Valuation 1.2 Flashcards
1
Q
How can rental incentives impact on HMO valuation?
A
Rental incentives can impact the the sustainable rent that is needed to assess market rent for valuation.
2
Q
What are guaranteed rents / cash backs in lieu of rental income and how can these impact upon value?
A
Guaranteed rent is where the rent is paid by a property agent every month for a set period of time whether of not the tenants pay rent or not, but this may be a slightly reduced rent due to the risk to the agent.
Cash back in Lieu is an incentive for perspective tenants to let a property where they receive some sort of cash back after signing the contract.
These forms of incentives can distort the sustainability of the rental figures and the demand which affect value.
3
Q
How can Market Rent impact upon the underwriting of a loan?
A
It can affect comparable evidence (Like with Like)
It is a key component in the lender’s assessment of the maximum loan amount and affordability.
4
Q
How have you commended upon any limitations to accuracy of your HMO
valuations?
A
Valuers should fully research, document and retain comparable rental evidence in the same robust way as they would for determining market value.
If there is insufficient or limited evidence, they should clearly state the limitations of accuracy.
5
Q
How can maintenance costs impact upon valuation and what does the Red Book say about these for HMOs?
A
High maintenance costs can affect the gross market yield due to increased management or re-letting fees or upgrading fees.
Redbook UK supplement:
The valuation obtained should be logic-checked against the tone of values for similar investment property in the vicinity.
6
Q
When is it reasonable to adopt the income approach when valuing HMOs under the Red Book?
A
it is reasonable to adopt an income approach method of valuation, assuming there is a continuing rental demand for this type of accommodation in the area.
7
Q
What additional considerations do you need to make for category 3 scenarios?
A
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)
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.
8
Q
What is a lifetime mortgage/home reversion/sale and rent back/home
purchase plan?
A
Lifetime mortgages and home reversion plans are together referred to as ‘equity
release products’.
Sale and rent back (SRB) is a facility whereby individuals sell their homes to an authorised firm at a discount, in return for the right to remain as a tenant for a set period.
9
Q
What are the Red Book requirements in relation to these?
A
The valuation of residential property for home finance products requires consideration over and above the standard mortgage valuation specification.
Although the purpose for which these valuations are required is regulated, they
are not ‘regulated purpose valuations’ in the terms of UK VPS 3, and so the particular requirements specified in UK VPS 3 do not apply.
SRB-
a) The valuation must be commissioned jointly by the SRB firm and the customer. A standard joint instruction letter is provided by the FCA, but its use is optional.
b) The valuation must be carried out by a valuer who is independent of the SRB firm.
c) The SRB provider must ensure that the valuation is carried out by a valuer who owes a duty of care to the customer in valuing the property.
10
Q
What is shared ownership/shared equity scheme?
A
Shared Ownership enables an individual to purchase a dwelling using a combination of part ownership and part rental.
Shared equity arrangements may arise as a result of developers offering either their own shared equity scheme, or a scheme as a result of government initiatives.
11
Q
How would you value a shared ownership / shared equity scheme property?
A
SO- The value of a share in a shared ownership property shall be in the same proportion of the market value of the whole interest with vacant possession as that share bears to the whole.
SE- Valuations for individual properties under a shared equity scheme shall be the market value of the whole interest.
12
Q
What is a trustee mortgage valuation?
A
Under the Act a trustee must obtain a report of the value made ‘by a person whom he reasonably believes to be an able practical surveyor or valuer instructed and employed independently of any owner of the property’, and the loan must be ‘made under the advice of the surveyor or valuer expressed in the report’.
13
Q
What legislation relates to this?
A
Trustee Act 1925
14
Q
What is affordable/market rent?
A
Affordable rent is designed to:
* maximise the delivery of new social housing by making the best possible use of constrained public subsidy and the existing social housing stock
- provide an offer that is more diverse for the range of people
15
Q
What is your role in relation to advising a lender client?
A
UK Finance and RICS regard it as important that the lender and the valuer develop
a close working relationship in respect of valuation and appraisal, especially in more
complex cases, to ensure that the service provided by the valuer reflects the lender’s
needs and that the lender fully understands the advice that is being given.
16
Q
What liability do you have to the borrower when advising a lender client?
A
Duty Of Care
17
Q
Does this vary depending on whether the valuation is disclosed by the mortgagee?
