Valuation Flashcards
What 3 steps would you take before undertaking an instruction?
Competence
COI
ToE
What are the 5 exceptions of the red book?
Agency
Litigation
Statutory Functions (like tax)
Internal
Expert witness
What are the bases of value that you are familiar with?
Market value
Market rent
Fair value
Investment value
Can you tell me what the VPS1-5 are?
VPS 1 - Terms of engagement
VPS 2 - Inspection, investigation and records
VPS 3 - Valuation reports
VPS 4 - Bases of value, assumptions and special assumptions
VPS 5 - Valuation methods
What is an assumption and a special assumption?
Assumption = when something is assumed to be true but requires no further investigation by the valuer eg. planning permission
Special assumption = when something’s not true but is assumed to be true for the purpose of the valuation eg vacant possession
How does the red book define market value?
The estimated amount for an asset at the valuation date between a willing buyer and willing seller at an arms length transaction after proper marketing and both parties have acted knowledgably
How would you calculate a yield?
annual rental income / value x 100
How do you calculate a years purchase?
100 / yield
Why is the red book used?
Promotes trust in the profession
Provides clear instructions for vals
Regulated by the RICS
Ensures vals are completed to a high standard
Would you carry out a COI any differently for a secured lending valuation?
Yes - they are enhanced COI where any previous, current or potential involvement with the prospective borrower / property must be disclosed to the lender.
Previous involvement is defined as being in the last 2 years.
You cannot accept an instruction if there has been a conflict within the last 2 years, where as any other instruction you can manage them etc
What is the current margin of error for valuations?
For residential it is plus or minus 5%
What are the repercussions of not having a margin of error for a valuation?
It can become a claim and go to an expert witness
What due diligence would you carry out for a valuation?
For a residential valuation I would typically check:
Flood risk
Conservation area
Planning
EPC
Listed buildings nearby
Can you tell me about the recommendations made recently by Peter Gray?
He stated that DCF should be used as major investment approach
Rotation of valuers every 7 years
Valuers should be continually assessed to make sure they are competent
Continue to build on RICS important work to ensure a diverse and inclusive profession
What are the methods of valuation and when would you apply them?
Comparative - market approach
DRC - When adopting the cost approach
Residual, Investment and Profits are used for the income approach
What are the key changes to the red book?
Need for complience with the red book and terms of reference
Terms of reference must be clear
Valuers should have regard to the relevance and significance of ESG and sustainability - they are now included in the glossary of the red book
What’s the hierarchy of evidence?
Cat A - Direct comps, near identical properties
Cat B - General market data, from published sources
Cat C - Other sources of transactional evidence
Relates to the guidance note 2019
What stages would you take when collecting comparables?
Search for them
Verify them
Assemble them
Adjust them
Analyse them
Report them
What would you do if there was significant lack of comparable evidence?
I would refer to the RICS Guidance Note Comparable Evidence in Real Estate Valuation 1st Edition 2019.
This provides advice when there is a lack of comparable evidence and sets out a non perspective hierarchy of evidence.
When would you use the investment method and how would you calculate it?
Use it for income producing property, and the method is rent x years purchase
What is IRR?
A rate of return at which all future cash flows must be discounted to produce a net present value of 0
What is the profits method and how would you calculate it?
Used for trade related properties, eg a pub. Calculate it: income / annual turnover - purchases = gross profit!
Gross profit - reasonable working expenses = unadjusted net profit
Tell me about the DCR / contractors method
Should only be used when direct market comparison is limited eg for a dilapidated old monument or lighthouse.
Value of land + current cost of replacing the building + fees - discount for depreciation.
When would you use the residual method and how would you calculate it?
Used for calculating the value of land.
GDV - Total development costs - profit.
When would you use the hardcore and layer method?
It is used for over rented properties.
Top Slice = rent passing
Bottom Slice = Market rent
Shows the difference.
When would you use term and reversion?
Used for under rented properties.
Term = capitalised at an initial yield
Reversion = market rent into perpetuity using a reversionary yield.
What are the steps of a valuation?
Receive instruction
check Competence
check Conflicts
Issue ToE
Receive signed ToE
Gather info eg. title plans, maps
Undertake DD
Inspect and measure
Do market research, assemble, verify & analyse comps
Undertake the valuation / form an opinion of value
Draft report
Have report looked over by a valuer
Finalise and sign it
Report it to the client and talk them through it if needs be
Issue invoice
Ensure the valuation file is in good order for archiving
what is a yield?
measure of investment return, expressed as a % of the capital invested
what is a years purchase?
number of years required for the income to repay its purchase price
What is residual used for?
To value development land
How do you work out GDV?
Market value of the completed proposed development at todays date
What are some development costs?
Build costs
Professional fees
Contingency (%build costs)
Marketing costs
Finance
Developers profit
etc etc
Have you done a secured lending? If so, where does it all under the UK Supplement and Red Book?
Red Book - VPGA10
UK Supplement - VPGA2
What is hope value?
Value arising from any expectation that future circumstances effecting the property might change eg. getting planning for development
What do you know about marriage value?
Additional value created by the merger of two interests
What is the nil rate band for stamp duty for residential properties?
Properties up to £250,000
What is the nil rate band for mixed use properties?
Properties up to £150,000
What are the stamp duty thresholds for residential properties?
£0 - £250K = 0%
£250,001 - £925,000 = 5%
£925,001 - £1.5m = 10%
£1.5m+ = 15%
Why do lenders need a loan security valuation report?
They need to know that their loan is going to be back up through security and if something were to go wrong, the borrower could repay the loan.
What are the main risks to a lender?
Property becoming unsuitable for lending, for example if there was in invasive plant.
What is a reinstatement cost?
The cost to build the property to its existing condition.
Who provides the reinstatement cost?
BCIS. (Build Cost Information Service)
Can you carry out reinstatement costs?
Yes but must be confirmed by the client in the terms of engagement.
If you have a conflict for a loan security valuation who would you declare it to?
The lender.
How do you identify if a road us adopted?
Look on the local authorities website and land registry.
What are in the terms of engagement for a red book valuation?
PII Cover
Bases of value
Confirmation that valuer is competent
Complaints handling procedure
What is VPGA 2?
Valuation for secured lending - it’s the application which sets out the enhanced COI checks and what needs to be included in a suitable secured lending val
What is VPGA10?
For matters that may give rise to material uncertainty
What are the key changes to the red book?
Easier to read
User friendly
Clear advice
What is marriage value?
The value of an asset if it were to combine with another, giving more value then if you were to sell the 2 individual units separately.
What is fair value?
Price for selling an asset selling between market participants at the measurement date
Can a leasehold affect a properties value?
Yes, if the lease is under 80 years it is considered a short leasehold and can devalue a property by 10-10%
What premium do new builds typically offer?
Homeowners would typically pay 25% more for a bran new flat. Rentals offer around 9-10% premium
What is an unbiased valuation and why is it important?
Ensuring my valuation is a true refelction of the properties value. I always get my work peer reviewed.
It is important to demonstrate to the client that I have provided honest and accurate work and advise.
Loan to value ratio
74-75% for residential properties and in general lenders tend loan 5-10% lower for new builds so around 60%
Why is it lower for new build?
More risky investment due to the property loosing value as soon as an occupier lives there. More risk.
How did the valuations differ from MR and MV in your terms of engagement?
In the terms of engagement I stated the bases of value will be for either market rent of market value.
Internal valuer
Instructed to value for internal purposes such as if are commercial valuation valued our estate agency offices for balance sheet purposes
External valuer
Has no link to the property to the client or property
