Valuation Flashcards
What are the 5 methods of valuation
- Comparable method
- Investment method
- Residual method
- Cost method
- Profits method
Summarise the Comparable method
Comparable method: This approach involves comparing the property being valued with similar properties that have recently been sold in the same area. The valuer analyzes the differences in size, location, condition, and other features to arrive at a value.
Summarise the Comparable method
Comparable method: This approach involves comparing the property being valued with similar properties that have recently been sold in the same area. The valuer analyses the differences in size, location, condition, and other features to arrive at a value.
Summarise the investment method
Commonly used for commercial property valuations.
Involves estimating the net rental income that is likely to be generated over a set period, typically ten years.
Valuer then applies a yield rate to the income to arrive at capital value.
Summarise the residual method
Similar to the investment method - used for valuing development projects. Estimates the future value of completed development, deducts the cost of development and the developer’s profit - arrives at a residual value.
Summarise the cost method
This involves estimating the cost of rebuilding the property from scratch, taking into account construction materials, labor costs, professional fees. Used when there are few comparable sales and the property has unique characteristics.
Summarise the profits method
Used to value businesses that are closely tied to a specific property, such as hotels. The valuer estimates the profit that the business is likely to generate and applies a capitalization rate to arrive at value.
What are the main bases of valuation?
- Market Value
- Investment Value
- Fair Value
- Rental Value
- Residual Value
- Depreciated Replacement Cost
- Existing Use Value
What is the market value?
This is the estimated amount that a property should sell for in an open and competitive market, between a willing buyer and a willing seller.
What is the investment value?
This is the value of a property to a particular investor, based on their individual investment criteria.
What is fair value?
This is the value at which an asset could be exchanged or a liability settled between knowledgeable, willing parties in an arm’s length transaction.
What is rental value?
Rental Value: This is the amount of rent that a property is likely to generate, based on its market rental value.
What is residual value?
Estimated value of a property or development project, taking into account all costs, including construction costs, fees, and profits.
What is depreciated replacement cost?
Estimated cost of replacing a property, taking into account its current age, condition, and obsolescence.
How do you decide which valuation method to apply?
Work with a registered valuer to come to a conclusion.
Be aware of the purpose and client requirements and relevant guidance.
Consider Red book valuation and read up on RICS requirements.
When and why would you use one of the 5 methods?
First of all - I would work with registered valuer to arrange
Two possible answers:
If valuing a pub I would use the profits method. Why? - Because it’s the RICS stipulated method for valuing a business tied to property.
When valuing a leasehold flat for the purpose of advising a lender, I would use the comparable method where data made this possible. Comparable is widley regarded as the preferred valuation method.
Why is it important to record accurate information during a building inspection?
To comply with RICS standards
What is a years purchase multiplier?
Factor used to convert rental income into a capital value.
Give me an example of a good covenant and how this might impact a valuation.
A good covenant is a legally binding agreement that ensures a property owner will fulfill their obligations.
For example, a long-term lease on a property could be seen as a good covenant and may have a positive impact on the valuation.
How would you distinguish limitations on liability in your valuations?
Limitations on liability in valuations would be clearly stated in the valuation report, highlighting any specific exclusions or assumptions made.
How would you distinguish limitations on liability in your valuations?
Limitations on liability in valuations would be clearly stated in the valuation report, highlighting any specific exclusions or assumptions made.
Where in your valuation report do you state any limitations on liability?
Limitations on liability would be stated in the assumptions and basis of valuation section of the report.
What relevance does Hart v Large have on your valuation practice?
I’m not a valuer
But would expect valuers to be more vigilant in advising further investigations for visual defects and clearly setting out scope of survey
What aspect of Hart v Large allowed the judge to award damages without applying the SAAMCO cap?
The fact he failed to recommend further investigations into defects issue
What is the SAAMCO cap?
provides that a claimant can only recover loss that falls within the scope of the duty of care assumed by the negligent defendant professional adviser.
Under the SAAMCO cap, is a valuer liable for losses due to a downturn in the market?
Under the SAAMCO cap, a valuer is not liable for losses due to a downturn in the market, only for losses directly caused by their negligence.
