (PII)?
A
Professional Indemnity Insurance, covers the cost of compensating clients for loss or damage resulting from negligent service
4
Q
Why do surveyors need PII?
A
Mandatory requirement of RICS surveyors, it protects clients and surveyors against financial impact of mistakes
5
Q
Tell me about the RICS requirements in relation to PII.
A
Mandatory, minimum cover levels are dictated by the firm size, turnover up to £100k needs a minimum of £250k cover, up to £200k is £500k cover and £200,001 and over is £1m
6
Q
What is run off cover?
A
Provides insurance cover once a firm has ceased trading, also a mandatory requirement
7
Q
What is the Red Book?
A
Mandatory document that combines professional, technical & performance standards to deliver high quality valuation advice that meets the requirements and expectations of clients, governments and the public.
8
Q
Why does the Red Book exist?
A
Promote and support high standrards in valuation work and offers useful resource for valuation users, gives mandatory practices for registered valuers and ensures a consiten approach
9
Q
Tell me about a factor which may impact value.
A
Location - position in relation to local services/schools and or desirability of the area can impact on value
10
Q
What is your duty of care as a surveyor when undertaking a valuation?
A
You owe a duty of care to the client, that you will complete the instruction with care and skill
11
Q
Why is independence and objectivity important when valuing?
A
It is important that my opinion and advice is free from bias due to the impact on clients, the wider market and trust in the profession plus it is used for financial decision making
12
Q
Is there a separate UK Red Book?
A
There is the Red Book, UK Suppliment published in July 2019
13
Q
When was the Red Book last updated? Does this differ to when IVS were last updated? What changes were made?
A
New Redbook was published in November 2021 and came into effect from January 2022, it reflects changes to the IVS and measurment rules, adds more detail on Terms of Engagement when exceptions are used, adds more detail on sustainability, sample report wording was removed and make it clearer and easier to use. The new IVS came into effect at the same time
14
Q
Which do you follow - the latest IVS or the Red Book Global?
A
The Red Book incorporates the key guidance in the IVS
15
Q
Which sections of the Red Book are mandatory and which are advisory?
A
The VPS 1-5 & PS 1-2 are mandatory, the VPG-A’s 1-10 are advisory
16
Q
What does PS1-2/VPS1-5/VPGAs relate to?
A
PS1 is compliance with standards where a written valuation is provided, PS 2 - Ethics, competency, objectivity & disclosures,
VPS1-5 are mandatory requirements and are performance standards, 1 is Terms of engagement, 2 is inspections, investigations and records, 3 is valuation reports, 4 is basis of value, assumptions and special assumptions, 5 is valuation approaches and methods
VPGAs are application guidelines for specific circumstances
17
Q
What type of advice does the Red Book cover?
A
VPG-A offer advice on the practical application of the standards in specific contexts
18
Q
If you provide preliminary advice / draft valuation report, what should you state in writing to your client?
A
You must state the opinion is provisional and subject to completion of the final report, provided for the clients internal purposes only and it is not to be published or disclosed.
19
Q
What type of valuations might be relied upon by a third party?
A
Managers of a property fund, publication in a companies accounts, prospectuses etc
20
Q
Tell me what the definition of MR/MV/investment value/fair value?
A
MV/MR The estimated amount for which an asset or liability should exchange on the valuation date between a willing buyer and a willing seller in an arm’s length transaction, after proper marketing and where the parties had each acted knowledgeably, prudently and without compulsion IV The value of an asset to the owner or a prospective owner for individual investment or operational objectives FV The price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date.
21
Q
What is the difference between an assumption and a special assumption?
A
An assumption is made where specific investigation by the valuer is not required in order to prove that something is true.
A special assumption is an assumption that either assumes facts that differ from the actual facts existing at the valuation date or that would not be made by a typical market participant in a transaction on the valuation date.
22
Q
What sources of information would you consider when preparing a valuation report?
A
The inspection, online research, documents provided by the vendor, market data
23
Q
If you have previously valued an asset, do you need to make any additional disclosures and what might they be?
A
Yes, need to disclose to all parties and obtain prior consent to continue, you need to disclose the nature of the relationship with the previous client and previous involvement, rotation policy, time as signatory and any proportion of fees
24
Q
If your firm is too small to have a rotation policy or valuation panel, what else can you do to ensure objectivity?
A
Arrange for a valuation to be reviewed by another member at periods of no greater than seven years when the same asset is being valued on a regular basis to demonstrate that objectivity is being followed
25
When might a conflict of interest exist in relation to a valuation instruction?
Where there is a pre-existing relationship with either party, where you have acted for the client within the past 12 months, where a referral fee has been payable, has a financial interest in the asset etc
26
What must be included in your terms of engagement / valuation report?
Covered in VPS 1, must state, who the valuer is and their status, the valuation date, identify the asset to be valued, valuation currency, purpose of the valuation, who the users of the report are and if it can be shared, basis of value, any investigations, basis of fee
27
What is a restricted valuation service and can you provide one?
A client may require a restricted service; for example, a short timescale for reporting may make it impossible to establish facts that would normally be verified by inspection, or by making normal enquiries; or the request may be for a valuation based on the output of an automated valuation model (AVM). Note that the provision of an AVM-derived output would be regarded as the provision of a written valuation for the purpose of these standards. Accordingly valuers should be alert to, and aware of, the implications of either accepting or manually modifying an AVM output. A restricted service will also include any limitations on assumptions made in accordance with VPS 2.
28
How do you deal with limitations on inspection or analysis?
The valuer should consider if the restriction is reasonable, with regard to the purpose for which the valuation is required. The valuer may consider accepting the instruction subject to certain conditions, for example that the valuation is not to be published or disclosed to third parties. If the valuer considers that it is not possible to provide a valuation, even on a restricted basis, the instruction should be declined. The valuer must make it clear when confirming acceptance of such instructions that the nature of the restrictions and any resulting assumptions, and the impact on the accuracy of the valuation, will be referred to in the report.
29
Can you revalue a property without inspecting?
Yes but only when you are satisfied that there have been no material changes to the property , that you have previously inspected it and that this assumption is included in the report
30
What RICS guidance relates to the use of comparable evidence?
Guidance Note: RICS Comparable evidence in real estate valuation October 2019
31
What is an internal valuer?
Valuer that is in the employ of the firm that owns the subject asset or accounting firm compiling the firms financial records/reports
32
Can an external valuer provide an internal purposes valuation?
Yes, but there will need to be clear Terms of Engagement and clear instructions about non disclosure to third parties
33
What happens if market conditions change between the valuation date and report date?
This should be mentioned in the report and brought to the attention of the client that markets are subject to change
34
Is special value from a special purchaser reflected in MV?
No, becauase the specuial value reflects a purchaser where the asset holds value above that of the rest of the market
35
Where does the definition of fair value come from?
IFRS 13- Internation Financial Reporting Standards
36
Does fair value differ from MV?
Yes, fair value is a measure of an assets worth and does not normally account for market forces but market value is the price of an asset in the marketplace but both figures will normally be the same
37
When is fair value used?
Usually used in financial reporting
38
What are the 3 approaches under VPS5?
Market approach - comparing against other or similar assets
Income approach - capitalisation or conversion of future income
Cost approach - purchaser will pay no more than the cost of obtaining one of equal equity
39
What is the Valuer Registration Scheme?
RICS scheme, which is a quality assurance mechanism that monitors RICS registered members who carry out valuations within the scope of the Red Book
40
Are there any instances where certain sections of the Red Book may not apply? What are these and which sections don’t apply?
Yes, PS 1-2 will always apply but VPS 1-5 may not in certain circumstances, for example when providing advice on insurance re-instatements or for internal purposes only where no third parties will see the result, when acting as an expert witness, when providing agency or brokerage advice or during negotiations or litigation where the valuer is acting as an advocate
41
What is the basis of value under UK GAAP FRS 102?
Fair Value, the amount at which an asset could be exchanged on that date between 2 knowledgable, willing parties
42
What is a SORP?
