Valuation

Question 1

What are the 5 Methods of valuation and give exmaples

Answer 1

1. Comparable - Resi
   2 - Investment - based on income (rent) and capitalised to obtain market value
   3 - Residual - goes further than investment, to give a residual value after developers profit etc
   4 - Profits - hotel & leisure, uses profits / cash flow, good will etc.
   5 - Depreciated Replacement Cost - specialised properties, rarely sold on open market therefore no sales. Assumption that no one would pay more than the cost to build / equivalent site. Assesses the cost to replace the making deductions for depreciation and obsolescence.

Question 2

How do you calculate Life Rent?

Answer 2

Need age and gender to determine life expectancy / multiplier. Either from parry’s tables or using formula.

Question 3

What is the definition of Market Value?

Answer 3

The estimated amount for which a property should exchange on the date of sale 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.

Question 4

What is PS1?

Answer 4

Compliance with Red Book Global Standards/IVS where a written valuation is provided

Question 5

What is PS2?

Answer 5

Ethics, Competency, Objectivity and Disclosures

Question 6

What are the VPS?

Answer 6

VPS 1 - Terms of Engagement
VPS 2 - Inspection, Investigation and records
VPS 3 - Valuation Report
VPS 4 - Basis of Valuation and assumptions
VPS 5 - Methods of Valuation

Question 7

What VPGA apply to Resi?

Answer 7

VPGA 2 - Secured Lending

VPGA 9 - Portfolios, collections and groups of Properties

Question 8

When can you deviate from VPS?

Answer 8

The only good example for resi is when acting as an expert witness, as the court can have different requirements.

Question 9

What is zoning?

Answer 9

Standard method of measuring retail premises to calculate and compar their value.

Premise that the front is of more value. Property is divided intoa. number of zones (20 feet deep) with zone A closest to the window, with decreasing value the further back it goes into zone B etc. Anything after zone C is usually defined as the remainder.

Question 10

When would you use the other methods of valuation in Resi?

Answer 10

Residual method can be used when valuing residential developments. Assuming you have all the variables you need (costs, profit margin, professional fees, PV and GDV etc).

Question 11

What is the purpose of the Red Book?

Answer 11

Provide consistency, objectivity and transparency - sustaining public confidence and trust in valuation.

Question 12

What is professional scepticism?

Answer 12

Professional scepticism is an attitude that includes a questioning mind, critically assessing evidence relied
on in the valuation process and being alert to conditions that may cause information provided to be misleading.

Question 13

PS1 - sub points

Answer 13

1 - Mandatory application (related to bye-laws as well)

2 - Compliance within firms

3 - Compliance with international standards

4 - Compliance with jurisdictional or other valuation standards

5 - VPS 1-5 exceptions
(expert witnesses, internal valuations)

6 - Departures

7 - Regulation: monitoring compliance with these global standards

8 - Application to members of other valuation professional organisations

Question 14

PS2 - sub points

Answer 14

PS2 links highly to the codes of conduct.

1 - Professional and ethical standards

2 - Member qualifications

3 - Independence, objectivity, confidentiality and the identification and management of conflicts of interest.

4 - Maintaining strict separation between advisers (after informed consent has been obtained - must be robust enough to ensure no chance of information or data passing. Must also have a compliance officer to oversee this.)

5 - Disclosures where the public has an interest or upon which third parties may rely.

6 - Reviewing another valuer’s valuation

7 - Terms of engagement (scope of works)

8 - Responsibility for the valuation

notable comments:
‘RICS does not allow a valuation to be prepared by a ‘firm’ (even though it is permitted by the IVS). However, the use of ‘for and on behalf of’ under the responsible valuer’s signature is an acceptable substitution.’
‘Members are discouraged from referring to any valuation or report as either ‘formal’ or ‘informal’, as these terms give rise to misunderstandings, particularly regarding the extent of investigation and/or assumptions that the member may or may not have undertaken or made.

Question 15

VPS1 - sub points

Answer 15

1 - General principles

2 - Terms of engagement format

3 - ToE (scope of work) - things that need to be addressed: Identification and status of the valuer, identification of the client(s), purpose of the valuation, valuation date, assumptions, etc.

Question 16

VPS2 - Sub points

Answer 16

1 - Inspections and investigations (must always be carried out to the extent necessary to produce a. valuation that is professionally adequate for its purpose).

2 - Revaluation without re-inspection of real property previously valued. (can do if appropriate and have verification from client that no changes have been made. If not appropriate can still value if used for their internal purposes only and verify that they won’t publish.)

3 - Valuation records (must be recorded in a way that is neither ambiguous nor misleading etc. Must have proper audit trail and hold up to scrutiny. Sus details. Notes retained in appropriate business format.)

Question 17

VPS3 - sub points

Answer 17

1 - General principles (Report should convey clear understanding of the opinions being expressed by the valuer and should be couched din terms that can be read and understood by someone with no prior knowledge of the subject or liability).

2 - Report content (similar as scope of works)

Question 18

VPS4 - sub points

Answer 18

1. Basis of value (must be appropriate for, and consistent with the purpose of valuation)

2 - General principles (type of value)

3 - Basis of value (must specify assumptions and basis of assumptions)

4 - Market Value

5 - Market Rent

6 - Investment Value
(the value of an asset to a particular owner or prospective owner for individual investment or operational objectives’

7 - 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 - generally there isn’t a difference between market and fair value)

8 - Assumptions

9 - Special assumptions

10 - Valuations reflecting an actual or anticipated market constraint, and forced sales

11 - Assumptions and special assumptions related to projected values

Question 19

VPS 5 - sub points

Answer 19

Valuers are responsible for adopting, and as necessary justifying, the valuation approach(es) and the valuation methods used to fulfil individual valuation assignments.

These must always have regard to: the nature of the asset (or liability); the purpose, intended use and context of the particular assignment and; any statutory or other mandatory requirements applicable in the jurisdiction concerned.

The market approach is base don comparing the subject asset with identical or similar assets (or liabilities) for which price information is available, such as comparison with market transactions in the same, or closely similar, type of asset (or liability) within an appropriate time horizon.

The income approach is based on capitalisation or conversion of present and predicted
income (cash flows), which may take a number of different forms, to produce a single current capital value. Among the forms taken, capitalisation of a conventional market-based income or discounting of a specific income projection can both be considered appropriate depending on the type of asset and whether such an approach would be adopted by market
participants.

The cost approach is based on the economic principle that a purchaser will pay no more for an asset than the cost to obtain one of equal utility whether by purchase or construction.

Question 20

What IVS Asset Standards are applicable to Resi?

Answer 20

IVS 400 - Real Property Interests

IVS 410 - Development Property

Question 21

What is VPGA2?

Answer 21

Valuation of interests for secured lending.

Guidance only.

Question 22

What is VPGA8?

Answer 22

Valuation of real property interests.

Guidance only

Question 23

What is VPGA9?

Answer 23

Identification of portfolios, collects and groups of properties.