Under the SAAMCO cap, is a valuer’s liability usually limited to the overvaluation on the valuation date?
liability is limited to the losses directly caused by their negligence and not the full value of the property.
Is there a difference between being negligent when undertaking a survey/valuation and providing negligent advice?
There is a difference between being negligent in undertaking a survey/valuation and providing negligent advice.
Negligent advice involves giving incorrect or incomplete information, while negligence in a survey/valuation involves errors or omissions in the report.
What is the Red Book?
The Red Book is the RICS Valuation - Global Standards
31 Jan 2002
which provides guidance on the best practices for valuation professionals.
The Red Book sets out the standards that valuers should follow. Red Book valuations are often requested in instances where a tax calculation or formal legal proceedings are involved
Why does the Red Book exist?
The Red Book exists to ensure consistency and transparency in valuation practices worldwide.
Tell me about a factor which may impact value.
Factors that may impact value include location, condition, size, age, and the intended use of the property.
What is your duty of care as a surveyor when undertaking a valuation?
As a surveyor, my duty of care when undertaking a valuation is to exercise reasonable skill, care, and diligence in providing an accurate and impartial assessment of the property.
Why is independence and objectivity important when valuing?
Independence and objectivity are important when valuing because they ensure that the valuation is not influenced by personal biases or external factors, and that it provides an accurate and impartial assessment of the property.
What is the UK valuation guidance called?
The UK valuation guidance is called the RICS Valuation - Global Standards.
Why does the UK guidance exist?
The UK guidance exists to ensure that valuations undertaken in the UK are consistent with international best practices and to provide guidance to RICS members on how to undertake valuations.
Which sections of the Red Book are mandatory and which are advisory?
VPS 1-5 and PS1-2 - MANDATORY
VPGAS - Advisory
What does PS1-2/VPS1-5/VPGAs relate to?
PS1-2, VPS1-5, and VPGAs relate to the mandatory and advisory requirements for valuation professionals, including ethical and professional standards, valuation bases and methods, and the application of valuation approaches.
What type of advice does the Red Book cover?
The Red Book covers advice on the best practices for valuations of various types of assets, including real estate, plant and machinery, and intangible assets.
If you provide preliminary advice / draft valuation report, what should you state in writing to your client?
If I provide preliminary advice or a draft valuation report, I should state in writing to my client that it is not a final valuation, and that it is subject to change based on further information or analysis.
What type of valuations might be relied upon by a third party?
Valuations that might be relied upon by a third party include those that are prepared for
- accounting,
- taxation
- lending
- legal purposes.
Tell me what the definition of MR/MV/investment value/fair value?
- Market Rent (MR) is the estimated rental value of a property at a specific point in time.
- Market Value (MV) 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 each acted knowledgeably, prudently, and without compulsion.
- Investment Value is the value to a particular investor based on their specific requirements, and may be higher or lower than market value.
- Fair Value is 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 an assumption and a special assumption?
An assumption is a proposition that is taken for granted, such as market conditions or zoning regulations
A special assumption is an assumption specific to a particular valuation assignment and may differ from market norms
What sources of information would you consider when preparing a valuation report?
comparable sales data,
rental information,
planning documents,
building plans,
local market reports
industry publications.
If you have previously valued an asset, do you need to make any additional disclosures and what might they be?
Yes, additional disclosures may be required to explain any changes in
- market conditions,
- methodology
- assumptions,
- Errors
What must be included in your terms of engagement / valuation report? Where is this covered in the Red Book?
In the RICS Red Book, the requirements for the terms of engagement and valuation report content are covered in VPS 1 and VPS 3, respectively.
Terms of Engagement (VPS 1):
- Client - Other Users
- Purpose
- Bases of Value and Date
- Limitations of the investigation and the scope of work.
- Assumptions / Special Assumptions
- Disclosing any conflicts of interest.
- fee basis
- PII Cover
- Specifying the report format and delivery date.
- Stating any complaints handling procedures
- Providing a statement of compliance with the RICS Red Book.
Valuation Report (VPS 3):
- Identifying the client and any other intended users.
- Clearly defining the purpose of the valuation.
- Specifying the basis of value and the date of valuation.
- Describing the property or asset being valued.
- Describing the extent of the investigation and the scope of work.