Statement of Recommended Practice
43
When would you use EUV?
Existing Use Value - Existing use value (EUV) is to be used only for valuing property that is owneroccupied by an entity for inclusion in financial statements.
44
What is the definition of EUV?
Existing Use Value - descirbes what a property is worth in it's current form and it being continued to be used in it's current purpose, like a social housing property, the value reflects it being continued to be used for social housing
45
What additional criteria apply to secured lending valuations?
VPGA 2 applies in this case, additional criteria may be dependant on the lender, market value is the usual methods, it identifies the price at that particular time. Must include a report date, inspection date and valuation date as well as a statement on conflict of interest and a statement on PII
46
What information should you specifically request for a secured lending valuation?
Any alternative requirements of the lender, identity of the lender, any recent transaction on the property or agreed price, extent of marketing, any incentves, what lending facilities there are.
47
What is a regulated purpose valuation?
Valuations for inclusion in this such as prospectuses, financial reports, takeovers and mergers etc. Found in the Red Book UK supplement
48
What additional disclosures must be made for a regulated purpose valuation?
Fees paid to the valuer from the client in the preceeding financial year and if it is likely if this figure will increase in the next year
49
What is the basis of value for a statutory valuation?
They are for capital taxation purposes and will usually use market value
50
What might a statutory valuation relate to?
Capital gains tax, inheritance tax, stamp duty
51
What is the definition of the statutory basis of valuation?
Price it would fetch if sold in the open market at that time based on the whole of the asset is to be sold
52
What is a yield?
It is a rate of annual return you are likely to get on your investment, it is calculated by expressing a years rental income as a percentage of how much the property cost.
53
What is a Net Initial Yield?
It is the ratio of net rental income and gross purchase price of a property
54
What is a reversionary yield?
The yield that should be achieved if the passing rent adjusts to the level of the estimated rental value
55
What is an equated yield?
Yield on a property investment which takes into account growth in future income
56
What is an equivalent yield?
Equivalent Yield (true and nominal) is a weighted average of the Net Initial Yield and Reversionary Yield and represents the return a property will produce based upon the timing of the income received. The true equivalent yield assumes rents are received quarterly in advance.
57
How would a yield reported from auction differ from a Net Initial Yield?
Taxation or pruchase price affecting the yield figures? Not included the purchase fees?
58
What purchaser’s costs do you deduct from a valuation?
Stamp duty, legal fees, agency fees
59
How would you value a property in uncertain market conditions - does the Red Book give any guidance?
Yes, VPGA 10 covers market uncertainty, you would provide a valuation but comment on the uncertainty and your level of confidence in it
60
How could you value a long leasehold interest?
Usually on the basis of fair value for a lease over 50 years
61
How does a term and reversion and DCF differ?
DCF is discounted cash flow, in DCF the forecasted cash flow is discounted back to the valuation date to give a present value based on it's future economic benefits.
Term & Reversion is a variation of DCF and is used when existing lease periods are due to expire, the new lease will have new contract terms so the current rate will probably differ from the market rate, if that's the case it's said to have revisionary potential. So the term rate is separated from the revisionary rate.
T&R will use different capitalisation rates
62
What is the difference between a growth explicit and a growth implicit yield?
An ‘implicit method’ of valuation consists of using a capitalisation rate and current market rent based on comparable evidence. The capitalisation rate is often referred to as an ‘all risks yield’, with all risks hidden in the selected yield.
Explicit method - the expected cash flows are determined and discounted at a target rate of return.
63
Give examples of each of these types of yield.
Not something I have done, I would refer to RICS practise standards note on Discounted Cash Flow for commerical property investments
64
How would you value an under/over rented investment property?
Not something I have done but I would refer to guidance on iSurv
65
When would you use a dual rate investment calculation?
When you are looking at an investment for a leasehold property and want to set aside some of the annual rent in a sinking fund to account for the reduction in the length of the lease.
66
Where can you find yield evidence from?
Comparables? Guidance on iSurv
67
What is the hierarchy of evidence?
Weight given to the evidence used, with 1 being direct comparables, 2 being market data and 3 is other sources such as other background date like interest rates
68
What would you do if comparable evidence was limited?
Widen the search area, make adjustments to available data and expand info to other property types, include it in your report
69
What is NPV?
Net Present Value -Net present value is the present value of the cash flows at the required rate of return of your project compared to your initial investment
70
What is IRR?
The internal rate of return (IRR) is a metric used in financial analysis to estimate the profitability of potential investments.
It is calculated by taking the difference between the current or expected future value and the original beginning value, divided by the original value and multiplied by 100
71
What is a term and reversion?
The term-and-reversion approach is a method to value real estate for which the existing lease contracts are expected to expire
72
What is a hardcore and topslice?
The theory with the layer method of valuation is: It capitalises present rent (hardcore rent) into perpetuity. Then it capitalises the top slice rent (difference between the market rent and the hardcore rent) that will start from reversion into perpetuity, this defers it as is appropriate
73
What is a Discounted Cash Flow (DCF)?
Discounted cash flow (DCF) is a valuation method used to estimate the value of an investment based on its expected future cash flows. DCF analysis attempts to figure out the value of an investment today, based on projections of how much money it will generate in the future.
74
What is a short-cut DCF?
The Short-cut DCF method is based on a model developed by Professor Neil Crosby of the University of Reading (and ultimately based on earlier work by Wood and Greaves). The RICS have encouraged use of the method in appropriate circumstances.[8] The Short-cut DCF is an adaptation to property valuation of the DCF method, which is widely used in finance
75
When would you use a DCF?
Discounted cash flow DCF analysis determines the present value of a company or asset based on the value of money it can make in the future so is used mostly when valuing property for investments.
The assumption is that the company or asset is expected to generate cash flows. In finance, it is used to describe the amount of cash (currency) in this time frame.
76
What are the advantages of a DCF?
It's detailed, gives a good comparision of differing assets with differing timeframes by giving a comparsion at a set moment in time
77
What are the disadvantages of a DCF?
It can be very sensitive to small changes and adjustments and can be quite complicated
78
What is a YP/PV/YP in perpetuity?
Years Purchase (YP), single rate or the Present Value (PV) of £1 per annum receivable at the end of each year after accounting for a sinking fund to accumulate at the same rate of interest as that which is required on the invested capital and ignoring the effect of income tax on that part of the income used to provide the annual sinking fund instalment
79
What is marriage value?
The value created by combining one or more assets which are worth more together than when sold separately. It is also used in Leasehold enfranchisement as the property becomes more valuable with an extension of the lease when the existing lease being extended is less than 80 years. Usually then 50% if the increase in value is paid to the freeholder, however Government consultation makes it look like this payment requirement might be scrapped
80
When would you include an element of hope value in a valuation?
When looking at a property where improvement is likely but planning approval has not yet been granted
81
How would you value a ransom strip?
It's a small piece of land that's been retained once a larger piece has been sold and can prevent access for developers etc. Set by the Stokes Vs. Cambridge case. The owner is entilted to 1 third the increase in value of the adjacent land.
82
How does market value differ to investment value/fair value?
Fair value refers to the actual worth of an asset, which is derived fundamentally and is not determined by the factors of any market forces. Market value is solely determined by the factors of the demand and supply, and it is the value that is not determined by the fundamental of an asset.
83
What is a dual capitalisation rate and when would you use one?
Putting asside some of the income into a sinking fund to account for the loss of value of the diminishing leasehold, the sinking fund will attract an interest rate of it's own, which is the second rate on top of the leasehold income.
84
Is the profits/DRC method used for specialised or specialist property?
Profits is used for specialist property like hotels and cinemas, DRC is commonly used for property which may not regularly be on the market, or where there is no income associated with it such as churches or libraries.
85
What type of properties would you use the profits method for?
Specialist ones like hotels, petrol stations and cinemas where their worth is closely linked to their trading potential and have been designed for a specific use
86
When would you use the profits method?
