Valuation Flashcards
Could you tell me about any case law relating to Duty of care, and what was the outcome?
Smith vs Eric Bush (1990) - Surveyor instructed by bank owes a duty of care to a to a modest residential purchaser, who would not be expected to instruct their own survey.
Scullion vs Bank of Scotland (2010) - Surveyor instructed by bank does not owe a duty of care to a commercial purchaser, who would be expected to protect their own interest by seeking their own advice.
Explain the key points from the Red Book for valuations
What it does - Sets out the professional and international valuation standards (terms of engagement, inspection, etc), the valuation techniques and their applications.
What the comparable evidence methods are - COT (Consistency, Objectivity, Transparency).
For what purposes might a valuation be required?
Loan security Rating Accounts Land and tenant functions (rent review/lease renewal) Tax - inheritnace tax Advice
What are the 5 methods of valuation included in the ‘Red Book’?
Comparable Investment Residual and dev appraisal Profits DRC
What is the hierarchy of comparable evidence?
- Open market lettings (A)
- Lease renewals
- Rent reviews
- Third party determinations
- Sale and leasebacks
- Inter-company transactions
How might you value a hospital?
Land value and Depreciated Replacement Cost due to the lack of comparable evidence.
What would be the purchasers costs for a £20 million transaction?
Agency fees, solictors fees, stamp duty - currently 6.8% (Agency 1% + Legal fees 0.5% + VAT = 1.8%, Stamp Duty = 5%)
On some large sales transactions it will be a lower percent, around 5.4%.
What would be your main considerations when determining a cap rate?
Comparable information Risks involved: Covenant Strength Diversification of income Lease Length
What is the definition of ‘fair value’?
Red Book:
‘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.’ (This definition derives from International Financial Reporting Standards IFRS 13.)
What is the definition of ‘investment value’ or ‘worth’?
The value of an asset to the owner or a prospective owner for individual investment or operational objectives
What’s the difference between an assumption and a special assumption?
An assumption is made where it is reasonable for the valuer to accept that something is true without the need for specific investigation.
A special assumption is a basis on which to value a property, agreed with the client prior to the valuation. (e.g. under VP/fully let/finished construction).
Can you give me an example of a matter which may give rise to material valuation uncertainty?
For particular types of assets or liabilities it may prove to be extremely difficult to form an opinion of value due to the particular characteristics, or even uniqueness, of the asset or liability. It may prove very difficult to assess how potential purchasers in the market would react to a significant change in circumstances (e.g. a potential planning permission) having regard to the special assumptions made.
Heavily restricted access to the required information for the valuer, and the adoption of reasonable assumptions cannot sufficiently address the subsequent valuation matters that arise, then the valuation will attach more variability and uncertainty than would normally be expected.
Unpredictable effects on the market can be triggered by relatively one-off factors, such as unforeseen financial, macro-economic, legal, political or natural events. Where a valuation date occurs during, or immediately after, such an event, it may prove extremely difficult for the valuer to collect consistent, or even any, empirical data in order to arrive at a value with the required level of certainty attached to it. Furthermore, the valuer may be faced with hardly any comparable evidence due to the unprecedented set of circumstances with which to base a judgement. In this case, valuers should still be able to make a judgment, but they must clearly state the context and impediments that were faced to arrive at the valuation figure.
How do you approach the valuation of a property with an F rated EPC?
A The property must achieve an EPC rating of ‘E’ or better to be let or sold. Therefore, I would review the EPC report to determine the required works and the estimated costs if available.
How would you approach the valuation of a building with cladding?
EWS1 forms are a requirement for many lenders when considering multi-storey buildings with cladding as security. I would seek further guidance if I was in this situation as I have limited experience on the matter.
What is ARY?
All Risk Yield - incorporates all risks and costs.
Define External and Internal Valuer’s
External Valuer – no material links with the asset to be valued or the client
Internal Valuer – employed by the company to value assets of the company. For internal use only
Describe the steps prior to commencing a valuation instruction
- Are you competent to undertake the instruction? Correct level of skills, understanding and knowledge. Determine the purpose of the valuation
- Independence – Check for any conflicts
- Signed terms of engagement – Confirmation of instructions, confirm competence of valuer and extent and limitations of the valuers inspection must be stated. Agree on assumptions and special assumptions. Minimum requirements are set out in PS1 of the Red Book
- Check that valuers firm holds sufficient PII to cover the potential liability stemming from the instruction
What is the purpose of statutory due diligence?
Background checks such as EPC rating, council tax, flooding, highways, tenure and title to check there are no material matters that could impact value on the valuation
Describe the process / timeline for a valuation?
