Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

APC > Valuation > Flashcards

Valuation Flashcards

1
Q

What are the different methods of valuation?

A

a. Comparable
b. Investment
c. Profits
d. Residual
e. Depreciated Replacement Cost / Contractors – Method

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

What is the Comparable method of valuation?

A

a. Uses sales data of properties that have recently been sold (last 6 -12 months) and are similar in size, location, condition, features and specification
b. Underpinned by comparable evidence which must produce a sound valuation that can stand scrutiny from the client and market

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

What is the Investment method of valuation?

A

a. Used where there is an income stream to value i.e the property is tenanted
b. Can be used on residential, commercial, retail, industrial and agricultural properties
d. This approach is growth implicit

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

What is the Profits method of valuation?

A

a. Used to value specialist properties like hotels, schools, cinemas, theatre etc where the value is derived from the business and its trading potential
b. The valuer will analyse the earnings of the business to calculate value. They can use the previous years earnings or take the average earnings over a set period.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

What is the Residual method of valuation?

A

a. The aim of the residual method of valuation is to establish how much a purchaser should pay for the development site / land
b. The Gross Development Value (GDV) is established first and then all of the development costs are deducted, leaving a residual value which is the cost of the development site / land.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

What is the Depreciated Replacement Cost method of valuation?

A

a. Also known as the Contractors Method and is a value based on the current equivalent cost of replacing an asset including deductions for physical deterioration and all other forms of obsolescence as well as the purchase land value.
b. Known as a method of last resort and is only used when it is impractical to use all other valuation methods

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

What are the different purposes of valuation?

A

a. Financial Reporting
b. Commercial Secured Lending Purposes
c. Residential Mortgage Purposes
d. Taxation
e. Compulsory Purchase and Statutory Compensation

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

What is the RICS Valuation - Global Standards 2022

A

a. Contains mandatory rules and best-practice guidance for members who undertake asset valuations

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

What is the current title of the Red Book?

A

a. RICS Valuation – Global Standards 2022

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

When was the Red Book last updated?

A

a. Effective from January 2022

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

What are some of the most recent changes to the Red Book?

A

a. Emphasising the need for clear and documented terms of engagement
b. Definitions and commentary on sustainability

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

What sections of the Red Book are mandatory?

A

a. Professional Standards (PS1 and PS2)
b. Valuation Technical and Performance Standards (VPS 1-5)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

What do Professional Standards 1 and 2 relate to?

A

a. PS1 - Compliance
b. PS2 – Ethics

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

What do Valuation Technical and Performance Standards 1-5 relate to?

A

a. VPS 1 – Terms of Engagement
b. VPS 2 – Inspections
c. VPS 3 – Valuation Report
d. VPS 4 – Bases of Value and Assumptions
e. VPS 5 - Valuation Approaches and Methods

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

What are the 6 bases of value?

A

MMISEL

a. Market Value
b. Market Rent
c. Investment Value
d. Equitable Value
e. Synergistic Value
f. Liquidation Value

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

What steps would you undertake following your valuation instruction?

A

a. Get details of the property
b. Check for conflict of interest
c. Provide a letter of instruction – Must be signed
d. Define the purpose of the valuation
e. Gather information i.e purchase price
f. Confirm factors such as rating, planning and environmental
g. Inspect and measure the property
h. Research the market
i. Value the property
j. Compile the report
k. Check valuation
l. Report to the client

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

What points would you expect to see covered in a Banks Letter of Instruction on a valuation for secured lending?

A

a. Details of borrower
b. Details of the Property
c. Purpose of the valuation
d. Any conflicts of interest
e. Details of the loan to be provided
f. Who the report is to be addressed to
g. Any special assumptions

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

What is Market Value?

A

a. RICS Definition: “The estimated amount for which an asset 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 each acted knowledgeably, prudently and without compulsion.”

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

What is Investment Value?

A

a. RICS Definition – “The value of an asset to a particular owner or prospective owner for individual investment or operational objectives.“
b. Often used to measure performance against an owners own investment criteria

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
20
Q

What is Fair Value?

A

a. RICS Definition – “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.”
b. Concept of Fair Value is consistent with Market Value and there would ordinarily be no difference between the valuation figures

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
21
Q

What is Hope Value?

A

a. Hope value is the term used to describe the market value of land based on the expectation of getting planning permission for development on it. This differs from the existing use value which is what the land or property is worth in its current form.
b. Think “I hope the land will be worth this much”

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
22
Q

What is Marriage Value?

A

a. This is the extra value that arises from the merger of two physical or legal interests
b. Think of “two houses getting married”

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
23
Q

What is the definition of Special Value?

A

a. An extraordinary element of value over and above the market value
b. What an investor or group of investors believes the property to be worth above market value due to unique advantages from the asset acquisition

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
24
Q

What is Capital Gains Tax?

A

a. 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.
b. 10% - Basic rate taxpayers
c. 20% - Higher rate taxpayers

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
25
Q

What is an assumption?

A

a. A supposition taken to be true

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
26
Q

What is a special assumption?