When valuing a hotel or cinema where spacing/zoning wouldn't work
87
What is intangible goodwill?
It is an excess in the value, above the total of the value of the assets and liabilities
88
What is turnover / gross profit / net profit?
The total of the income made by a business
Total of sales, less cost of sales before tax
Total left over after cost of sales and tax is removed from turnover
89
What are the steps to providing a profits valuation?
Work out the fair maintainable turnover and fair maintainable profit, look at future operating potential while ignoring the skill of the current occupier, the FMOP is then capitalised at an appropriate rate of return reflecting the risk and reward of the property and it's future earnings potential, taking into account comparable evidence
90
What is Fair Maintainable Turnover?
It is the level of trade an asset/business is expected to achieve if it is operated in a reasonably efficient way. It assumes the property is well equiped and in good repair
91
What is a Reasonably Efficient Operator?
a valuer should disregard any impact on turnover and profit attributed solely to the personal skill, reputation, and expertise of the existing owner.
92
Does the assessment of the REO (reasonably efficient operator) include personal goodwill and trading potential?
No, it removes elements related to one individual from the equation
93
What is personal goodwill?
Personal goodwill is an asset that is owned by an individual, not the business itself. It is generated from the personal expertise or business relationships of an individual employee or shareholder.
94
What is trading potential?
It is the trade that could be achieved at an optimum output, assuming the business is well run
95
How do you calculate the tenant’s proportion of rent in a profits valuation?
It can typically be done by calculating the net profit then dividing that figure by 50% to give a rental figure
96
What is EBITDA?
Earnings before interest, tax, depreciation, Amortization
97
What is Fair Maintainable Operating Profit?
It is the level of profit an asset/business is expected to achieve if it is operated in a reasonably efficient way. It assumes the property is well equiped and in good repair
98
How do you calculate the divisible balance?
It is Gross Profit minus the operating expenses
99
What accounts information would you want to review for a profits valuation?
The financial accounts for at least the last 3-4 years
100
Do RICS provide any guidance on RLVs or valuing development property?
Yes, the Guidance Note, Valuation of development property 2019
101
What is an RLV?
Residual Land valuation, finding the value of a piece of property or land with potential for development. It works out the value by removing the builders costs and profit from the estimated sales achieved by selling the end properties
102
What is a development appraisal? How do they differ? (from RLV)
A development appraisal assesses the ability of a scheme to make sure it is financially viable, the RLV is a method to set the value of the land to be developed
103
How else can you value development land?
The comparable method if there are suitably similar sales to base your calculations on
104
What is the basic process of undertaking a RLV/development appraisal?
Assess land and project, work out GDV, work out expenses and profit required then take the development costs from the GDV to leave a value for the land
105
What does a development appraisal show?
an objective financial viability test of the ability of a development project to meet its costs including the cost of planning obligations, whilst ensuring an appropriate site value for the landowner and a market risk adjusted return to the developer in delivering the project
106
What are the key things you need to consider when appraising /inspecting a development site?
Characteristics of the site and surrounding area, likely demand for any development and if its likely to obtain planning, plus any restrictions such as access, slopes etc
107
What else should you consider in appraising a development site?
Safety for inspection, what was the past use of the site and likihood of contamination, waste management, rights of access, mineral extraction rights
108
Tell me about your due diligence when undertaking a development appraisal.
You want to look at things such as rights of way, contamination, planning restrictions, site restictions, access, TPO's, site address, right to light etc
109
What sources of information do you use when undertaking a development appraisal?
Many, past projects, geotechnical information, market sales
110
How can you assess development potential?
You can look if the scheme is profitable or at least to cover its costs, is there demand for the finished project, is the site suitable for development or do restrictions make it unviable
111
What is GDV/NDV?
Gross development value is the value achieved by selling the houses at the end of the project, Net development value is the figure left over after selling the houses and deducting the builders costs and profit
112
How do you calculate GDV?
Find a value for the finished properties, usally by comparable method to find the market value
113
What do development costs include?
Site clearance, labour and material costs, purchase price of the land, builders profit
114
Where can you source build costs from?
BCIS can be a useful tool to check accuracy, as can schedules of rates or information from a QS
115
What are typical finance costs?
Loans and interests on them, plus fees for arranging the finance
116
What would you apply finance costs to and on what basis?
Mostly through discounted cash flow calculations, you'd want to include it in fees and expenses in a residual appraisal for an accurate outcome
117
What is an S curve?
A way of showing costs through the lifecycle of a project, as they are unlikely to come in on a straight line basis as costs are likely to be lower in the early stages of a project but increase as construction progresses
118
What do holding costs typically include?
They are the costs of owning the site and might include interest on finance, maintenance costs, security and taxes payable
119
How do you typically calculate developer’s profit?
It is typically worked out as a percentage of the development costs, usually around 20%
120
What are some typical inputs (and %/£) in a RLV?
Costs of labour and materials, selling fees, design costs, builders profits. Selling fees can often be between 1-2%
121
What other criteria might be assessed in terms of performance measurement for a RLV?
How quickly the property could sell, it's ability to cover it's costs, cash on cash returns
122
What are the advantages/disadvantages of a RLV?
Advantages are that it is an effective way of determining a value of a piece of land or property, especially when there are no comparables available, it can also be a way of determining likely build costs to see if the scheme is worth it. The disadvantage is that they can be very sensitive to small changes in the inputs which can give very different results
123
What is included in the development programme?
Programmes describe the sequence in which tasks must be carried out so that a project (or part of a project) can be completed on time. Programmes will often identify: Dates and durations allocated to tasks. A critical path (the sequence of critical tasks upon which the overall duration of the programme is dependent).
124
What is CIL?
The Community Infrastructure Levy (CIL) is a levy that local planning authorities can charge on certain types of new development in their area. It can fund roads, parks, new schools etc
125
What is S106?
It is a legal agreement between developers and the local authority during developments. When the developments are deemed to have a big impact on the local area the local authority will place obligations on the developer to include improvements to the local areas as part of any approvals. This typically includes social or affordable housing in the development, improvements to roads, town centres or education
126
What are the differences between CIL and S106?
A CIL is a community infastructure levy, it is a charge that the authority will then use to spend on local infastructure. The 106 usually places the emphasis on the developer doing the work themselves
127
What is CIL charged on?
Community Infrastructure Levy
On developments of new houses, for extensions over 100m2 and new retail buildings over 100m2
128
What is a Monte Carlo simulation?
It is a mathmatical simulation that generates random variables to model risk and uncertainty
129
What is a sensitivity analysis?
It is a look at how costs in the project can be subject to change to see what impact they will have on the project to see if it is still worth it or if changes need to be accounted for or made
130
How do you carry out a sensitivity analysis?
You can alter the costs or finished prices to see what change they have to the viability of the project. I have done this by using an excell spreadsheet to allow easy analysis that these changes can have on the project finances
131
What variables might you change in a sensitivity analysis and why?
You might change the projected costs as material and labour prices and be subject to change based on supply and demand. The likely selling price could be subject to change as well on a longer project so these changes need to be assessed to ensure the project is still viable if things do change
132
What factors affect sensitivity of a development appraisal?
Cost of finance, building material and labour costs, availability of either, likely prices for the finished product
133
Tell me about your understanding of incorporating affordable housing into development appraisals.
Under local planning regulations and depending on the size of the project there may be a requirement for an element of affordable housing needed in order to obtain planning permission. This can vary between authorities and it can include lower cost housing, housing reserved for social housing or schemes with restrictions on who can buy them such as those with local connections or certain public sector jobs
134
Tell me about software you have used to provide a RLV.
MS excel & BCIS (Building Cost Information Service) to confirm estimated build costs.
135
What RICS guidance relates to the valuation of development property?
Valuation of development property, guidance note October 2019
136
Give me a limitation of this software.
It can be venerable to human error in the data that is input into it
BCIS may be behind the times if material and labour prices are rapidly changing
137
What is viability?