- Outlining the sources of information, including verification and reliance.
- Describing any assumptions, special assumptions, or departures from the RICS standards.
- Providing the valuation, including any caveats or qualifications.
- Disclosing any conflicts of interest.
- Providing a statement of compliance with the RICS Red Book.
In summary, the terms of engagement provide a clear framework for the valuation process, while the valuation report documents the process, assumptions, and final valuation, ensuring transparency and compliance with RICS standards.
What RICS guidance relates to the use of comparable evidence?
VPGA 9 of the Red Book.
What are the 3 approaches under VPS5?
The three approaches under VPS5 are the
income approach
market approach
cost approach
What is the Valuer Registration Scheme?
The Valuer Registration Scheme is a registration program established by RICS for valuers to show that they are qualified and competent.
Are there any instances where certain sections of the Red Book may not apply?
Yes - but I would refer to valuer for advice
What is the basis of value under UK GAAP FRS 102?
The basis of value under UK GAAP FRS 102 is the fair value.
What is a SORP?
A SORP is a Statement of Recommended Practice which provides guidance on financial reporting to a specific industry.
When would you use EUV?
EUV (Existing Use Value) is used when determining the market value of a property as it currently exists, particularly in compulsory purchase cases.
What is the definition of EUV?
Existing Use Value (EUV) is the estimated market value of a property, assuming its current use continues without any potential alternative uses being considered.
What additional criteria apply to secured lending valuations?
terms and conditions of the loan being secured
What information should you specifically request for a secured lending valuation?
information on the amount,
term
repayment schedule of the loan,
the identity of the lender,
any specific requirements of the lender.
What is a regulated purpose valuation?
a valuation carried out for a regulated financial institution
What additional disclosures must be made for a regulated purpose valuation?
the purpose of the valuation,
the identity of the lender,
the intended use of the report.
What is the basis of value for a statutory valuation?
The basis of value for a statutory valuation is usually the market value.
What might a statutory valuation relate to?
A statutory valuation might relate to property for taxation purposes or for compulsory purchase purposes.
What is the definition of the statutory basis of valuation?
The specific legal basis
on which a valuation is carried out
for a statutory purpose.
Is the basis the same for all statutory valuations?
No, the statutory basis of valuation can differ depending on the specific legislation in question.
What is a yield?
The “yield” of a property tells you how much of an return you are likely to get on your investment
What is a Net Initial Yield?
The ratio of net income
to the property’s value
at the beginning of the investment period.
What is a reversionary yield?
The ratio of net income to the property’s value at the end of the investment period.
What is an equated yield?
The weighted average of the Net Initial Yield and the reversionary yield.
What is an equivalent yield?
A hypothetical yield
produces the same net present value
as a specific cash flow.
How would a yield reported from an auction differ from a Net Initial Yield?
A yield reported from an auction is a gross yield, which is calculated based on the sale price of the property and its rental income. The Net Initial Yield is calculated
What purchaser’s costs do you deduct from a valuation?
Stamp duty land tax
Legal fees
Survey costs
Lender fees (if applicable)
When do you deduct purchaser’s costs from a valuation?
When calculating net yield
When do you deduct purchaser’s costs from a valuation?
When calculating a net yield, which considers the net cost of acquiring the property
How would you value a property in uncertain market conditions - does the Red Book give any guidance?
Use multiple valuation methods
Assess market trends
And recent comparable sales
Red Book: Emphasises the importance of professional judgment and experience
How could you value a long leasehold interest?
Comparables with similar lease terms
How does a term and reversion differ from a DCF?
Term and reversion: Considers current rent and reversionary rent separately
DCF: Considers all future cash flows, including rent
What is the difference between a growth explicit and a growth implicit yield?
Growth explicit yield: Assumes specific growth rates
Growth implicit yield: Assumes growth rates are embedded
Give examples of each of these types of yield.
Growth explicit yield: A yield that considers a 2% annual rental growth
Growth implicit yield: A yield derived from market comparables
How would you value an under/over rented investment property?
Use term and reversion method
Assess market rent and compare to actual
When would you use a dual rate investment calculation?
properties with distinct income streams or growth rates
Where can you find yield evidence from?
Property transactions and auction results
Commercial property databases
Property research reports
