Valuation Flashcards
What are the 5 methods of valuation?
1) Investment
2) Residual
3) Comparable
4) Depreciative Replacement Cost
5) Profits
What is market value/rent?
Market value is the estimated amount for which a property should exchange on the date of valuation between a willing buyer and a willing seller in an arm’s length transaction after proper marketing wherein the parties had acted knowledgably, prudently and without compulsion.
Market rent is the estimated amount for which an interest in real property should be leased on the valuation date between a willing lessor and a willing lessee on appropriate lease terms in an arm’s length transaction after proper marketing when the parties had acted knowledgably, prudently and without compulsion.
What is the current title of the Red Book?
RICS Valuation – Global Standards 2017
What are some of the changes made in the most recent Red Book?
The incorporation of IVS 2017 Global Standards
What are some of the changes outline by IVS 2017?
Bases of value – Comments upon equitable value (formerly fair value) and synergistic value etc.
Explain Capital Gains Tax?
A tax on the profit made when an asset is sold which has increased in value. This does not include the property classed as your main dwelling.
Does the condition of a roof make a difference on the valuation?
The condition of all factors are in a property are taken in to account for a valuation. It would only make a major difference if the condition was found to be in a poor state of repair.
Would add value to a property as it had PV panels?
There is no evidence to suggest they attract any premium for valuation purposes. Can often be a burden as buyer may be required to take on outstanding debt. Most lenders advise not to add value for PV panels.
Are you aware of projected market value often requested for repossession properties?
Yes, it is based on assumptions which are agreed in the terms of engagement and can included recommended good practice for sales to be achieved within 90 days or another specific set time limit.
A client asks you to value a hotel , what advice would you give?
I would advise them that it would require the Profits method of valuation and this was not an area of my expertise. I would provide them with the details of our leisure department who do specialise in such valuations.
What difference is there in terms of valuing traditional housing and non-traditional housing?
In Edinburgh there tends to be sufficient comparable evidence and differences in values tend to be as a result of specification, size and location. If the form of construction was deemed unmortgageable then this would have an adverse effect on value.
Do you have experience of valuing in a rapidly rising or falling market?
No personal experience, however I have carried out retrospective valuations from 2007. Ensure comparable evidence is as close to date of value as possible, discuss with colleagues.
What would you do if a client challenged your valuation with other sales evidence?
I would corroborate and analyse this evidence and take these in to account in my valuation if found to be recent and relevant.
According to RICS, how are incentives dealt with in valuing new build property?
They do not add value to a property but facilitate the sales transaction. They should be accounted for when analysing comparable evidence. Establish if the incentives are property related (higher spec fixtures and fittings etc.) or non-property related (cash, LBTT payment etc.) The valuer should exercise professional judgement.
What else can be included when valuing a property?
New build premium
When was the Red Book last updated?
Effective from 1st July 2017
What sections of the Red Book are mandatory?
Professional Standards (PS1 + PS2), Valuation Technical and Performance Standards (VPS1- 5)
What does PS1 and PS2 relate to?
Ethics and compliance
What does VPS 1 – 5 relate to?
VPS1 – Terms of engagement
VPS2 – Inspections
VPS3 – Valuation Report
VPS4 – Bases of Value
VPS5 – Valuation Approaches
What are the bases of value?
- Market Value
- Market Rent
- Equitable Value
- Investment Value
- Synergistic Value
- Liquidation Value
Give an example of some points contained within the terms of engagement?
- Fee
- Surveyors details and qualifications
- Firm’s details
- Clients name
- Type of valuation
- Basis of valuation
- Scope of inspection
- Inspection date/time
Are you aware of any case law relating to valuation?
Stokes v Cambridge Corpration (1961)
Assessing ransom strip value – The court held that a proper price to be attributed to the ransom strip was one-third of the increase in value of the subject land attributable to acquisition of the ransom strip.
Titan v Colliers (2015)
Valuation fell within a 15% margin of error and was not negligent
What is necessary in a valuation report?
The minimum requirements are found in VPS3 of the red book and are-:
1) Identification and status of the seller
2) Identification of the client and any other intended users
3) Purpose of the valuation
4) Identification of the asset to be valued
5) Basis of value
6) Valuation date
7) Extent of investigations
8) Nature and source of information relied upon
9) Assumptions and special assumptions
10) Consent, or any restrictions to publication
11) Confirmation the valuation has been undertaken in accordance with Red Book/IVS standards
12) Valuation approach and reasoning
13) Valuation figure(s)
14) Date of valuation report
Talk me through a residual valuation you were involved in?
Vacant site in Midlothian.
Private sale – potential developer wanted a valuation of site.
To be converted in to a 5-bedroom detached houses with integral garages.
Profit of 17.5% was required.
An estimated build cost of £330,000 (Including 5% contingency) was used (figures obtained from a similar project the developer had recently completed and looked over by our building surveying department.)
Estimated end value of £625,000 based on £250/sq.ft obtained from comparable evidence.
5% Contingency (of construction costs).
10% Professional fees (of construction costs).
Marketing fees of 2% of GDV.
