Valuation Flashcards
Tell me what the 5 methods of valuation are.
Comparable
Depreciated replacement cost/contractor’s
Investment
Profits
Residual
What is a years purchase multiplier?
It is a multiplier which is calculated through the setting of a yield (or other variable) and a number of years. To find the years purchase multiplier, the valuer must make an assumption of a yield rate and refer to the Parrys tables
Give me an example of a good covenant and how this might impact a valuation.
A positive covenant requires some form of action to be taken e.g. to erect a fence along a boundary or to undertake specific repairs to the property which has a positive impact on the valuation
How would you distinguish limitations on liability in your valuations?
Where in your valuation report do you state any limitations on liability?
in a prominent position within the body of the report
What relevance does Hart v Large have on your valuation practice?
To protect a prospective purchaser of a renovated property, a surveyor should:
spell out any limitation on the advice given and, if necessary, recommend further investigation
be particularly alert to any signs of inadequate design or faulty workmanship
draw attention in appropriate terms to protections available to the purchaser, including a PCC.
What aspect of Hart v Large allowed the judge to award damages without applying the
SAAMCO cap?
Mr Large’s legal team sought also to rely on the principles in SAAMCO and Hughes-Holland. They argued that Mr Large was not an “advisor” in the sense of these authorities and that a surveyor in a house purchase could never be considered to be the advisor. Further, they argued that the “advice”/”information” categories were binary and there could never be any sort of hybrid situation. Coulson LJ reviewed the authorities that explain the difference between ‘information’ and ‘advice’, before firmly rejecting these arguments and finding that the “advice”/”information” categories are not rigid and could overlap. In particular, he referred to the cases that draw a distinction between the role of someone providing information for the purposes of enabling a third party to decide upon a particular course of action (an ‘information’ case); and the role of someone providing advice as to what course of action that third party should take (an ‘advice’ case). Having reviewed the authorities, he reasserted the factual findings of the High Court which concluded that this was not a mere “information” case. He concluded that, while this could be considered a hybrid case, it was in fact much closer to an advice case, because Mr Large had failed to advise the Harts to take the course of action of requesting a PCC.
What is the SAAMCO cap?
SAAMCO established that a valuer’s liability for providing a negligent valuation is limited to the consequences of that valuation being wrong
Under the SAAMCO cap, is a valuer liable for losses due to a downturn in the market?
In SAAMCO, the House of Lords effectively held that losses attributable to a subsequent fall in the property market fell outside the scope of duty of care owed
Under the SAAMCO cap, is a valuer’s liability usually limited to the overvaluation on the
valuation date?
The damages would be limited to the difference between the negligent valuation and the true valuation at the time
What would you do if you received a notice of a PII claim from a client or their
solicitor?
you may have only 48 hours in which to notify the claim or your insurers may reject it. In any event, you should notify your insurers as soon as reasonably practicable
Is there a difference between being negligent when undertaking a survey/valuation
and providing negligent advice?
yes,, the difference is between information and advice, and the liability cap associated with information but not advice
What is run off cover?
Run-off cover is insurance for claims made against a law firm after it has stopped doing business.
What is the Red Book?
contains mandatory rules, best practice guidance and related commentary for valuers
Why does the Red Book exist?
Promote and support high standards in valuation work and offers useful resource for valuation users, gives mandatory practices for registered valuers and ensures a consistent approach
Tell me about a factor which may impact value.
supply and demand
Use
Restrictive covenants
What is your duty of care as a surveyor when undertaking a valuation?
A valuer owes a duty to use reasonable care and skill in valuing property
To whom do you owe this duty of care?
to my client and anyone relying on my report
Why is independence and objectivity important when valuing?
to be able to provide unbiased advice - It is important that my opinion and advice is free from bias due to the impact on clients, the wider market and trust in the profession plus it is used for financial decision making
Is there a separate UK Red Book?
there is a UK supplement
What is the UK valuation guidance called?
RICS Valuation - Global Standards
2017: UK national supplement
Why does the UK guidance exist?
as it is subject to UK jurisdiction
When was the Red Book last updated?
January 2022
was the red book updated differ from when IVS were last updated?
no, this is also january 2022
What changes were made to the IVS?
it reflects changes to the IVS and measurment rules, adds more detail on Terms of Engagement when exceptions are used, adds more detail on sustainability, sample report wording was removed and make it clearer and easier to use.
Which do you follow - the latest IVS or the Red Book Global?
They are incorporated in the red book
Which sections of the Red Book are mandatory and which are advisory?
The VPS 1-5 & PS 1-2 are mandatory, the VPG-A’s 1-10 are advisory
What does PS1-2/VPS1-5/VPGAs relate to?