A
No
18
Q
Tell me about the requirements in relation to your terms of engagement / inspection.
A
VPS1 -Terms Of Engagement
Enhance client understanding of the service to be provided, with clarity concerning the basis on which the fee will be calculated
Provide assurance that work undertaken by RICS members meets high professional
standards backed by effective regulation
Address particular aspects of implementation that may arise in individual cases.
VPS2- Inspection
Inspections and investigations must always be carried out to the extent necessary to
produce a valuation that is professionally adequate for its purpose. The valuer must take reasonable steps to verify the information relied on in the preparation of the valuation and, if not already agreed, clarify with the client any necessary assumptions that will be relied on.
19
Q
What is the basis of value?
A
VPS 4- Basis Of Value
A basis of value is a statement of the fundamental measurement assumptions of a valuation.
20
Q
What factors may have a material impact on value?
A
The uniqueness of the property and its location.
Limited or Restricted information
Economic or social factors
21
Q
What assumptions / special assumptions have you made in relation to this?
A
Assumption:
The property is assumed to have a cavity wall insulated.
Special Assumption:
-the property has planning permission when information wasn’t provided.
22
Q
What is reinstatement cost and when would you be asked to provide it?
A
The reinstatement cost is a cost estimate that determines how much a property would cost to rebuild if it is destroyed. This is because it will contribute to your building insurance cost.
This would be provided to the client when instructed to carry out a home survey with a valuation.
23
Q
How would you calculate it?
A
BCIS Calculator
Input following:
Property address
Age
Construction: bungalow, semi, detached, flat
Floor size
Bedrooms
Outside adjustments: fencing, garage, drains, etc.
Creates a reinstatement cost for a similar house in the area based on the information supplied by the surveyor.
24
Q
How would you deal with suspected hidden defects?
A
Under VPS 3 Report- If you suspect a hidden defect you can recommend further investigation.
In certain circumstances you may have to defer providing a valuation figure until further investigation takes place.
25
How would you treat incentives?
The UK Finance Disclosure of Incentives Form requires builders to advise of any incentives and/or discounts included in the sale price.
Two types of incentives:
* Enhancements specific to the property, e.g. bespoke kitchen fittings, tiling, wooden
floors that are part of the property and will remain; in other words, they are
permanent benefits.
* Monetary contributions, e.g. legal fees, stamp duty, cashbacks, guaranteed rents,
etc.; they are not tangible and are not related to the property.
26
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.
VPGA 11: When carrying out a valuation without an internal inspection it must be confirmed in writing, and the manner of valuation and the restrictions under which it is given clearly stated.
The lender must be informed that the value stated must not be disclosed to the borrower or any other party, unless required to do so by the FCA rules.
VPGA 13: A ‘re-inspection’ is a further visit to a property for which the valuer has previously provided a report where the lender has either imposed conditions or made a retention.
27
Where would you find the RICS Residential Mortgage Specification?
Redbook UK Supplement VPGA 11.
28
What are the 3 categories of BTL investments?
Category 1: a single individual residential unit let to a single household on a single
assured shorthold tenancy (AST).
Category 2: A small house in multiple occupation (HMO) comprising a residential property let on a single AST to a group of individuals or on separate ASTs with a minimum of three tenants (forming two households) up to a maximum of six tenants sharing communal facilities.
Category 3: Larger licensable houses in multiple occupation (HMOs) with seven or more tenants and multiple units with an element of shared facilities held on a single title.
29
Have you valued a historic building?
No. If I were due to my limited expertise I would need to obtain specialist advice or decline the instruction.
30
What RICS guidance were you aware of?
Valuation of historic buildings
1st edition (2014)
31
Can you tell me a key principle of this guidance?
Adopting one or more of the valuation methods and adapting that selected, where required, to allow for the issues that affect the individual property.
32
How do you reflect the historic nature of a building in your valuation advice?
By looking at:
1. Philosophical considerations
2. Statutory and legal considerations
3. Heritage Value
4. Costs of repair and restoration
5. Client and valuer perception
6. Impact of grants, loans, and tax incentives
7. Enabling development
8. Compulsory purchase
9. Scheduled ancient monuments
33
What type of RICS surveys include a valuation?