It is a check to see if the development can meet the requirements of the project, typically if it is profitable but it can be other things
138
When would a cost approach be used?
Cost approach is a way of caluculating value based on the cost of building a replacement, plus the cost of the land, less the cost of depreciation. It may be used with the valuation of a new building where there are no or very few comparables. It can also be used for things such as Churches, libraries, schools where there is no income and they are rarely sold
139
What type of buildings would a cost approach be used for?
Usually either something new where there are no comparables or where they are rarely sold and there is no income associated with them such as schools, churches, libraries etc
140
What is the supposition that a DRC is based upon?
The underlying theory is that the potential buyer in the exchange would not pay any more to acquire the asset being valued than the cost of acquiring an equivalent new one. The technique involves assessing all the costs of providing a modern equivalent asset using pricing at the valuation date
141
What are the 3 components of the cost approach?
Cost of buying the land, cost of building the property, cost of depreciation
142
How do you assess the value of the land?
Direct comparison where possible assuming that there are land sale values to base this on. It can also be computed as a residual value using the cost approach equation for a newly constructed property where the cost new and sales price are both known.
143
How do you assess Gross Replacement Cost?
Calculate the purchase cost of the land, cost of building the replacement building and then the cost of depreciation for the existing building
144
What costs would you consider within GRC?
Cost of the land less the cost of building the replacement property and the depreciation costs for the existing building
145
What would you do if the building could be replaced with a modern equivalent?
Depends on client needs, you may wish to calculate both and dual report
146
How would you deal with depreciation/obsolescence?
By assessing the current condition of the building and replicating how the market would view the asset, also looking at the expected remaining life of it, the s-curve can also be used
147
What types of obsolescence are there?
Economic obsolescence, the changes in demand based on economic conditions, functional obsolescence when the design or specification no longer meets the function for what it was originally designed, so designed for a process that no longer takes place
Technological
148
What are the three ways to deal with depreciation?
Physical obsolescence, ecomonic obsolescence, functional obsolescence
149
Is the cost approach a market valuation?
It does account for various market costs such as the cost of purchasing the land but it does not compare the value of the asset itself against the market
150
How might onerous lease terms, e.g. restrictive user, break clause, impact upon capital or rental value?
If costs are too high it can put potential buyers off and make the prospect of purchasing less appealing for buyers, especially if there are other purchase options available
151
What liabilities may be created through valuation?
Things such as professional negligence, breach of contract or tort that could give rise to legal action by the client
152
What is a liability cap and when would one be used?
A liability cap is a contractual agreement that a client can only claim damages up to the amount agreed, even if the law would otherwise award a greater sum in damages. It can be used to divide risk between the client and valuer. It could be used when there is a lot of uncertainty in the valuation/market
153
Explain why the RICS are carrying out an Independent Valuation Review. Who is leading this?
Peter Gray, and it is being done as there is a fear that valuers are not fully in touch with changes to the investment markets, particularly with the changes to home working in the pandemic so a review is being held to maintain confidence in the profession. It is being looked at for valuations for investment purposes or when unable to find insurance for risk relating to fire such as valuing flats where there needs to be an EWS1
154
Explain what you understand by the term, margin of error.
Under case law there is a margin of error in valuations, usually 5% for residential and up to 15% for unusual cases, it is a figure that can be a certain amount above or below what the court may deem to be the 'correct' figure for a valuation
155
Explain your understanding of K/S Lincoln v CBRE Hotels (2010).
CB wanted to invest in several hotels, a valuer produced a reporting, including a projected yield, however the investors thought that they were inaccurate and the investment turned out to be worth less than they thought. However the judge felt that this only formed part of the investors decision and that it fell within the margin of error and found in the defendants favour
156
Explain the precent set in Hyde and another v Nygate and another (2021) in relation to the valuation of high-profile development sites.
There had been an allegation that an administrator had failed to fully value the development potential of a high profile site, the main outcome was the way in which costs were awarded
157
What are the proposed changes in the 2022 Red Book Global consultation?
Clarifying some of the text in light of feedback, making it clearer the need for unambiguous TOEs
158
What is leasehold enfranchisement? How does it differ for flats and houses?
The process of extending the terms of the lease or purchasing a share of the freehold under leasehold reform act 1967.
For Houses it gives the right to purchase the freehold
159
What is the basis of valuation? (for leasehold enfranchisement)
Market Value using comparable evidence taking into accound leasehold relativity
160
What is the basic procedure of leasehold enfranchisement?
You need for a section 42 Notice which is a formal notice to the landlord that you want to extend the lease, including a valuation. This starts the process.
This is reviewed by the freeholder has 2 months to respond with a counter notice (or more depending on what timescale was enclosed in the notice).
A private agreement with the freeholder can be reached without the need for a section 42.
If no agreement can be reached it will go to a leasehold tribunal for a decision.
161
What are current mortgage rates (on a BTL mortgage)?
I have seen them for currently between 1.5% - 5%
162
How have interest rates changed over the past few years?
Interest rates have gone up recently, after a long period of low interest rates set by the Bank of England
163
What are current LTV ratios?
Usually 75% plus
164
How could you value an HMO using the investment method?
The methodology to be adopted for the valuation is likely to be an investment approach, capitalising the sustainable rent at an appropriate yield based on local evidence.
165
What were you specifically looking for in relation to the HMO use?
Is it HMO? Shared facilities with 3 or more tenants forming 2 or more different households. Is there a license, is there comparable evidence of other HMO properties nearby? Is there a stop on other new HMO licenses so a premium attached to an existing one, condition of the property
166
How can you establish if a property is an HMO?
Using government and local authority criteria, but is it used by 3 or more tenants, forming 2 households with shared kitchen and bathroom. Is it bedsits with shared kitchen and bathroom or not wholy self contained flats?
167
What are the minimum rooms sizes for an HMO?
Min 6.5m2 with anything below 1.5m high discounted from floor area
168
What is statutory overcrowding? What legislation relates to this?
A property is statutorily overcrowded under Part X of the Housing Act 1985 when either the room standard or the space standard is contravened. The room standard is contravened when the number of people sleeping in a dwelling and the number of rooms available as sleeping accommodation is such that two persons of opposite sexes who are not living together as man and wife are forced to sleep in the same room.’
169
Tell me about any other legislative requirements relating to HMOs you are aware of.
Planning, HHSRS, MEES
170
What planning use do HMOs fall into.
Use Class 4 if over 6 people (single dwelling is use class 3)
171
Is there generally a premium attributable to HMO use over and above value as a single family house?
It will depend on the area, in an area of predominately single use dwellings then possibly no, in an area of high demand such as student areas then yes
172
Why did you use an investment method of valuation?
? Lack of directly comparable evidence of similar investment properties
173
What is an Article 4 direction?
It limits the scope of permitted development rights so may prevent works to change a property to make it suitable for HMO. Article 4's are common in conservation areas and if one is in place a landlord will need to seek planning permission instead
174
How might gross and net yields differ for HMOs?
Service charges, running costs, agency fees, sinking funds, maintenance etc
175
What RICS guidance are you aware of relating to HMO valuation? Was there any UK-specific guidance you also complied with?
Valuation of buy to let properties and HMO properties Guidance note december 2016
176
What category of buy-to-let valuation does a HMO fall within?
Category 3
177
What are some of the broader issues facing the HMO sector?
Legislation to clamp down on rogue landlords, poor reputation, selective licencing making compliance better, HHSRS ratings
178
Tell me about the regulation of the HMO sector.
Housing act 2004 applies but predominately it's done through licensing by the Local authority who grant a license, landlords need a fit and proper test and checking will be subject to HHSRS through the environmental health team as well as fire safety regs
179
How can rental incentives impact on HMO valuation?
Contained in Red Book UK suppliment. The valuer should be aware of the impact of rental incentives in respect of properties suitable for buy-to-let investment. Guaranteed rents that are above market rent and cashbacks in lieu of rental income for a number of years may have an effect on price. The valuer should consider these impacts and report accordingly.
