Valuation 1.2 Flashcards
How can rental incentives impact on HMO valuation?
Rental incentives can impact the the sustainable rent that is needed to assess market rent for valuation.
What are guaranteed rents / cash backs in lieu of rental income and how can these impact upon value?
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.
How can Market Rent impact upon the underwriting of a loan?
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.
How have you commended upon any limitations to accuracy of your HMO
valuations?
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.
How can maintenance costs impact upon valuation and what does the Red Book say about these for HMOs?
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.
When is it reasonable to adopt the income approach when valuing HMOs under the Red Book?
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.
What additional considerations do you need to make for category 3 scenarios?
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.
What is a lifetime mortgage/home reversion/sale and rent back/home
purchase plan?
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.
What are the Red Book requirements in relation to these?
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.
What is shared ownership/shared equity scheme?
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.
How would you value a shared ownership / shared equity scheme property?
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.
What is a trustee mortgage valuation?
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’.
What legislation relates to this?
Trustee Act 1925
What is affordable/market rent?
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
What is your role in relation to advising a lender client?
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.
What liability do you have to the borrower when advising a lender client?
Duty Of Care
Does this vary depending on whether the valuation is disclosed by the mortgagee?
No
Tell me about the requirements in relation to your terms of engagement / inspection.
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.
What is the basis of value?
VPS 4- Basis Of Value
A basis of value is a statement of the fundamental measurement assumptions of a valuation.
What factors may have a material impact on value?
The uniqueness of the property and its location.
Limited or Restricted information
Economic or social factors
What assumptions / special assumptions have you made in relation to this?
Assumption:
The property is assumed to have a cavity wall insulated.
Special Assumption:
-the property has planning permission when information wasn’t provided.
What is reinstatement cost and when would you be asked to provide it?
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.
How would you calculate it?
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.
How would you deal with suspected hidden defects?
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.
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.
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.
Where would you find the RICS Residential Mortgage Specification?
Redbook UK Supplement VPGA 11.
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.
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.
What RICS guidance were you aware of?
Valuation of historic buildings
1st edition (2014)
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.
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
What type of RICS surveys include a valuation?
RICS Home Survey – Level 2 (survey and valuation)
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
What guidance does the RICS provide in relation to this?
Home Survey Standard 1st edition, 2019
What is the basis of valuation in this type of report?
Market Value
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).
What else do you need to include in relation to your valuation?
Re-instatement cost for building insurance.
Tell me about the RICS guidance relating to the valuation of individual new-build homes.
Valuation of New Build Homes 2019
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
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.
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.
What is a key principle of this document?
It provides best practice guidance and should be referred to when valuing individual new-build homes.
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.
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
What is an AVM?
Automated Valuation Model
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
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
Have you valued a residential property purpose built for renting?
No
What RICS guidance are you aware of in relation to this?
Valuing Residential Property Purpose Built for Renting, 1st edition
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.
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
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.
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.
What factors influence yields?
tenant changes
speed of let up
depth of occupier market
void rates
Market Rents
Taxes
Fees
What residential operating expenses would you need to take into account?
Agent Fees
Utilities
Taxes
Legals
What is Net Operating Income?
A commonly used figure to assess the profitability of a property.
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.
Have you valued a BTL / HMO property?
No
What RICS guidance are you aware of in relation to this?
RICS Valuation of Buy To Lets And HMO’s 2nd Edition
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:
- Single residential units
- Houses in Multiple Occupation (HMOs)
- Multi-unit blocks
The guidance applies to valuation work for both private and lender clients.
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.
How might the release of a large number of new build properties impact the local market?
Excess supply will reduce demand and prices.
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.
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.
Is there a set discount for a new build premium?
No.
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.
Should you reflect sales incentives in your valuation?
Adjustments should be made to reflect these incentives when analysing varying comparables.