RICS Home Survey – Level 2 (survey and valuation)
34
What level of valuation advice does a Level 2 Home Survey include?
The market value of the property and the
reinstatement cost at the time of the inspection
35
What guidance does the RICS provide in relation to this?
Home Survey Standard 1st edition, 2019
36
What is the basis of valuation in this type of report?
Market Value
37
What assumptions are made in this type of report?
The materials, construction, services, fixtures and fittings, and so on:
The surveyor assumes that:
* an inspection of those parts that have not yet been inspected would not identify significant defects
* no dangerous or damaging materials or building techniques have been used in the property
* there is no contamination in or from the ground, and the ground has not been used as landfill
* the property is connected to, and has the right to use, the mains services mentioned in the report and
* the valuation does not take into account any furnishings, removable fittings and sales incentives of any description.
Legal matters
The surveyor assumes that:
* the property is sold with ‘vacant possession’ (your legal advisers can give you more information on this term)
* the condition of the property, or the purpose that the property is or will be used for, does not break any laws
* no particularly troublesome or unusual restrictions apply to the property, the property is not affected by problems that would be revealed by the usual legal enquiries, and all necessary planning and Building Regulations permissions (including permission to make alterations) have been obtained and any works undertaken comply with such permissions, and
* the property has the right to use the mains services on normal terms, and the sewers, mains services and roads giving access to the property have been ‘adopted’ (that is, they are under local authority, not private, control).
38
What else do you need to include in relation to your valuation?
Re-instatement cost for building insurance.
39
Tell me about the RICS guidance relating to the valuation of individual new-build homes.
Valuation of New Build Homes 2019
40
What is the new build premium?
New Build Premium is the benefits associated with new build properties such as:
First owner
Newness
Incentives
Guarantees
Customised
41
How would a valuation of new build home differ to a second hand home?
New-build properties may attract a new-build premium price over and above second-hand market prices.
The new build premium is split into two categories; first owner benefits and resale benefits.
First owner benefits are those only available to the first owner of a new-build property and which fall away after first occupation.
42
Tell me about how you have applied this guidance to a new build valuation.
RICS members should exercise
professional judgement in the light of all available information and evidence.
The Guidance Note requires valuers to make a number of assumptions and special assumptions when valuing new-build property.
Comparable evidence should be collated from three main source categories; on-site comparables, off-site comparables from other new build sites and resale or second-hand comparables.
43
What is a key principle of this document?
It provides best practice guidance and should be referred to when valuing individual new-build homes.
44
Tell me about your use and understanding of AVMs.
AVMs are a form of computer modelling and part of the science of valuation.
They are viable where there is sufficient, accurate data which facilitates higher quality valuations and reduces exposure to litigation.
45
Does the RICS provide any guidance on this?
The use of an AVM (i.e., no physical inspection undertaken and the inherent limitations of this) must be recorded in the Terms of Engagement (VPS 1) and valuation report (VPS 3) of the Global Redbook.
And
UK Supplement of Redbook VPGA 13
46
What is an AVM?
Automated Valuation Model
47
What is an advantage and a disadvantage of using an AVM?
Advantages:
1. For lenders, they can support lower risk applications and be built into existing electronic processes
2. AVMs can reflect statistical analysis or nuances that may not always be observed by valuers
3. Efficient in terms of time, money and resources
4. Creates a level of certainty
5. Removes the human element in relation to fraud risk
Disadvantages:
1. The property is not physically inspected.
2. A reliable AVM requires a large amount of accurate market data, which is not always available
3. Little consumer transparency.
4. Can still be subject to fraudulent activity
5. Low confidence scores can be the result of poor quality and limited quantity comparable data
6. The type of data is the AVM based on may not be at the top of the hierarchy of evidence or at arm’s length.
7. The source data may not be regularly updated
8. An AVM cannot explain the valuation process in the same way that a valuer can
48
Give me an example of an AVM you have used.
New mortgage / secured lending – at the outset to assess proposed figures and risk before instructing a physical valuation by a surveyor
Revaluation or remortgage – during the mortgage term to check how property values have changed
49
Have you valued a residential property purpose built for renting?
No
50
What RICS guidance are you aware of in relation to this?
Valuing Residential Property Purpose Built for Renting, 1st edition
51
What are the key principles?
General approach to valuation that should be adopted for the build-to-rent part of the residential investment sector and recognises that – reflecting market practice – the principal basis should be an income-driven one.
52
What are the three key pieces of legislation which have impacted the UK residential market (and purpose built valuation)?
Fire Safety Act 2021
Building Safety Act 2022
Leasehold Reform (Ground Rent) Act 2022
53
What valuation considerations would you take into account when valuing a purpose built for renting property?
Key valuation considerations in this context are:
* security of the existing income
* the potential for rental growth and assessment of the market rent
* likelihood of tenant change, speed of let up, depth of occupier market and void rates
* assessment of the likely expenditure necessary to sustain the current income and market rent
* an assessment of any additional factors that could materially affect the value of the asset, such as legal or planning considerations (such as a covenant that may limit individual dwellings to rent for a period)
* an assessment of the appropriate investment return
* as a ‘sense check’ the underlying potential to sell off the individual dwellings, one by one for sale – often referred to as the ‘break-up potential’ – assuming this is permitted in planning/legal terms.
54
What is the difference between a gross and net yield in this respect?
Gross yield is the overall return on an investment without deducting taxes and expenses.
Net yield is the real return to the investor.
55
What factors influence yields?
tenant changes
speed of let up
depth of occupier market
void rates
Market Rents
Taxes
Fees
56
What residential operating expenses would you need to take into account?
Agent Fees
Utilities
Taxes
Legals
57
What is Net Operating Income?
A commonly used figure to assess the profitability of a property.
58
How would you calculate it?
The calculation involves subtracting all operating expenses on the property from all the revenue generated from the property.
The higher the revenues and the smaller the expenses, the more profitable a property is.
59
Have you valued a BTL / HMO property?
No
60
What RICS guidance are you aware of in relation to this?
RICS Valuation of Buy To Lets And HMO's 2nd Edition
61
When was it last updated and what changes were made?
December 2022
Market changes have led to a substantial residential private rented sector (PRS) in the UK, primarily due to strong returns compared to alternative investment opportunities.
The new guidance recognises the current state of the PRS, which includes:
1. Single residential units
2. Houses in Multiple Occupation (HMOs)
3. Multi-unit blocks
The guidance applies to valuation work for both private and lender clients.
62
What are the key principles?
Valuers must have a clear understanding of HMO requirements and licensing, together with what is defined as shared facilities for shared houses, flats and bedsits.
63
How might the release of a large number of new build properties impact the local market?
Excess supply will reduce demand and prices.
64
Can ‘hope value’ be considered in valuations falling under UK Appendix 10?
Hope Value is to be properly reflected in a valuation for taxation purposes.
65
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?
At the date of Valuation.
66
Is there a set discount for a new build premium?
No.
67
What do RICS say about sales incentives?
Comparable evidence of new-build transactions requires adjustment to assess any sale price element that is attributable exclusively to sales incentives.
68
Should you reflect sales incentives in your valuation?
Adjustments should be made to reflect these incentives when analysing varying comparables.
69
Where would you find details of incentives?
UK Finance Disclosure of Incentives Form
70
When and why would you review a UK Finance Disclosure of Incentives Form?
A copy of the fully completed and signed and dated UK Finance disclosure form relating to the subject property should, wherever possible, be obtained prior to submitting a valuation.
It includes details of the property and site, the vendor, construction, warranty, tenure, all incentives offered in the sale of the home,
together with part-exchange information where this is used in the sale.
71
What are some of the ways that a home can be offered at a reduced price?
Bulk Purchases.
Government Scheme
Economy
72
For houses with restrictions on occupancy, (e.g., by income or job type),
what is a typical discount used in the market?
Discounted Market Value
73
What is a new build warranty?
Issued to protect buyers from the costs of fixing structural defects caused by faulty materials or poor workmanship during construction.
74
How long would a typical warranty last for?
10 years.
75
If a property was built in the last 10 years and does not have a professional certificate or guarantee/warranty, would this affect value?
The absence of warranties or assurance schemes, particularly for recently constructed dwellings, may limit mortgageability and consequently affect the assessment of value.
76
What are some of the types of home finance product?
Help To Buy
Shared Ownership
77
Who further regulates valuations for home finance products?
UK Government
FCA
RICS
78
What are the two special assumptions relating to Projected Market Value (PMV) and when would you adopt PMV?