A

a. An assumption that assumes facts that differ from the actual facts existing at the valuation date.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
27
Q

What is Land and Buildings Transaction Tax (LBTT) in Scotland?

A

a. Replaced UK Stamp Duty Land Tax in 2015 following the Scotland Act 2012
b. Residential rates are as follows:
Up to £145,000 0%
£145,001 - £250,000 2%
£250,001 - £325,000 5%
£325,001 - £750,000 10%
Over £750,000 12%

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
28
Q

What is the Additional Dwelling Supplement?

A

a. Came into force in April 2016 and is charged at 4% on the total purchase price
b. Introduced to protect opportunities for first-time buyers in Scotland

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
29
Q

When valuing new build properties, what is a Disclosure of Incentives Form and why is it used?

A

a. Introduced in 2008, the purpose of the form is to draw all the relevant financial information about the sale of newly built, converted and/or renovated property transactions into a single form.
b. It was introduced after the credit crunch to improve transparency and simplify the flow of information to all key parties involved in the transaction.

30
Q

How are incentives dealt with in valuing new build properties?

A

a. They do not add value to a property but facilitate the sales transaction.
b. They should be accounted for when analysing comparable evidence.
c. Establish if the incentives are property related i.e higher spec fixtures and fittings or non-property related i.e cash, LBTT payment etc.
d. The valuer should exercise professional judgement.

31
Q

When would you include a retention in a valuation?

A

a. If the cost of works is going to be more than 10% of the property value you would use a retention.
b. A way to avoid retentions is to incorporate the costs of the work into the value of the property i.e you might deduct £10,000 from the final value instead of putting in a retention of £10,000.

32
Q

A client asks you to value a specialised property type i.e a hotel, what would you do?

A

a. As this would require the use of the Profits Method of valuation I would advise them that this was not in my area of expertise. I would then pass them the details of the relevant department who could assist them in the valuation.

33
Q

What difference is there in terms of valuing traditional and non-traditional housing?

A

a. The properties are valued using the comparable method however if the form of construction was deemed unmortgageble then this could have a negative impact on value.

34
Q

What would you do if a client challenged your valuation with other sales evidence?

A

a. I would analyse their evidence and, considering they were recent, relevant and compared properly to the subject, I would take them into account in my valuation.

35
Q

Would adding solar panels to a property increase value?

A

a. There is no evidence as of yet to suggest this would attract a premium however with the rise in the cost of living and the implementation of the UK government sustainability targets this may add value in the future

36
Q

What is projected market value and when is it usually requested?

A

a. It’s the market value at a particular time in the future
b. Assumptions for this are outlined in the terms of engagement
c. Good practice is for sales to be achieved within 90 days or another time limit
d. Usually requested for repossessions

37
Q

What information is included in the Terms of Engagement?

A

a. Fee
b. Surveyor details
c. Firm’s details
d. Client’s name
e. Type of valuation
f. Basis of valuation
g. Scope of inspection
h. Inspection date and time

38
Q
  1. Are you aware of any case law in relation to valuation?
A

a. Titan V Colliers (2015)
b. Determined that Colliers were negligent in their valuation and had overvalued by 31%. The claimant sued for damages for the 31% overvaluation.

39
Q

Talk me through a Residual Valuation you were involved in?

A

a. Proposed development in Easthouses district of Midlothian for Midlothian Council
b. Proposal for 36 residential units, 6 of which are social housing, consisting of 2,3 and 4 bed properties.
c. I used the comparable method to calculate a rate/m2 for each property type
d. I used the rate/m2 to calculate a GDV of £7,669,500
e. A discount was applied to the affordable units of 20%
f. I carried out a sensitivity analysis on the GDV assuming variations of 2.5% - 5% in relation to costs, profit, exit values etc.
g. Development costs including construction costs, finance fees, Section 75 payments etc were applied to the GDV which provided a residual site value of £575,000

40
Q

Talk me through a Reinstatement valuation you were involved in?

A

a. Detached house in Greenhill district of Edinburgh
b. I completed a floor plan and calculated the GIA of the main building and double garage
c. I took note of the construction type i.e timber frame for the main building and solid block for the garage
d. Calculated the reinstatement cost using the GIAs and BCIS rates. In this case it was £2,600m2 for the main building and £2,000m2 for the garage.

41
Q

How is Yield calculated?

A

a. (Annual Rent / Value) x 100

42
Q

What are the various yields?

A

APIRE

All Risks Yield
Equated Yield
Indicative Yield
Prime Yield
Reversionary Yield

43
Q

What is the definition of a yield?

A

a. The annual rate of return on an investment expressed as a percentage. It relates to both risk and reward in an investment

44
Q

What valuation method would be used to value a school?

A

Profits Method

45
Q

What valuation method would be used to value a hotel?