180
What are guaranteed rents / cash backs in lieu of rental income and how can these impact upon value?
Valuers should also be aware of the impact of rental incentives in respect of properties suitable for buy-to-let investment. Guaranteed rents that are above market rent and cashbacks in lieu of rental income for a number of years may affect price. Valuers should consider these impacts and report accordingly.
181
How can Market Rent impact upon the underwriting of a loan?
It sets the yield which will determine if the property is suitable for lending purposes based on if the rental income is high enough to cover mortgage costs, taxes and likely maintenance costs
182
How have you commended upon any limitations to accuracy of your HMO valuations?
I've not done this but typical limitiations may be a lack of Hmo's in the area for suitable comparable evidence, unconfirmed if local authority may grant a licence etc
183
How can maintenance costs impact upon valuation and what does the Red Book say about these for HMOs?
Contained in the Val of Buy to Let & HMO Guidance note, Also, if a property is likely to incur higher-than-average maintenance costs because of its age/type, existing condition or intensity of occupation this should be identified in the report, as the proportion of rent required for reinvestment will exceed normal levels and accordingly reduce net income.
184
When is it reasonable to adopt the income approach when valuing HMOs under the Red Book?
When there is not enough comparable evidence of similar properties in the local vicinity
185
What additional considerations do you need to make for category 3 scenarios? In HMO's
For this specialist area of valuation, the valuer must have knowledge of, and experience in, the valuation of the more complex residential investment property in the particular locality. Need to consider if it's compliant with Housing Act 2004, safety requirements, local authority rules and if there is demand in the area a) management regulations for HMO
b) potential mandatory, discretionary or selective licensing schemes
c) Local Authority policy on HMOs and areas designated under Article 4
d) condition/fitness requirements, that is, Housing Health and Safety
Rating System (HHSRS) and
e) the possibility that planning consent will be required for the HMO usage,
including sui generis, in addition to the usual local authority consents for
the current property form and layout.
186
What is a lifetime mortgage/home reversion/sale and rent back/home purchase plan? What are the Red Book requirements in relation to these?
Lifetime, typically, repayment will happen at the end of the life of the occupant, sale and rent back is when you sell and have a guarantee to rent the property back at an agreed rate, home purchase plan is for islamic mortages, home reversion when they sell all or part and live there rent free until death. It's contained in the UK supliment. Any valuations and subject to the FCA guidelines but no special requirements for valuations, they'll be subject to VPGA 2 and UK VPGA 11
187
What is shared ownership/shared equity scheme?
Where the occupier owns a percentage of the property, with the other owned by a company, usually a social housing provider. It allows for cheaper purchase prices for owners to get onto the property ladder and they can then 'staircase' buy buying the remaining shares
188
How would you value a shared ownership / shared equity scheme property?
Value at the full amount, based on the local market value
189
What is a trustee mortgage valuation?
Guidance found in Red Book UK suppliment, a trustee us a mutual 3rd party that holds the title of the property until the loan is completely paid off by the borrower, legislated by the Trustee Act 1925 and the valuer must be an 'independent valuer' • the surveyor or valuer must be instructed and employed independently, of both the mortgagor and his or her solicitor in the transaction • the amount or payment of the fee must not in any way depend on the • where a security is introduced by the surveyor or the valuer, the latter proposed loan being effected and should not be employed to make the valuation.
190
What legislation relates to trustee mortgages?
Trustee Act 1925
191
What is affordable/market rent?
The estimated amount for which an interest in real property should be leased on the valuation date between a willing lessor and willing lessee on appropriate lease terms in an arm’s length transaction, after proper marketing and where the parties had each acted knowledgeably, prudently and without compulsion
192
What is your role in relation to advising a lender client?
The Valuer is the eyes and ears of the lender when undertaking a valuation and is expected to inform the lender of all relevant factors that may become apparent before, during and after an inspection of the property for the identification of possible fraud or money laundering and to ensure that all relevant information is available when the lending decision is made.
193
Tell me about the requirements in relation to your terms of engagement / inspection.
That they must be provided, signed by the client ahead of the time and state matters to be addressed
194
What is the basis of value?
A statement of the fundamental measurement assumptions of a valuation.
195
What factors may have a material impact on value?
It's location, condition, size
196
What assumptions / special assumptions have you made in relation to factors impacting value?
I have undertaken a valuation for a property close to a railaway line, there was a very similar property close by which had sold recently and was a good comparision, however it was further away from he railway line and ouside of the distance you could hear it. So to account for the reduced appeal of a property much closer to the line I adjusted the price down slightly
197
What is reinstatement cost and when would you be asked to provide it?
It is the cost to replace a building with a like for like modern replacement. I would include this is a report for a valuation for secured lending when it has been requested by a lender client
198
How would you calculate a reinstatement cost?
I use the BCIS calculator, using the observations from site to ensure accuracy
Building Cost Information Service
199
How would you deal with suspected hidden defects?
I would investigate as much as possible on site, but if I was still uncertain I would include this in my report and advise the client to undertake further checks, obtain guarantees or obtain a PCC if appropriate
200
How would you treat incentives?
I would investigate what incentives have been offered, using records or information provided and exclude them from any valuation figure
201
Tell me about the application of the RICS Residential Mortgage Specification in relation to a specific purpose, e.g., re-inspection or valuation without internal inspection.
It is contained in the UK Red Book supplement in UK VPGA 13, you must insure the previous report is accurate enough, if there are any material changes,
A request to report, without internal inspection must be confirmed in writing with the client, the valuer must also consider the purposes of the report and if the method is sufficient
202
Where would you find the RICS Residential Mortgage Specification?
UK Red Book Suppliment in UK VPGA 11 & 13 & RICS Guidance Note: Bank Lending Valuations and Mortgage Lending Value 1st Edition 2018
203
What are the 3 categories of BTL investments?
Investments for capital growth, investments for income and a mix of both
204
Have you valued a historic building? What RICS guidance were you aware of? Can you tell me a key principle of this guidance?
RICS information paper: Valuation of Historic Buildings, things such as the heritage value should be considered, condition and repair and the additional costs should be considered as should the impact of grants and loans for maintenance,
205
How do you reflect the historic nature of a building in your valuation advice?
That it can both make a property more appealing as it's seen as a validation of a buildings worth, however it can put off buyers who are fearful of the costs of maintenance and extra restrictions in place for changes
206
What type of RICS surveys include a valuation?
Level 1 and Level 2 Home Survey with valuation
207
What level of valuation advice does a Level 2 Home Survey include?
The market value of the property and the reinstatement costs at the time of the inspection (assuming the level 2 with valuation option was instructed)
208
What guidance does the RICS provide in relation to this? (level 2 survey)
RICS proffesional Statement, Home Survey Standard 1st Edition 2019
209
What is the basis of valuation in this type of report? (Level 2)
Comparable
210
What assumptions are made in this type of report? (Level 2)
That no hazardous materials are present, that it is being sold with vacant possesion, that areas not inspected contain no serious defects, there's no contamination, it is connected to mains services, and it does not take into account sales incentives
211
What else do you need to include in relation to your valuation? (Level 2)
Reinstatement costs & a statement on the EPC rating and obvious discrepancies
212
Tell me about the RICS guidance relating to the valuation of individual new-build homes.
There's a guidance note, Valuation of Individual New Build Homes 3rd Edition December 2019
Valuers need to find out if incentives were included as part of the purchase, it provides guidance on the type of information that should be collected, UK Finance Disclosure Form, examine things like the ground rents, event fees, what to be aware of in finding comparables like the proportion of homes sold to investors, , what the hierarchy of evidence is
213
What is the new build premium?
It is the supposed additional cost buyers are willing to buy to have first use of a home. It is expected that this benefit does not exist when the property is re-sold
214
How would a valuation of new build home differ to a second hand home?