Valuations of residential property for the purpose of possible possession
proceedings, or the proposed sale of a repossessed property, should be on the
basis of projected market value (PMV), subject to the following special assumptions
that:
* the asset will exchange at a future date after the valuation date specified by the
valuer
* during the marketing period the property has been unoccupied and all
furnishings and fittings have been removed
* the vendor (the mortgagee) has to sell the property within a reasonable period to
recover the secured debt.
79
What are the key differences between a lifetime mortgage and a conventional mortgage?
The main differences between a lifetime mortgage and a conventional mortgage
are:
a) the redemption date is not fixed but comprises the date of death of the
mortgagor and
b) no repayments of capital are made, and the interest is ‘rolled up’ and compounded over the length of the mortgage term.
80
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?
The mortgage debt to be redeemed at the end of the term is much greater than with a conventional mortgage, because of the lack of any capital repayment during the term and
the accumulation of ‘rolled up’ interest.
81
What is home reversion?
The occupant sells all or part of your home in return for a cash lump sum, at regular income or both.
82
What is sale and rent back?
Sale and rent back (SRB) is a facility whereby individuals sell their homes to an authorised firm at a discount, in return for the right to remain as a tenant for a set period.
83
What is a home purchase plan?
A home purchase plan serves the same purpose as a regular mortgage, but it is
structured in such a way that makes it acceptable under Islamic Law.
84
What are the bases of value for a registered social landlord’s housing stock for secured lending purposes?
Market Value With Special Assumptions
85
What is a statutory valuation?
valuations of residential property for a number of reasons where the valuation is on a basis defined in law, and/or is required for a specific legal purpose.
Examples:
- valuations for taxation and/or probate purposes, including capital gains tax (CGT) and inheritance tax (IHT)
- valuations for bankruptcy
- valuations for divorce purposes or other legal proceedings
- valuations for council tax
- right to buy valuations.
86
Who is responsible for Council Tax valuations?
Valuation Office Agency (VOA)
87
What Council Tax bands exist in England?
A-H
88
What is the basis of value for Council Tax valuations?
Open Market Value
89
What assumptions are made in a Council Tax valuation?
* The assumed sale was with vacant possession
* Houses were sold freehold
* Flats were sold on a 99 year lease
* Properties were in a ‘state of reasonable repair’s
* The property had no potential for any building work or other development requiring planning permission
90
What is the Right to Buy?
Right to Buy allows most council tenants to buy their council home at a discount.
91
What legislation relates to Right to Buy?
Housing Act 1985
92
When might a lender instruct a drive-by valuation?
A Valuation without an Internal Inspection
93
What is the impact of the Rent charges Act 1977?
Act to prohibit the creation, and provide for the extinguishment, apportionment and redemption, of certain RENT CHARGES.
94
Until 22 August 2037, how should rent charges be dealt with?
Certain types of rentcharge are redeemable under the Rentcharges Act 1977.
This means that you pay a single lump sum and after that no longer have to pay the rentcharge.
95
Within what general distance of a dwelling might Japanese Knotweed have a material impact on value?
3m.
96
What is leasehold enfranchisement?
The name given to the process by which tenants can, in certain circumstances, buy their freehold or acquire a new lease (often called a 'lease extension') from their landlords.
97
How does it differ for flats and houses?
To purchase your freehold title under the Leasehold Reform Act 1967, the property must be defined as a ‘house’, rather than a flat.
98
What is the basis of valuation?
Fair Value
99
What is the basic procedure of leasehold enfranchisement?
Speak to your landlord.
Find a valuation surveyor and a solicitor.
Make a formal offer.
Pay the deposit and allow access.
Counter Notice.
Negotiate terms.
100
Who can serve a valid notice to enfranchise/extend on the freeholder?
a tenant who has for the last two years been a qualifying tenant of the flat
101
How could a mortgagee seeking remedy from a defaulting borrower serve a valid notice?
The mortgagee is entitled to possession without notice or demand, and usually without a court order.
102
How would you value a long leasehold property with a rising ground rent which increases significantly in a fairly short period?
make additional enquiries before valuation if they are aware that an extension or enfranchisement is to be carried out, or has been carried out without the protection of the 1967 or 1993 Acts..
103
Do RICS publish any guidance on leasehold reform?
Leasehold Reform in England And Wales 3rd Edition.
104
What right did the Leasehold Reform Act 1967 introduce?
enfranchisement and extended leases
for houses
105
What is the definition of a house under the Leasehold Reform Act 1967?
“house” includes any building designed or adapted for living in and reasonably so called, notwithstanding that the building is not structurally detached, or was or is not solely designed or adapted for living in, or is divided horizontally into flats or maisonettes; and—
(a) where a building is divided horizontally, the flats or other units into which it is so divided are not separate “houses”, though the building as a whole may be; and
(b) where a building is divided vertically the building as a whole is not a “house” though any of the units into which it is divided may be.
106
What are the qualification criteria to acquire the freehold of a house?
1. the property must be a house.
2. the house must be held under a long lease, i.e. one which was granted for a term of more than 21 years.
3. the house must have been owned by you for more than two years.
107
How long is a ‘long tenancy’?
Any tenancy/ AST over 6 months could be classes as a long term tenancy.
A long Lease is anything over 21 years.
108
Which section are the bases of valuation set out in?
basis of valuation is in Schedule 13- IFRS 13
109
What does the Section 9 (1) basis of valuation comprise?
Under the section 9(1) basis of valuation, it is to be assumed the tenant has taken an extended lease, which is why it is necessary to understand the valuation principles of
the modern ground rent.
110
What does the Section 9 (1A) basis of valuation comprise?
Section 23 of the Housing and Planning Act 1986 amended the 1967 Act so as to include the words ’ … or an extended lease and, where the tenancy has been extended under this Part of the Act, that the tenancy will terminate on the original term date’. This closed what was known as ‘the Hickman’ loophole
111
What does the Section 9 (1C) basis of valuation comprise?
This basis of valuation applies to all those houses that did not qualify for enfranchisement until the amendments of the 1993 Act were introduced.
Section 9(1C) broadly follows section 9(1A) but adds provision for the payment of compensation.
112
Which is the most favourable basis of valuation?
Marriage Value
113
How is a claim to acquire a freehold started?
A Tenant Notice is drafted and sent to the Freeholder
114
What is the main impact of the tenant’s notice?
The tenant’s notice triggers the legal procedures for buying the new lease and you are liable for the landlord’s reasonable costs from the date they receive it.
115
How long does a landlord (reversioner) have to respond to the tenant’s notice?
28 days
116
If a landlord intends to reoccupy or redevelop, what Sections can they rely on?
The Landlords Counter-Notice-
Landlord intends to reoccupy or redevelop- This can only apply where at least two-thirds of all the leases in the building are due to terminate within a period of five years from the date of service of the Initial Notice.
117
If the parties cannot agree on a price, where is the matter referred to?
The dispute is referred to an independent body, the First-tier Tribunal ("FTT")
118
What is marriage value?
The increase in the value of the property following the completion of the lease extension, reflecting the additional market value of the longer lease.
119
What is hope value?
the difference between the existing use value and the price that the market might pay for the property with the hope of a more valuable use.
120
How is marriage value calculated?
The value of the future value less the value of the current property.
50% of the marriage value is split between both parties in relation to their interests.
121
What is the deferment rate?
The Deferment Rate is a percentage used to calculate the compensation a tenant pays to their landlord when they extend the number of years on their lease.
This reflects the current day value of a landlord's benefit of gaining possession at the end of the term.
122
What right did the Leasehold Reform, Housing and Urban Development Act 1993 introduce?
Introduced for flat owners with qualifying leases, the collective right to enfranchise their block of flats and the individual right to a lease extension.
123
What is the basis of a new lease for a flat under the 1993 Act?
In order for the building to qualify under the Act, it must:
- be an independent building or be a part of a building which is capable of independent development; and
- contain two or more flats held by qualifying tenants; and
- have at least two thirds of the flats held by qualifying tenants.
124
What is the basis of valuation in Schedule 13 for the new lease premium under the 1993 act?
Fair Market Value
125
How long can a lease be extended for?
90 Years
126
Is a premium payable upon the grant of an extended lease?
The landlord is entitled to a premium (the price) for extending the lease.
127
What are the additional qualification criteria if the long leaseholder of a house wishes to extend their lease (rather than acquire the freehold)?
1. The tenant must be the tenant of whole house unless he is already the freeholder of those parts of the house of which he is not a tenant. However, the tenant need not also be the tenant of the 'premises'.