Professional stndards
PS 1 Compliance with standards where a written valuation is provided
PS 2 Ethics, competency, objectivity and disclosures
Valuation technical and performance standards:
VPS 1 Terms of engagement (scope of work)
VPS 2 Inspections, investigations and records
VPS 3 Valuation reports
VPS 4 Bases of value, assumptions and special assumptions
VPS 5 Valuation approaches and methods
Valuation applications:
VPGA 1 Valuation for inclusion in financial statements
VPGA 2 Valuation of interests for secured lending
VPGA 3 Valuation of businesses and business interests
VPGA 4 Valuation of individual trade related properties
VPGA 5 Valuation of plant and equipment
VPGA 6 Valuation of intangible assets
VPGA 7 Valuation of personal property, including arts and antiques
VPGA 8 Valuation of real property interests
VPGA 9 Identification of portfolios, collections and groups of properties
VPGA 10 Matters that may give rise to material valuation uncertainty
What type of advice does the Red Book cover?
VPG-A offer advice on the practical application of the standards in specific contexts
If you provide preliminary advice / draft valuation report, what should you state in
writing to your client?
You must state the opinion is provisional and subject to completion of the final report, provided for the clients internal purposes only and it is not to be published or disclosed.
What type of valuations might be relied upon by a third party?
Mortgage valuations
Tell me what the definition of MR/MV/investment value/fair value?
MV/MR The estimated amount for which an asset or liability should exchange on the valuation date between a willing buyer and a willing seller in an arm’s length transaction, after proper marketing and where the parties had each acted knowledgeably, prudently and without compulsion
IV The value of an asset to the owner or a prospective owner for individual investment or operational objectives
FV 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 fact that is true at the date of valuation
A special assumption is something that is not fact at the time of the valuation but could reasonably be so at a future date
What sources of information would you consider when preparing a valuation report?
The inspection, online research, documents provided by the vendor, market data
If you have previously valued an asset, do you need to make any additional disclosures
and what might they be?
Yes, need to disclose to all parties and obtain prior consent to continue, you need to disclose the nature of the relationship with the previous client and previous involvement, rotation policy, time as signatory and any proportion of fees
If your firm is too small to have a rotation policy or valuation panel, what else can you
do to ensure objectivity?
Arrange for a valuation to be reviewed by another member at periods of no greater than seven years when the same asset is being valued on a regular basis to demonstrate that objectivity is being followed
When might a conflict of interest exist in relation to a valuation instruction?
Where there is a pre-existing relationship with either party, where you have acted for the client within the past 12 months, where a referral fee has been payable, has a financial interest in the asset etc
What must be included in your terms of engagement / valuation report?
Covered in VPS 1, must state, who the valuer is and their status, the valuation date, identify the asset to be valued, valuation currency, purpose of the valuation, who the users of the report are and if it can be shared, basis of value, any investigations, basis of fee
What is a restricted valuation service and can you provide one?
A client may require a restricted service; for example, a short timescale for reporting may make it impossible to establish facts that would normally be verified by inspection, or by making normal enquiries; or the request may be for a valuation based on the output of an automated valuation model (AVM). Note that the provision of an AVM-derived output would be regarded as the provision of a written valuation for the purpose of these standards. Accordingly valuers should be alert to, and aware of, the implications of either accepting or manually modifying an AVM output. A restricted service will also include any limitations on assumptions made in accordance with VPS 2.
How do you deal with limitations on inspection or analysis?
The valuer should consider if the restriction is reasonable, with regard to the purpose for which the valuation is required. The valuer may consider accepting the instruction subject to certain conditions, for example that the valuation is not to be published or disclosed to third parties. If the valuer considers that it is not possible to provide a valuation, even on a restricted basis, the instruction should be declined. The valuer must make it clear when confirming acceptance of such instructions that the nature of the restrictions and any resulting assumptions, and the impact on the accuracy of the valuation, will be referred to in the report.
How do you deal with limitations on inspection or analysis?
The valuer should consider if the restriction is reasonable, with regard to the purpose for which the valuation is required. The valuer may consider accepting the instruction subject to certain conditions, for example that the valuation is not to be published or disclosed to third parties. If the valuer considers that it is not possible to provide a valuation, even on a restricted basis, the instruction should be declined. The valuer must make it clear when confirming acceptance of such instructions that the nature of the restrictions and any resulting assumptions, and the impact on the accuracy of the valuation, will be referred to in the report.
Can you revalue a property without inspecting?
Yes but only when you are satisfied that there have been no material changes to the property , that you have previously inspected it and that this assumption is included in the report
What RICS guidance relates to the use of comparable evidence?
Guidance Note: RICS Comparable evidence in real estate valuation October 2019
What is an internal valuer?
Valuer that is in the employ of the firm that owns the subject asset or accounting firm compiling the firms financial records/reports
Can an external valuer provide an internal purposes valuation?
Yes, but there will need to be clear Terms of Engagement and clear instructions about non disclosure to third parties
What happens if market conditions change between the valuation date and report
date?
