Valuation Flashcards
What are the 5 methods of valuation?
1 - Comparable method
2 - Investment method
3 - Profits method
4- Residual method
5- Contractors methods / Depreciated Cost Replacement Method
What method of valuation would you use for a incoming producing property which is under- rented?
Investment method, using the term and reversion.
You would decrease the yield in the term to show the property is under-rented.
What is the profits methods and how does it work?
The profits method is used for income producing properties but specialist properties such as Hotels, care homes, petrol stations and pubs.
What is the red book?
Issues by RICS as part of the commitment to promote high standards in valuation worldwide
Why does the red book exist?
To support high standards in valuation delivery worldwide. The publication details mandatory practices for RICS members undertaking valuation services.
Is there a separate red book for the UK?
Since 2015, there has been a separate UK supplement to the red book.
What are the five exceptions to the red book?
1- Agency Work ( disposing/ acquiring)
2- Internal use only for the client
3- For litigation purposes
4- A statutory Function
5- Giving evidence as an expert witness
Name 4 of the bases of value
1- Market value
2- Fair value
3- Investment value / worth
4- market rent
What is Market Value?
The estimated amount for an assets which should exchange on the valuation date, between a willing seller and willing buyer at an arm’s length transaction after proper marketing, where the parties have acted knowledgeable, prudently and without compulsion
What is market rent?
The estimated amount an asset should be leased on the valuation date between a willing lessor and lessee, on appropriate terms in an arms length transaction, where the parties have acted knowledgable, prudently and without compulsion.
What is fair value?
The price that would be received to sell an assets in a orderly transaction between market participants at the measurement date.
What is investment value?
The value of an asset to a particular owner, for individual investment or cor occupational objectives.
This may differs from market value and used a measure of worth to reflect the value to a certain individual.
What is the overall purpose of the red book?
Consistency, objectivity and transparency are fundamental to building and sustaining public confidence and trust in valuation.
What does COT stand for when asking what the purpose of the red book is?
Consistency, Objectivity and Transparency.
All Risk Yield
The rate that reflects all prospects and risks attached to a property/ tenant
True yield
Assumes the rent is paid in advance and not arrears
Nominal yield
Initial yield assuming rent paid in arrears
Gross yield
Yield mot adjusted showing purchaser costs
Net yield
Yield showing purchasers costs
Equivalent yield
Average weighted yield when a reversionary property is valued using an initial and reversionary yield
Reversionary yield
Market rent / divided by current price of an investment let out at below market rent
Running yield
A yield at one moment in time
What is Net Present Value
The sum of the discounted cash flows
What is internal rate of return
The rate of return which all future cash flows must be discounted to produce a NPV of 0
What is the structure of the red book?
Part 1 - introduction
Part 2 - Glossary
Part 3 - Professional standards (PS)
Part 4 - Valuation technical and performance standards (VPS)
Part 5 - Valuation Applications (VPGA)
Part 6 - The international valuation standards (IVS)
What is an assumption
Accept that something is true without the need for investigation
What is a special assumption
Something you accept to be true and fact even though it is not true
Eg a let property is vacant
Three valuation approaches
Income approach
Cost approach
Market approach
The timeline of a valuation instruction
1- Receive instructions from client
2- check competence
3 - conflict of interest check
4- Issue terms of engagement
5- Receive signed terms of engagement
6- Gather information- leases etc
7- undertake due diligence- planning etc
8- inspect and measure
9- research market / collect and varify comparables
10- Undertake valuation
11- draft report
12- Stand back - have report checked by another surveyor
13- finalise and sign report
14- report to client
15- issue invoice
16- Ensure valuation is filled correctly
What is the Stamp Duty for commercial
0-£150,000 = 0
£150,001 - £250,000 = 2%
£250,001 + = 5%
What is VPGA 1?
For financial statements
What is VPGA 2?
Secured lending
What is VPGA 3?
Valuation for business and business interests
What is VPGA 4?
Individual trade related properties
What is VPGA 5?
Plant and equipment
What is VPGA 6?
Intangible assets
What is VPGA 7?
Personal property including arts and antiques
What is VPGA 8?
Real property assets
What is VPGA 9?
Portfolios, collections and groups of properties
What is VPGA 10?
Matters that may give arise to material uncertainty
What is professional standard 1 (PS1)
Compliance with standards when a written valuation is provided
Professional standards 2 (PS2)
Ethics, competency, objectivity and disclosures
Valuation technical and performance standards (VPS1)?
Terms of engagement ( scope of work)
Valuation technical and performance standards (VPS) 2?
Inspection, investigation and records
Valuation technical and performance standards (VPS) 3?
Valuation reports
Valuation technical and performance standards (VPS) 4?
Bases of value, assumptions and special assumptions
Valuation technical and performance standards (VPS) 5?
Valuation approaches and methods
Valuation headings in report
1- Identity of Valuer and status
2- client and other users of report
3- purpose of valuation report
4- assets being valued
5- Basis of value
6- valuation date
7- extent of valuation investigation
8- Nature and soured of information
9- Assumptions and special assumptions
10- Restrictions of use
11- instructions undertaken in accordance with IVS
12- Valuation approaches
13- Valuation Figure
14- Date of report
15- Comment on Market uncertainty
16- Statement setting out any limitations
Under VPS 1, what should be in TOE?
Identity of client
Currency
Client
Property
State any other users
Purpose of valuation
Basis of value
Valuation date
Extent of investigation
Nature / source of information eg leases
Assumptions and special assumptions
Restrictions
Confirmation of red book compliance + IVS
Fee
CHP
PII
When does the new UK National Supplement come into effect?
1st May 2024
What are some of the changes to the UK supplement?
1- Rotation Policy = every 5 years, the valuer needs to change, every 10 years, the firm needs to change.
2- Sustainability and ESG - this has become integral part of valuation reporting
How do you calculate using the profits method?
Annual turnover
LESS costs/ purchases
= gross profit
LESS reasonable business expenses
= unadjusted profit
LESS operators remuneration
= Adjusted profit
X yield