2. The tenancy must be a long tenancy (s.1(1)(a)).
3. At the relevant time, the tenant must have been the tenant for the last 2 years (s.1(1)(b)), i.e. the tenant must have been the registered proprietor for the last 2 years.
128
What are the ways to calculate a modern ground rent?
The modern ground rent is calculated as a proportion of the full rental value of the property.
129
What precedent was set in the Sportelli v Cadogan Estate (2008) case?
The valuation should not take into account any "hope value" (the value to the landlord of one day being able to sell an extended lease or the freehold).
130
How is the generic rate in Sportelli calculated?
Deferment Rate = Risk Free Rate + Risk Premium – Real Growth Rate
131
Does a leaseholder have to pay the landlord’s reasonable professional costs?
The leaseholder must pay the freeholder's 'reasonable costs' for a lease extension.
132
What valuation approach should be used to assess the value of the freeholder’s loss (or landlord’s diminution in value)?
Market Value
133
When does marriage value generally become payable?
Once the lease has been extended after agreement with the landlord.
134
What is collective enfranchisement?
It is a right, subject to qualification, for the owners of flats in a building, and sometimes part of a building, to join together and buy the freehold of that building.
135
What does the collective enfranchisement price under Schedule 6 include?
Income received from ground rents (the term) reversionary value of the freehold on expiry of the leases (the reversion) the marriage value.
136
What is the capitalisation rate?
The capitalization rate is calculated by dividing a property's net operating income by the current market value.
137
What is the Delaforce (1970) Effect?
The Delaforce (1970) effect is the overpaying of tenants due to pressure form freeholder/landlord.
138
Explain your understanding of Sloane v Mundy and Reiss v Ironhawk Ltd.
It was determined that relativity should be defined principally by market evidence. Only where such evidence is lacking should reliance be had on historical graphs of relativity.
139
Explain the impact of Cadogan Square Properties Ltd v Earl Cadogan and Cadogan v Erkman.
Tenants can now contend for a higher deferment rate where their leases have less than 20 years unexpired.
140
What precedent was set by the Zucconi and Deritend cases in relation to relativity?
Valuers should either use market evidence, or PCL graphs.
141
What is an adverse differential?
The result of the application of different percentages to decapitalise the site value to reach the section 15 rent, and to recapitalise the section 15 rent in the freehold price computation; the lower the decapitalisation and the higher the recapitalisation percentages, being favourable to the tenant.
142
What is leasehold relativity?
The value of a dwelling held on an existing lease at any given unexpired term divided by the value of the same dwelling in possession to the freeholder, expressed as a percentage.
143
What is relative value?
An investment's value by considering how it compares to valuations in other, similar investments.
144
What do you understand by a Graph of Relativity?
A relativity curve is a graph prepared for leasehold reform practitioners that indicates relative leasehold value at any point in a lease term compared to a freehold value.
145
Who produces graphs of relativity?
Savills
Beckett And Kay
146
Do these graphs vary with different types or locations of property?
Yes, Some present the values on the
assumption that the leaseholder does not have the right to extend their lease, while others assume they do.
147
What is the Parthenia Model?
Hedonic regression is a statistical method used to isolate the effect on value of a single variable.
In the case of lease extension, it is the unexpired length of the lease.
It had been used to determine ‘relativity’ and is intended to provide, a ‘no act world’ when it comes to valuing for lease extension.
148
Explain what you understand in relation to the issue of 'down valuation'.
A valuation given to a property that is less than the agreed sale price
149
What RICS guidance relates to residential leasehold properties and secured lending valuation?
Valuation of residential leasehold properties for secured lending purposes, 1st Edition 2021
150
What principles from this are you aware of?
The guidance has particular application for valuing diminishing lease terms of less than 80 years remaining, when marriage value becomes payable and, in many markets, there starts to be a material impact on market value.
151
What sections of the Red Book and the UK National Supplement should this guidance be read alongside?
UK VPGA 11 in RICS Valuation – Global Standards: UK national supplement 2018 (Red Book: UK national supplement).
152
What length of unexpired lease term does the guidance relate to?
80 years or less.
153
Why does it not relate to unexpired lease lengths below this?
Because it is felt that the affect on value doesn't have as great an impact when it is a longer lease.