I would account for the new build premium which supposes that buyers are more likely to pay an increased amount to have the first use of a home and the potential to have it in a style designed around modern tastes and possibly have their say in the specification. With a second hand home, this appeal does not exist but there is more likely to be comparable market evidence available
215
Tell me about how you have applied this guidance to a new build valuation. (vs 2nd hand home)
This is not something I have done but if I had to I would look at the market and the comparables used, trying to ensure any I did use were wither new build or second hand, depending on the type of valuation I was doing
216
What is a key principle of this document? (valuing new build home)
To account for incentives, restrictions on being able to inspect the property and the reporting around this back to clients
217
Tell me about your use and understanding of AVMs.
They are primarily used by lenders in low risk scenarios or in examining the risk in their portfolio, re-mortgage applications, mass appraisal for local taxation. They have their pluses and minuses but can be a very useful tool for valuers and lenders.
Valuations based on AVM's still count as a Red Book Valuation
218
Does the RICS provide any guidance on AVM's?
RICS Automated Valuation Models Roadmap
219
What is an AVM?
It is an Automated Valuation Model, it is a form of computer modeling to provide an estimate of value and measure of confidence in this figure by using statiscal analysis
220
What is an advantage and a disadvantage of using an AVM?
An advantage is that they can analyse a broad range of data automatically. A disadvantage is that they do not account for things such as building orientation, property condition etc
221
Give me an example of an AVM you have used.
I have not used one yet
222
Have you valued a residential property purpose built for renting?
I have valued a property that was oringally purpose built for renting but was then subsequently being sold to the tenant but I am aware that this is outside the scope of the Guidance note for this type of valuation as it was an idividual property and not a portfolio or collection
223
What RICS guidance are you aware of in relation to valuing properties purpose built for renting?
RICS Guidance Note: Valuation of Residential Property Purpose Built for Renting
224
What are the key principles?
Primarily the valuation is based on capitalisation of the Net Operating Income, factor in things such as section106 and below market rent, additional income streams etc
225
What are the three key pieces of legislation which have impacted the UK residential market (and purpose built valuation)?
Stamp duty relief/change in stamp duty rules, reduction in tax relief on BTL properties
226
What valuation considerations would you take into account when valuing a purpose built for renting property?
What is the purpose of the valuation? Is it for disposal, purchase, loan security, financial reporting. You'd also need to clarify the market the assest is expected to perform in, the estimated operating costs for the building, is there income from other streams such as furnitire renting, renting parking spaces, properties let to below market rent, legislation such as rent controls,
227
What is the difference between a gross and net yield in this respect?
Gross is the total income for the asset and any additional income streams, Net removed the cost of the operating costs for it such as void loss, maintenance, letting costs, management fees
228
What factors influence yields?
Purchase price, market rent, void periods, below market rent properties, management costs, lettings costs etc
229
What residential operating expenses would you need to take into account? (for yields)
Maintenance, any sinking funds, service charges, letting costs, and write offs
230
What is Net Operating Income?
It is the value of the income for the subject property, less the cost of operating the asset
231
How would you calculate Net Operating Income?
Assess things such as expected void periods, operating costs, maintenance, service charges etc. For an existing assets this can be calculated
232
Have you valued a BTL / HMO property?
No I have not, but I know guidance is contained in RICS Professional Guidance Note, Valuation of Buy to Let and HMO properties
233
What RICS guidance are you aware of in relation to this? (valueing an HMO)
RICS Proffesional Guidance Note, Valuation of Buy to Let and HMO properties
234
What are the key principles of valuing HMO's?
Agree clear terms, that the inspection and report must consider the ability of the property to be let immediately as an HMO, 2 approaches to valuation can be made, depending on the number of HMO's in the area, 1 is to capitalise the sustainable rent, 2 is a vacant possession approach based on local market evidence. The valuation is likely to be an investment approach
235
What key factors might affect the impact on the market of a large release of new build property?
It may flood the market, reducing value for the new builds and potentially if there have not been other new build properties available for a long time, make second hand homes less desirable
236
Can ‘hope value’ be considered in valuations falling under UK Appendix 10?
Yes, but it should be commented on
237
If Market Value is assessed prior to or during construction, should the valuation reflect the evidence and market at the date of valuation or an assumed completion date?
Date of valuation, with the special assumption it will be completed to the agreed standard etc
238
Is there a set discount for a new build premium?
No, the new build premium can vary, and usually increases what someone is willing to pay for a property
239
What do RICS say about sales incentives?
For a new build, the valuer should obtain a copy of the developers Disclosure Form, that they should be searched for when possible, that the valuer needs to evaluate and judge them and adjust the value if appropriate in the comparables. This should also be reported on
240
Should you reflect sales incentives in your valuation?
It will depend, are they cash incentives or upgrades to the property, they should be discussed in the report, but adjustments should be made when analysing varying comparables.
241
Where would you find details of incentives?
Usually in the UK Finance Disclosure Form
242
What are some of the ways that a home can be offered at a reduced price?
With some kind of deposit contribution, Right to buy legislation, cashbacks, possibly a part exchange
243
For houses with restrictions on occupancy, e.g. by income or job type, what is a typical discount used in the market?
I know that at Connect Housing we typically considered affordable housing as a property let at 80% of the market rate
244
What is a new build warranty?
It is a warrenty, issued for a new build home, that will be part of a recognised scheme and that will provide cover for defects and structural issues
245
How long would a typical warranty last for?
Usually 10 years
246
If a property was built in the last 10 years and does not have a professional certificate or guarantee/warranty, would this affect value?
It can certainly affect it's appeal to the market, especially if there are other, similar types available where a warranty is available. There is also the fact that many mortgage lenders may not lend against it if the property doesn't have one, if that's the case then value definitely will be affected
247
What are the two special assumptions relating to Projected Market Value (PMV) and when would you adopt PMV?
During the marketing period all furnishings have been removed and the property has been unoccupied & the vendor has to sell the property within a reasonable period to recover the secured debt. It is used when there is a possibility of the property being reposseded
248
What are some of the types of home finance product?
Equity release, mortgage, remortgage
249
Who further regulates valuations for home finance products?
Financial Ombudsman Service
250
What are the key differences between a lifetime mortgage and a conventional mortgage?
With a lifetime mortgage, it is not repaid until you die or go into long-term care, with a conventional mortgage there will be both interest and balance being paid back during the span of the mortgage
251
Would the amount of mortgage debt to be redeemed at the end of a lifetime mortgage term be less or more than that of a conventional mortgage?
Yes, as interest will accrue over the lifespan of the mortgage which will increase the balance, as the balance on a conventional mortgage should decrease over time so should the amount of interest being paid
252
What is home reversion?
You sell all or part of your home in return for a cash lump sum, a regular income, or both
253
What is sale and rent back?
You sell your property to a firm then pay a rental figure to continue to occupy it, this will be on a fixed term tenancy for at least 5 years
254
What is a home purchase plan?
It is a way of buying a home, without paying interest, a firm buys the property, you buy the property from the firm, effectively leasing it from them, paying a figure that includes rent and money to pay off the balance
255
What are the bases of value for a registered social landlord’s housing stock for secured lending purposes?
This is contained in UK VPGA 14. Existing Use Value - Social Housing is the bases of value used.
256
What is a statutory valuation?
Basically one for taxation purposes, ie capital gains, stamp duty, inheritance tax, or can be for compulsory purchase
257
Who is responsible for Council Tax valuations?
The Valuation Office Agency, a division of the HMRC
258
What Council Tax bands exist in England?
The bands are A-H
259
What is the basis of value for Council Tax valuations?
The value is based on the price the property would have sold for on the open market on 1 April 1991 in England and 1 April 2003 in Wales
260
What assumptions are made in a Council Tax valuation?
That it was sold on the open market (with no right to buy discounts), that it is habitable
261
What is the Right to Buy?
It is a scheme, which allows Local Authority (& certain other social Housing tenants) the right to buy their home at a discount, provided they have been a social tenant for at least 3 years
262
What legislation relates to Right to Buy?