This should be mentioned in the report and brought to the attention of the client that markets are subject to change
Is special value from a special purchaser reflected in MV?
No, because the special value reflects a purchaser where the asset holds value above that of the rest of the market
Where does the definition of fair value come from?
IFRS 13- International Financial Reporting Standards
Does fair value differ from MV?
Yes, fair value is a measure of an assets worth and does not normally account for market forces but market value is the price of an asset in the marketplace but both figures will normally be the same
When is fair value used?
Usually used in financial reporting
What are the 3 approaches under VPS5?
Market approach - comparing against other or similar assets
Income approach - capitalisation or conversion of future income
Cost approach - purchaser will pay no more than the cost of obtaining one of equal equity
What is the Valuer Registration Scheme?
RICS scheme, which is a quality assurance mechanism that monitors RICS registered members who carry out valuations within the scope of the Red Book
Are there any instances where certain sections of the Red Book may not apply?
Yes, PS 1-2 will always apply but VPS 1-5 may not in certain circumstances, for example when providing advice on insurance re-instatements or for internal purposes only where no third parties will see the result, when acting as an expert witness, when providing agency or brokerage advice or during negotiations or litigation where the valuer is acting as an advocate
What is the basis of value under UK GAAP FRS 102?
Fair Value, the amount at which an asset could be exchanged on that date between 2 knowledgable, willing parties
What is a SORP?
Statement of Recommended Practice
When would you use EUV?
Existing use value (EUV) is to be used only for valuing property that is owneroccupied by an entity for inclusion in financial statements.
What is the definition of EUV?
describes what a property is worth in it’s current form and it being continued to be used in it’s current purpose
What additional criteria apply to secured lending valuations?
VPGA 2 applies in this case, additional criteria may be dependant on the lender, market value is the usual methods, it identifies the price at that particular time. Must include a report date, inspection date and valuation date as well as a statement on conflict of interest and a statement on PII
What information should you specifically request for a secured lending valuation?
Any alternative requirements of the lender, identity of the lender, any recent transaction on the property or agreed price, extent of marketing, any incentives, what lending facilities there are.
What is a regulated purpose valuation?
Valuations for inclusion in this such as prospectuses, financial reports, takeovers and mergers etc. Found in the Red Book UK supplement
What additional disclosures must be made for a regulated purpose valuation?
Fees paid to the valuer from the client in the preceeding financial year and if it is likely if this figure will increase in the next year
What is the basis of value for a statutory valuation?
hey are for capital taxation purposes and will usually use market value
What might a statutory valuation relate to?
Capital gains tax, inheritance tax, stamp duty
What is the definition of the statutory basis of valuation?
Price it would fetch if sold in the open market at that time based on the whole of the asset is to be sold
What is a yield?
It is a rate of annual return you are likely to get on your investment, it is calculated by expressing a years rental income as a percentage of how much the property cost.
What is a Net Initial Yield?
It is the ratio of net rental income and gross purchase price of a property
What is a reversionary yield?
The yield that should be achieved if the passing rent adjusts to the level of the estimated rental value
What is an equated yield?
Yield on a property investment which takes into account growth in future income
What is an equivalent yield?
Equivalent Yield (true and nominal) is a weighted average of the Net Initial Yield and Reversionary Yield and represents the return a property will produce based upon the timing of the income received. The true equivalent yield assumes rents are received quarterly in advance.
How would a yield reported from auction differ from a Net Initial Yield?
Taxation or pruchase price affecting the yield figures? Not included the purchase fees?
What purchaser’s costs do you deduct from a valuation?
Stamp duty, legal fees, agency fees
How would you value a property in uncertain market conditions - does the Red Book
give any guidance?
Yes, VPGA 10 covers market uncertainty, you would provide a valuation but comment on the uncertainty and your level of confidence in it
How could you value a long leasehold interest?
Usually on the basis of fair value for a lease over 50 years
How does a term and reversion differ to a DCF?
DCF is discounted cash flow, in DCF the forecasted cash flow is discounted back to the valuation date to give a present value based on it’s future economic benefits.
Term & Reversion is a variation of DCF and is used when existing lease periods are due to expire, the new lease will have new contract terms so the current rate will probably differ from the market rate, if that’s the case it’s said to have revisionary potential. So the term rate is separated from the revisionary rate.
T&R will use different capitalisation rates
What is the difference between a growth explicit and a growth implicit yield?
An ‘implicit method’ of valuation consists of using a capitalisation rate and current market rent based on comparable evidence. The capitalisation rate is often referred to as an ‘all risks yield’, with all risks hidden in the selected yield.
Explicit method - the expected cash flows are determined and discounted at a target rate of return.
Give examples of explicit and implicit types of yield.
Not something I have done, I would refer to RICS practise standards note on Discounted Cash Flow for commerical property investments