154
What factors might affect the valuation of a leasehold property according to the Guidance Note?
* diminishing lease terms
* restrictive covenants in the lease
* planning agreements
* compliance with fire safety and health and safety regulations
* maintenance works
* service charges
* ground rents
155
What assumptions might be made in this type of secured lending valuation?
Assumptions should only be relied on where appropriate enquiries have been reasonably pursued but failed to elicit information.
Examples:
a) The unexpired term of the lease is assumed to be 85 years, and no action is being taken by any eligible party with a view to acquiring the freehold or extending the lease term.
b) There are no exceptionally onerous covenants upon the leaseholder.
c) The lease cannot be determined, except on the grounds of a serious breach of covenant in the existing lease agreement.
156
What special assumption might be agreed and why, with the lender client?
Special assumption that a lender in possession has the right to serve notice to extend the lease or purchase the freehold.
This means that, in the event of default, a lender would be assumed to have the right to operate in the same way as other market participants, and that this would have no impact on value.
157
What methods are available to value a leasehold property and when/why might you adopt each?
Graphs of Relativity- When differences in lease lengths
In conjunction with
Comparable Methods- used when there is numerous sales locally of similar properties.
Used to find similar properties to the subject but to allow for adjustments in accordance to the relatively graph.
158
When would you use a leasehold relativity graph?
The operation of the market will determine leasehold relativity.
Suitably experienced valuers will understand and be able to interpret the market dynamics in their own locality and so have confidence in the particular relativities to be used in adjusting the comparable evidence.
159
How would you choose which leasehold relativity graph to use?
Depending on your location as Central London has specific graphs.
Also market experience locally and your confidence in the particular relatives.
160
What would you use a magnet / plumb bob / spirit level for during an inspection?
Magnet- Test for Lead, asbestos
Plumb Bob- Check vertical lines of property for any distortion.
Spirit Level- unevenness of floors due to movement or subsidence.
161
How would you value a property affected by Japanese Knotweed?
Reduced level of demand
Reduction in price
Cost of remediation
Public perception.
162
What does the legal case of Ryb v Conways (2019) say about the valuation of property affected by Japanese Knotweed?
It is the difference between the market value of a property without Japanese knotweed and that same property where Japanese knotweed is present, as being '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'
163
What valuation approach does the RICS recommend is taken when valuing property is affected by Japanese Knotweed?
Market Value
Japanese knotweed Management Category assessment Tree
164
What guidance sets this approach out?
Japanese knotweed and
residential property 2022
165
What is the House Price Index and how would you use it when valuing a residential property?
A joint production by HM Land Registry (HMLR), Registers of Scotland, Land and Property Services Northern Ireland, and the Office for National Statistics (ONS).
A guide to the change in value of property both locally and nationally.
This could be used as part of your comparable evidence scenes checking routine when checking demand.
166
What are some of the key drivers of demand for housing?
Affordability.
Confidence.
Interest Rates.
Population.
Mortgage availability.
Economic growth and real incomes.
Cost of renting.
167
How would you assess and report on condition in an investment valuation?
Discounted Cash Flow
168
How could a S106 agreement affect the valuation of a new build home?
Section 106 agreements are legal agreements between a planning authority and a developer, or undertakings offered unilaterally by a developer, that ensure that certain extra works related to a development are undertaken.
Can improve the area by the improvements they have agreed to undertake.
169
How would you analyse a part-exchange comparable?
RICS members should carefully consider the impact of any such premium price paid for a part-exchange property, the details of which will be noted in the UK Finance disclosure form.
Comparables from sales involving part-exchange may have to be ignored if
there is insufficient detail about the bought-in property transaction.
170
What is a neighbourhood in terms of residential valuation and why do you need to understand this concept?
New build Valuation in relation to Off-Site comparables.
RICS members should also take into account the size and location of comparable
developments, together with the immediate neighbourhood and factors such as school
catchment areas.
171
When analysing comparable evidence, how would you apply the concept of adjusted value?
Evidence of directly comparable resale property can provide an insight into the market value of a new-build property, when suitably adjusted to reflect the attributes of the new property that add value.
172
What residential design features do you consider add value in your locality?
* energy efficiency
* better layout/design
* additional bathrooms
* better kerb appeal and
* builders’ brand/reputation.