The Housing Act 1980
263
When might a lender instruct a drive-by valuation?
When it has recently been valued (by the same valuer), possibly when they are in the process of repossession and the inspection is too risky, when the Loan to value rate is very low (there is a large deposit), in some cases when their client is very low risk and it is for a re-mortgage
264
What is the impact of the Rentcharges Act 1977?
It abolished the creation of new Rentcharges (selling land to developers cheaper, then getting an income from the owners of the new houses). Existing rentcharges were capped at 60 years so all existing ones would expire in 2037
265
Until 22 August 2037, how should rentcharges be dealt with?
This is predominately dealt with by the conveyancing solicitor. Valuers should check any documents & report on them or if there is uncertainty & advise to seek suitable advice from a qualified expert
266
Within what general distance of a dwelling might Japanese Knotweed have a material impact on value?
Under the latest guidelines within 3 metres of the property boundary
267
Do RICS publish any guidance on leasehold reform?
RICS Guidance Note: Leasehold Reform in England and Wales, 3rd Edition August 2015
268
What right did the Leasehold Reform Act 1967 introduce?
It gave the tenant of a house the right to acquire the freehold and any intermediate leases
269
What is the definition of a house under the Leasehold Reform Act 1967?
Any building designed or adapted for living in and reasonably so called and not divided horizontally into flats or maisonettes and must be divided vertically from other dwellings
270
What are the qualification criteria to acquire the freehold of a house?
It must be a house and it must be on a long lease
271
How long is a ‘long tenancy’?
Originally for a term of more then 21 years, you must be the leaseholder and held the lease for the past 2 years
272
Which section are the bases of valuation set out in?
Section 9
273
What does the Section 9 (1) basis of valuation comprise?
Market Value
274
What does the Section 9 (1A) basis of valuation comprise?
It comprises the basis of sale and assumptions on the sale itself, I would need to consult the document for more detailed answers
275
What does the Section 9 (1C) basis of valuation comprise?
It comprises the basis of sale and assumptions on the sale itself, I would need to consult the document for more detailed answers
276
Which is the most favourable basis of valuation?
This is not something I have done but I would consult the legislation documents and consult with a colleague who has experience in these matters
277
How is a claim to acquire a freehold started?
You serve a tenants notice on the landlord
278
What is the main impact of the tenant’s notice?
It creates a contract between both sides to grant and accept the freehold
279
How long does a landlord (reversioner) have to reply to the tenant?
2 months
280
If a landlord intends to reoccupy or redevelop, what Sections can they rely on?
I would need to check this against the regulation documents
281
If the leasehold parties cannot agree on a price, where is the matter referred to?
Leasehold Valuation Tribunal or the First-tier Tribunal (Property Chamber)
282
What is marriage value?
Marriage value is the increase in value by combining two or more assets where the combined value is more than the sum of the separate assets
283
What is hope value?
Hope value is the term used to describe the market value of land based on the expectation of getting planning permission for development on it. This differs from the existing use value which is what the land or property is worth in its current form.
284
How is marriage value calculated?
It's a complex business, but put as simply as possible, the marriage value is calculated as the difference between what the property is worth in its current state with a lease of less than 80 years, and what the value would be with the new lease.
285
What is the deferment rate?
It is the discount rate applied to the current price of a property, in order to assess the present value of the right to vacant possession of a residential property at the end of a leasehold to which the freehold is subject
286
What right did the Leasehold Reform, Housing and Urban Development Act 1993 introduce?
Collective enfranchisement and lease renewal for tenants of flats
287
What is the basis of a new lease for a flat under the 1993 Act?
Marriage value, based on market Value
288
What is the basis of valuation in Schedule 13 for the new lease premium under the 1993 act?
Market Value
289
How long can a lease be extended for?
90 years
290
Is a premium payable upon the grant of an extended lease?
Yes there is, usally 50% of the marriage value
291
What are the additional qualification criteria if the long leaseholder of a house wishes to extend their lease (rather than acquire the freehold)?
You must have owned a long lease for at least 2 years
292
What are the ways to calculate a modern ground rent?
Usually it is 0.1% of the value of the property per year
293
What precedent was set in the Sportelli v Cadogan Estate (2008) case?
That the valuation should not take into account hope value and it set the deferment rate
294
How is the generic rate in Sportelli calculated?
the addition of an appropriate risk-free rate and an appropriate risk free premium, with a deduction for capital growth”. As a formula, it is represented as follows: DR = RFR – RGR + RP where DR is the deferment rate; RFR is the risk-free rate; RGR is the real growth rate and RP is the risk premium
295
Does a leaseholder have to pay the landlord’s reasonable professional costs?
Yes they are
296
What valuation approach should be used to assess the value of the freeholder’s loss (or landlord’s diminution in value)?
Term and reversion
297
When does marriage value generally become payable?
When there is less than 80 years on the unexpired lease
298
What is collective enfranchisement?
It is the process where the leaseholders in a block can exercise their right to purchase the freehold
299
What does the collective enfranchisement price under Schedule 6 include?
The price to be paid for the freehold, according to Schedule 6, Part II of the Leasehold Reform, Housing and Urban Development Act 1993, shall include: income received from ground rents (the term) reversionary value of the freehold on expiry of the leases (the reversion) the marriage value.
300
What is the capitalisation rate?
The capitalization rate is the rate of return on a real estate investment property based on the income that the property is expected to generate.
301
What is the Delaforce (1970) effect?
It is tenants overpaying by conceding to the landlords terms to avoid the cost of a hearing
302
Explain your understanding of Sloane v Mundy and Reiss v Ironhawk Ltd.
They were regarding the methods of valuation used to calculate the value of the lease, they stated a preference for market evidence over graphical ones
303
Explain the impact of Cadogan Square Properties Ltd v Earl Cadogan and Cadogan v Erkman.
The Upper Tribunal decided that there should be a departure from the rate fixed by Sportelli. In doing so, they adopted the formula laid down by Sportelli but accepted that adjustments had to be made to the real growth rate in accordance with the position in the property cycle at the valuation date.
304
What is an adverse differential?
It is a term which favours one party over another
305
What is leasehold relativity?
The relative value of a property held on an existing long lease compared to its freehold value.
306
Explain what you understand in relation to the issue of 'down valuation'.
It is where the value of the leasehold option is decreasing, this can impact on lending and the money needed by a purchaser
307
What RICS guidance relates to residential leasehold properties and secured lending valuation? What principles from this are you aware of?
RICS Guidance Note: Valuation of Residential Leasehold Properties for secured lending purposes, 1st Edition, May 2021
308
What sections of the Red Book and the UK National Supplement should this guidance be read alongside?
VPS 4, VPS 2 UK VPGA 11, PS2
309
What length of unexpired lease term does the guidance relate to? Why does it not relate to unexpired lease lengths below this?
If none can be found it is assumed the unexpired term is 85 years
310
What factors might affect the valuation of a leasehold property according to the Guidance Note?
Service charges, sinking funds, remaining lease term, repair costs, restrictive covenants, planning agreements
311
What assumptions might be made in this type of secured lending valuation?
Length of unexpired lease, sold with vacant possesion, that there are non statutory notices, no contamination or environmental issues, planning permissions are in place, no deliterious materials have been used in the construction
312
What special assumption might be agreed and why, with the lender client?
That a lender in possesion has he right to serve notice to extend the lease, that if it is not yet completed then the builder has the necessary permisions
313
What methods are available to value a leasehold property and when/why might you adopt each?
Leasehold relativity, comparable transactions to be used when there is sufficient market data, relativity graphs when there is no data
314
When would you use a leasehold relativity graph?
When setting a value for the lease extension
315
What would you use a magnet / plumb bob / spirit level for during an inspection?
Magnet to determine the materials used and if they Are steel, plumb bob to check for aligment on wall, spirit level for the same but it can also be used on the floor
316
How would you value a property affected by Japanese Knotweed?