Finance costs of 7% based on loan agreement that developer had agreed in principal.
Build time of 12 months.
Total cost of development = £440,000
Profit = £110,000
Site value = £625,000 - £440,000 - £110,000 = £75,000
Talk me through a reinstatement valuation you were recently involved with?
Two storey 1930’s detached house with a single detached garage.
Inspected the property taking a note of materials used in/form of construction.
Measured the property.
Discussed with Building Surveying department who estimated an applicable rate of £2000/sqm and £15,000 for the single garage.
This equated to £235,000
Talk me through the valuation of the retail unit you were involved in?
Small Class 1 retail unit in south Edinburgh.
Inspected the property with the commercial partner.
The reduced floor area was calculated at 242 sq.ft.
Current rent is £10,000 per annum which is line with market rent (£41/sq.ft)
4 Years left on lease.
The current rent was capitalised with a yield of 6%, and again with the reversion in perpetuity taking in to account a 3 month marketing period and 3 months rent free.
LBTT, Agents fees and Legal fees were deducted and this equated to a capital value of £160,000.
What is the reduction factor for the first floor area ITZA?
Typically 15%
Talk me through an investment valuation you were involved in?
Instructed by an investment fund to value a block of new build flats.
20 Units in total (16 x 2 bed flats, 4 x 1 bed flats)
The Market aggregate value was £3m, based on comparable evidence.
The Market aggregate rent was £160,800 per annum.
The subjects would be let to a social housing provider on ten year lease and rents would be based on the local authority housing allowance. This equated to £92,000 Net per annum.
Net initial yield of 5.5% for year 1.
Years 2-10 and perpetuity a yield of £6.25% was used, obtained from comparable evidence.
6 month end period void.
Less expenses for legal fees, agent fees and LBTT this equated to £2m (Rounded)
When would you use a retention?
- When the defect would have a material effect on the valuation i.e. 1% of valuation or a structural issue or over £2000.
- In line with specific lenders guidance e.g. Santander if the issue makes the property unmortgageble in current state of repair.
How does a retention work?
The lender will not pay the remaining amount until the works that resulted in the retention have been completed. For example, if a house has been valued at £120,000 but a retention of £10,000 is in place for structural repairs then the lender will only lend up to £110,000 and then release the £10,000 once the works are complete.
If there was no recent comparable sales evidence how would you value a subject?
- A land value.
- Recent listings e.g. first second hand sale on a new build site.
What are the various steps to a valuation report?
- Receive Instruction.
- Confirm Terms of Engagement.
- Undertake a conflict of interest check.
- Log the instruction on to the database.
- Identify the location of the valuation.
- Establish the tone of value.
- Establish the type of property.
- Ensure you have the competence to carry out the valuation.
- Undertake the inspection.
- Complete site notes.
- Research current sales.
- Nalyse comparable data.
- Produce report.
- Produce invoice.
- Ensure file is correctly stored.
Where would you find the conditions of engagement in the red book?
VPS1 Minimum Terms of Engagement
What are the minimum terms of engagement?
- Name and status of the valuer and disclosure of any previous involvement.
- Name of client and any other intended users.
- Purpose of the valuation.
- Identification of the asset to be valued.
- Basis of value.
- Valuation date.
- Extent of investigations.
- Nature and source of the information relid upon.
- Assumptions and special assumptions.
- Restrictions for use, distribution and publication.
- Confirmation of Red Book/IVS compliance.
- Description of the report.
- Fee basis.
- Complaints handling procedure to be made available.
- Statement that the valuation may be investigated by the RICS for monitoring regulations to comply with their conduct and disciplinary regulations.
What is the definition of Investment Value?
The value of an asset to the owner, or prospective owner, for individual investment or operational objectives.
What are the 3 valuation approaches detailed in VPS 5?
- Market approach – “Comparable”
- Income approach – “Investment, Profits
- Cost approach –“Depreciated Replacement Cost, Residual”
How is a yield calculated?
(Annual Rent/Purchase Price or value) x 100
What are the various yield definitions?
Yield – The annual rate of return on an investment expressed as a percentage. It relates to both risk and reward in an investment.
All Risks Yield - Implies that the investor had considered all the risks and potential reward in arriving at a purchase price which is then reflected in the yield.
Equated Yield – Describes the yield on a property investment, which takes in to account growth in future income.
Indicative Yield – Estimates the annual dividend yield; it is only a forecast and can go up or down. Initial yield is the annualised rent of a property as a percentage of the property value.
Prime Yield – Describes the remunerative rate of interest appropriate at the date of valuation if the property is to be let at its full market rental value. Considered as a benchmark to compare against other properties.
Reversionary Yield – Is the anticipated yield to which the initial yield will rise and fall.
What other methods have you been involved with, excluding comparable?
Investment valuation and residual valuation.
How do you deal with having no suitable comparables for the past 6 months?
- Use older comparables taking price growth in to account.
- Widen the search parameters e.g. nearby districts of a similar style, larger/smaller houses.
How would you value an office?
The investment method.
How would you value a school?
Depreciated Replacement Cost