A

Profits Method

46
Q

Talk me through a hypothetical valuation using the Profits Method

A

a. Establish Gross Profit by deducting cost of sales from turnover
b. Establish Net Profit by deducting working expenses from Gross Profit
c. Deduct the interest/profit on the tenant’s capital and annual sinking fund for contents to get the Net Operating Profit
d. Capitalise using a suitable YP (calculated from comparable all risk yields) to obtain market value

47
Q

What are the main drivers that impact value?

A

a. Location
b. Size
c. Condition
d. Facilities i.e garage

47
Q

What are the main drivers that impact value?

A

a. Location
b. Size
c. Condition
d. Facilities i.e garage

48
Q

What are the 3 valuation approaches detailed in VPS 5?

A

a. Market Approach - Comparable Method
b. Income Approach - Investment and Profits Method
c. Cost Approach - DRC and Residual Method

49
Q

How does a retention work?

A

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 £100,000 but a retention of £10,000 is in place for structural repairs then the lender will only lend up to £90,000 and then release the £10,000 once the works are complete.

50
Q

What are Parry’s Tables and when are they used?

A

a. “Parry’s Valuation and Conversion Tables” First published in 1913, they are used as a calculation tool for property valuation, development and investment appraisal.
b. Help to make calculations for compound interest easier i.e “Amount of a £1”

51
Q

Explain the various development costs encountered when carrying out a development appraisal?

A

a. Construction Costs
b. Contingency i.e 2.5% of construction cost
c. Site acquisition costs
d. Finance Fees
e. Professional fees
f. Section 75 Payments
g. NHBC guarantees

52
Q

What is a Section 75 Agreement?

A

a. Otherwise known as a planning obligation, this is a contract between the landowner/developer and local council as part of the planning application.
b. May restrict land use or require fees to be paid to the local council to support local facilities i.e schools, roads, hospitals etc

53
Q

How are Section 75 fees calculated?

A

a. Negotiated between the council and developer

54
Q

Talk me through an hypothetical Investment valuation i.e for a portfolio?

A

a. For a freehold property the calculation is Net Income x Years Purchase = Capital Value
b. If income unknown, calculate net income by using comparables to find the market rent (assuming FRI lease) and deducting relevant expenses
c. Calculate the yield i.e All Risks Yield using market comparables (Years purchase = 1 / Yield i.e 1 / 8% = 12.5
d. Multiple the two together to get a capital value

55
Q

What does Years Purchase (YP) mean?

A

a. Present value of £1 per annum forever
b. YP perp = 1/i where i = Yield

56
Q

How is Yield calculated?

A

a. (Annual Rent / Value) x 100

57
Q

What is an All Risks Yield and when is it used?

A

a. Standard comparison measure of the rate of return of an investment
b. Calculated using market comparables of like-for-like properties
c. Used for comparing like-for-like properties

58
Q

What is generally the minimum ARY which is considered adequate?

A

a. At least 8% or above

59
Q

What is meant by under, over and rack rented?

A

a. Under – Passing rent is below the market rent
b. Rack – Passing rent is equivalent to market rent
c. Over – Passing rent above market rent

60
Q

How would you value a shop?

A

a. Comparable method
b. Use zones to compare sizes and value.
c. Split the NIA into zones and use the “Halving back” method i.e A = x, B = ½ X, C = ¼ X. All zones beyond zone D are regarded as Remainders.

61
Q

What is zoning in relation to retail properties?

A

a. Standard method of measuring retail premises to calculate and compare their value.
b. The ship NIA is divided into zones, each of a depth of 6.1m
c. Zone A is closest to the shop frontage window and is the most valuable
d. Each zone decreases in value the further back from Zone A it gets.

62
Q

At what value does a property have to be before inheritance tax is charged and at what percentage?

A

£325,000
40%

63
Q

What is the hierarchy of evidence when conducting comparable valuations?

A

A - Direct comparables
B - General market data
C - Other sources

64
Q

What is the UK supplement of the Red Book?

A

Sets out requirements and guidance for members carrying out valuations subject to UK jurisdiction.

It is supplemental to the Global standards and not a substitution to it

65
Q

When was the RICS Valuation – Global Standards: UK National Supplement updated?

A

October 2023
Effective from May 2024

66
Q

What has been updated in the Red Book – UK National Supplement as of October 2023?

A

General wording throughout
Inclusion of recommendations following the review of real estate investment valuations

67
Q

How are liferents calculated?

A

Market value is calculated using the comparable method

A percentage deduction is calculated which considers the liferenters age, health, lifestyle, length of tenancy etc.

This deduction is made to the Market value, leaving the liferent value.

Example - If the liferenter was a smoker on his last leg with no dependents, the value may only drop by circa 10%-15%

Think: The closer the tenant is to death the higher the end value.

68
Q

What is a liferent?

A

A tenant is given permission from the landlord to live in the property for life or a set period of time.

The property cannot be sold while the liferent tenancy stands.

You need to liaise with solicitors to confirm the terms of the liferent

69
Q

What are the average fees for a development appraisal?

A

Contingency – 5%
Professional Fees – 10%
Finance Fees – 7%
Estate Agent Fees - 1.5%
Profit – 10% - 15%

APC (22 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions