Valuation Flashcards
What are the 5 methods of Valuation?
1) Comparable Method
2) Investment Method
3) Profits Method
4) Depreciated Replacement Cost Method
5) Residual Method
What guidance is there on the comparable method?
The RICS Guidance Note, Comparable Evidence in Real Estate Valuation 2019
What is a comparbale?
An item of information used during the valuation process as evidence to support the valuation of another similar item
What is goof comparable evidence?
Comprehensive - several examples rather than a singular transaction
Similar - of character & size
Recent - as close to the date of valuation to accurately reflect the market at that time
What is the definition of 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 arms length transaction, after proper marketing and where the parties had each acted knowledgeably, prudently and without compulsion
What is Basis of Value?
A statement of the fundamental measurement assumptions of a valuation. Typically market value
What is fair value?
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
What is the difference between market value and fair value?
Fair value is a measure of an assets worth whereas market value if the price of an asset in the marketplace.
What is Investment Value?
The value of an asset to the owner or a prospective owner for individual investment or operational objectives.
What is marriage value?
An additional element of value created by the combination of two or more assets or interests where the combined value is more than the sum of the separate values
What is the difference between an assumption and special assumption?
As assumption is something that is believed to be true and therefore is stated so and not checked by the valuer
A special assumption is something that either assumes something that differ from the actual facts at the valuation date
What is a special purchaser?
A particular buyer for whom a particular asset has a special value because of advantages arising from its ownership that would not be available to other buyers in the market.
What are the terms of engagement? How do they differ from the terms of Business?
The TOE are written confirmation of the conditions that the member and client have agreed, such as fee, scope of work
TOB are matters which apply to all of the members business dealings, unless agreed otherwise, such as complaints handling, force majeure
What are differing reasons a valuation might be required?
Taxation reasons, Insurance reasons, Prior to a sale, Lending,
What is the Red Book?
The red book is the RICS Valuation – Global Standards, the current edition is effective from the 31st January 2022. It includes a set of standards for valuers to follow that are both mandatory and advisory
What is the importance of the Red Book?
To set out standards to ensure consistency, objectivity and transparency and sustain public confidence in valuation, and in particular red book valuations.
What are the changes to the new Red Book?
- reflects changes to the International Valuation Standards 2022
- emphasises importance of terms of engagement
- requires more commentary on ESG matters,
What is an external valuer?
Someone with no material links to the asset to be valued or the client
What is an internal valuer?
- someone employed by a company to value the assets of the company
- valuation for internal use only
- no third party reliance
What do you need to check prior to accepting a valuation instruction?
1) Competence - do I have the level of knowledge for the work required. if not - refer them to RICS find a surveyor
2) Conflicts - are there any conflicts
3) Terms of Engagement - set out in writing the full confirmation of instructions
What is due diligence?
Checks that need to be undertaken that may have a material affect on the valuation
What are the applications of the 5 methods of valuation?
Comparable - secured lending
Investment - taxation
Residual - development land
Profits - valuing a business
depreciated replacement cost - insurance
Why might a red book valuation not be used?
internal purposes and planning - such as tax planning
prior to sale - when a market appraisal might be more appropriate
internal accounting purposes
Why is the Red Book important?
- Gold Standard - valuations carried out in accordance with the Red book are carried out in line with a high set of standards,
- Reliance - because of these high standards the end product should be considered a robust document
- Similarity - same set of standards so that there is relativity