It can be expected to have a negative impact on the value, principally due to the public perception of knotweed, the guidance advices to take into account the impact on the market prior to remediation, restictions on use on the property, impact during remediation, impact on adjoining land, impact on future saleability, as well as the cost of remediation and the state of the local market at that time
317
What does the legal case of Ryb v Conways (2019) say about the valuation of property affected by Japanese Knotweed?
the sum representing the discount on the otherwise market value which the buyer could reasonably have sought and the vendor ought reasonably to have agreed’
318
What valuation approach does the RICS recommend is taken when valuing property is affected by Japanese Knotweed? What guidance sets this approach out?
The RICS Guidance Note: Japanese Knotweed and Residential Property, First Edition 2022
319
How can a NIY of zero be achieved?
Net Initial Yield, The passing rent or net operating income divided by the gross property value including notional acquisition costs in the first year. Zero can be achieved depending on the purchase costs, rental costs, satutory inspections and other investments or improvements in the property
320
In a scenario where rents are static and the capital value increases, would you expect yields to increase or decrease?
Decrease as the rent is not keeping pace with the increase in capital value
321
How does the 2022 Global Red Book differ from the 2020 Global Red Book?
Incorportates changes to the IVS, gives more detail on the need for clear TOE's, more detail on the IPMS, additional commentary on sustainability
322
What is Laing Easiform construction?
It is a method of construction using in-situ concrete
323
Tell me why terms of engagement are important.
Because it sets out, in clear terms the scope o the service to be provided, identifies the parties and the method used to calculate the fees, in short it should help prevent disputes as it should confirm the parties are in agreement over the service
324
What checks do you undertake before accepting a valuation instruction?
Conflict of interest, money laundering, within competence
325
How do you ensure you know who your client is when undertaking a valuation instruction?
You can undertake ID checks, obtaining copies of their photo id and possibly a utility bill
326
Are there any additional requirements when undertaking a valuation in which the public has an interest or third parties may rely?
There may need to be additional disclosures in some circumstances, such as when the valuer has previously valued the asset and done before the valuation is undertaken, additional conflict checks, diclose relationship with the client, and potentially have a rotation policy in place
327
Are there any additional requirements for loan security valuations?
Yes, it will depend on the requirements of the lender
328
Talk me through an example of when you have agreed terms of engagement with a client.
I have done this with a number of clients, I speak with them via the telephone and discuss their reasons for the survey, what concerns they have, what the fee will be, what is involved in the survey, what the timescale for the report is, what the access arrangements will be etc. This is then entered into a standard terms document, ammended as necessary and sent to the client for their signature and return
329
What are the key elements included within terms of engagement?
Identify the valuer, their RICS statement, identity of the client, correspondence address, address of the subject property, survey type, how the fee is calculated, date of inspection and valuation
330
What does the Red Book say about terms of engagement?
That they must be clear, robust signed and understood and be in place
331
What does the Red Book say about inspections?
It's contained in VPS 2, that they must be to the extent necessary to produce a valuation, that the scope of the inspection should be agreed in the TOE's Any limitations to the inspection should be discussed in the report, that it should be in line wth the guidance note on surveying safely, measurements should be in line with the IPMS
332
What does the Red Book say about reporting requirements?
This is in VPS 3, It should clearly set out the conclusions of the valuation, any limitations, assumptions and special assumptions, and convey the understand of the opinions of the valuer. It also lists what the content of the report should be
333
What are the differences between a desktop and a full valuation report?
A desktop report does not include an inspection of the property, it could be a review based on a previous inspection or done using an AVM
334
Tell me about how you ensure that information relied upon in your valuation is appropriate and reliable?
By checking the quality of the information through research, is it from a trusted source
335
Padstow Gardens, Leeds, why did you use the comparable method? What was your search radius?
My initial search radius was within 1/4 of a mile, I then increased this to within a mile, looking at the price differential between MMC & traditional built properties of that size
336
Talk me through the adjustments you made? (for Padstow Gardens)
So by looking at sample properties I looked at the price difference between trad and non-trad build types and the price difference based on size, using these to build up an evidence base of how the pricing of the sizes and built types differed. This was then used as evidence against more local properties of a smaller size
337
Why is there a reduced demand for Laing Easiform construction? How did this reduced demand affect value?
It is a modern method of construction which can be hard to insulate, is prone to condensation and there is reduced appeal for this property type when there are more traditional properties located close by. There is also the perception that buyers may not be able to obtain a mortgage or that they won't last
338
Church Lane, Huddersfield, why did you use a wide search area? What adjustments did you make?
Because there were few similar sized properties in the area in a similar style, so I searched in equally desirable areas of Huddersfield to gather evidence of any difference in price between new properties and Victorian ones
339
Swillington, Leeds, how did you set build costs/professional fees/other costs?
Some we provided by LCC based on information from past projects, checked against BCIS, others were by research, i.e. checking with selling agents etc over fees, I'd allowed for £1,850 for build costs, BCIS came back with 1830
340
How much developer’s profit did you deduct? (for Swillington)
Kept it modest at 15%, this plus fees resulted in a negative value
341
How did you decide how much developer’s profit to deduct? (for swillington)
Looked at what was reasonable given the area and times
342
How did you present your calculations? (for swillington)
In a meeting, via Zoom, on an excell spreadsheet, backed up by a report in PDF including information on desktop research, comparable evidence etc
343
Manor Farm Drive, Leeds, talk me through your hierarchy of evidence.
I set it out with the closest possible match in terms of location, size and condition and date of sale to the subject property sitting at the top
344
How did you comply with RICS comparable evidence guidance? (Manor Farm Drive)
I ensured the comparable evidence used was recent, was in a suitable location, of a similar size and adjustments were made for any discrepancies
345
What advice did you give regarding repairs? (Manor Farm Drive)
That there was a hole in the roof which needed to be repaired and some small internal damage needed to be completed
346
How did you adjust the value to reflect the defects in the roof? (Manor Farm Drive)
As per the instructions I was given, I used the agreed SOR rates for the repairs needed then reduced the valuation figure to this affect, it was relatively minor, £1,500 and may not normally be deemed to have a material impact on the value, however this was the agreed internal process I was asked to adhere to
347
Scawthorpe, Doncaster, talk me through your pre-survey investigations.
I undertook mining searches, flood maps, geological searches, conflicts of interest checks, radon
348
How did you carry out mining/radon/flood map searches?
I completed the searches online, using British Geological Survey info, UK Radon, Coal Mining Authority, Gov.UK info on flood maps
349
What advice did you give regarding condition ratings?
That it was overall in good condition and a good prospect for purchase, provided some minor repairs to the garage were undertaken
350
What advice did you provide regarding the proximity of the railway line? (Scawthorpe)
That it was within hearing distance, which some may find disturbs their peace and that it may restrict the buyers and sale figure in the event of a resale
351
Talk me through your viability appraisal. (Scawthorpe)
That it was a good prospect for purchase, with a good prospect to re-sell based on nearby comparable properties selling quickly, that minor repairs were needed
352
What are the 3 categories in Buy-To-Let Valuations?
Category 1 - Is a single residential unit, let to a single household on a single AST
Category 2 - Is a single residential unit on a single AST, but to individuals on a sharing basis up to a maximum of 4 individuals
Category 3 - Licensable house in multiple occupation and multiple units held on a single title, They will include categories of properties not capable of being valued on an assumption of owner occupation and/or by adopting a traditional comparable methodology. These will be valued only after confirmation of direct terms of engagement with the instructing lender and referring to the lender’s specific guidance.
More detailed guidance is set out in RICS guidance note The valuation of buy-to-let
and HMO properties, 1st edition.
353
What are the three aims of the VRS?
Improve the quality of valuation and ensure highest possible professional standards
Meet the RICS requirement to self regulate effectively
To protect and raise the status of the valuation profession as the leading expertise in valuation
354
What does PS2 state?
All members practising as valuers must have the appropriate experience, skill and judgement for the task in question and must always act in a professional and ethical manner free from undue influence, bias or conflict of interest