- Receive an instruction
- Check competence and independence so no conflicts
- Issue ToE inline with VPS1 of Red Book (if compliant)
- Receive ToE from client
- Gather information – leases, title documents, OS plans
- Undertake due diligence – check there are no matters that could impact the valuation
- Inspect and Measure in line with Property Measurement and Surveying Safely
- Research market and assemble, verify and analyse comps
- Undertake valuation and draft report. Potentially cross check using another method if appropriate. Get report peer reviewed by RICS Registered Valuer
- Issue to client and issue invoice.
- Ensure valuation file is in good order for archiving
Describe each step of the comparables method?
- Search and select comparables, which are in a similar location, similar size / construction type to the Subject property
- Confirm and verify details with agents to ensure reliable and work out price per sqft/sqm
- Put comparables into a schedule and adjust comparables using the hierarchy of evidence. Most weight to completed transactions, recently sold
- Analyse and adjust comparable evidence (adjust for size, location, condition etc)
- Report value and prepare file note
Name guidance note on comparable method, and describe it
RICS Guidance Note – Comparable Evidence in Real Estate Valuation, 1st Edition, 2019
• Outlines principles in the use of comparable evidence
• When limited available comparable evidence, notes that the valuer should use professional judgement to assess evidence on a case by case basis
• Provides Hierarchy of Evidence information
Describe hierarchy of evidence?
Hierarchy of Evidence – certain types of evidence usually take precedence over others
Category A Evidence (Direct Comparable Evidence)
• Recent completed transactions of near identical properties, possibly the subject property itself, with full and accurate data is available
• Similar real estate being marketed where offers may have been made but a binding contract has not been completed
• Asking Prices, with careful analysis
Category B Evidence (General market data)
• Information from published sources
• Indices – HPI index for housing
• Historic evidence
Category C Evidence (Other sources)
• Transactional evidence from other real estate types and locations
Name the types of investment valuation methods
Term and Reversion, Hardcore Layer and DCF
What are the sections in the Red Book?
- Introduction
- Glossary
- Professional Standards
PS1: Compliance with standards and practice statements where a written valuation is provided
PS2: Ethics, competency, objectivity and disclosures - Valuation technical and Performance Standards (mandatory unless otherwise stated)
VPS 1 Terms of engagement
VPS 2 Inspections, investigations, and records
VPS 3 Valuation reports
VPS 4 Bases of Value, Assumptions and Special Assumptions
VPS 5 Valuation Approaches and Methods - Valuation applications
- International Valuation Standards 2017
(CHECK THIS ANSWER)
In Red Book - Global Standards, name main points in PS2 (Ethics, competence, objectivity and disclosure)
Professional and ethical standards:
- Members undertaking valuations must act in accordance with the Rules of Conduct 2022.
Member qualifications:
- Individuals must be appropriately qualified to accept responsibility for a valuation
- Have appropriate academic / professional qualifications
- Membership of a professional body
Independence, objectivity and the identification and management of conflicts of interest
- Valuer and firm must act objectively and independently always and not be influenced by any situation which could threaten professional objectivity
- No member should advice/represent a client where doing so would involve a conflict of interest. Members should keep records of the obtaining of informed consent, any measures taken to avoid conflicts of interest arising.
Terms of Engagement
- Members must understand client’s requirements and comply with the minimum terms of engagement. Members must be able to demonstrate professional competence
In Section 4, VPS3 Valuation reports, name some of the minimum requirements to be stated within a Red Book compliant valuation
Minimum requirements to be stated within the report are
(a) Identification and status of the valuer
(b) Identification of the client and any other intended users
(c) Purpose of the valuation
(d) Identification of the asset(s) or liability(ies) valued
(e) Basis(es) of value adopted
(f) Valuation date
(g) Extent of investigation
(h) Nature and source(s) of the information relied upon
(i) Assumptions and special assumptions
(j) Restrictions on use, distribution and publication of the report
(k) Confirmation that the valuation has been undertaken in accordance with the IVS
(l) Valuation approach and reasoning
(m) Amount of the valuation or valuations
(n) Date of the valuation report
(o) Commentary on any material uncertainty in relation to the valuation where it is essential to ensure clarity on the part of the valuation user
(p) A statement setting out any limitations on liability that have been agreed.
What is Hope Value?
Value arising from any expectation that future circumstances affecting a property may change, for example, prospect of planning permission for development of land, where no planning permission currently exists or the realisation of marriage value arising from merger of two land interests
Define Marriage Value
Created by a merge of interests. A valuation is undertaken before and after the merge and the marriage value level is created
- Negotiation outcome – split marriage value created 50/50 to the value of the individual interests
