Valuation Flashcards
Tell me what the 5 methods of valuation are.
- Comparative Method
- Investment Method
- Profits Method
- Residual Method
- Depreciated Replacement Cost (Contractor’s method)
Tell me about how you would value a building using the profits/ contractors /investment /comparable/residual method of valuation.
- Comparative:
* Search & select comparable, confirm details.
* Analyze headline rent to get a net effective.
* Assemble comparables in a schedules.
* Adjust comparables using the hierarchy of evidence:
Category A – direct comparables of contemporary (completed identical, near identical and similar, similar where offers have been made and asking prices)
Category B – general market data (info from public sources, historic evidence & demand /supply data)
Category C – other sources (evidence from other real estate types & locations & other background data e.g. interest rates)
* Analyze comparables to form opinion of value.
* Report value & prepare file note.
What is a years purchase multiplier?
1 ÷ yield to give the multiplier.
Give me an example of a good covenant and how this might impact a valuation.
Strong financial data to prove ability to pay rent. Improves yield.
What is PI Insurance (PII)?
Professional Indemnity Insurance. To protect clients, surveyors and third parties against negligence claims when there is a duty of care breached & a claim for damages arises.
Why do surveyors need PII?
To protect clients, surveyors & third parties.
How did the decision in Hart v Large affect PII?
Professional Consultants Certificates (PCC) should be obtained from the vendors if a property has been recently refurbished. This provides the client protection against concealed defects.
* Normally damages are applied as in Watts v Morrow. Providing damages to be assessed on the difference between the surveyor’s valuation and the value of the property in its actual condition.
* Hart V Large argues that damages should be assessed on a basis of the difference between his valuation and the value of the property with the defects that could have been identified but were missed.
* This is based on the argument damages should not reflect the cost of repair, unless MR Large (surveyor) provided a warranty as to the condition of the property (which he did not).
RICS Home Survey States – a RICS member must recommend further investigations ‘if they have a suspicion that a visible defect may affect other concealed building elements’.
What level of PII cover does your firm have?
£5,000,000
How would you distinguish limitations on liability in your valuations?
Ensure the terms of engagement clearly sets out what services the surveyor will and will not provide.
Where in your valuation report do you state any limitations on liability?
In the terms of engagement.
What is the SAAMCO cap?
If negligent, the valuer is liable for the amount by which the property was overvalued, but not the full loss of the lender on a failed transaction which may arise from a drop in the property market.
What would you do if you received a notice of a PII claim from a client or their solicitor?
Give early notification to the firm’s insurers.
What is run off cover?
Insurance for claims made against a law firm after it has stopped doing business.
What is the Red Book?
Mandatory rules, best guide practice & related commentary for all members undertaking valuation of an asset.
Why does the Red Book exist?
To promote & support high standards in valuation delivery worldwide.
Tell me about a factor which may impact value
Rent, yield, location
Why is independence and objectivity important when valuing?
To ensure valuations will be carried out in accordance with the IVS and promote & maintain a high level of public trust.
Is there a separate UK Red Book?
No, there is the UK national supplement.
What is the UK valuation guidance called?
VPS (valuation technical and performance standards)
When was the Red Book last updated?
31st January 2022
Does this differ from when IVS were last updated?
What changes were made?
No, same date. IVS (International Valuation Standards).
Addition of a new chapter ‘IVS 230 Inventory’. Updated glossary. The introduction has been updated to incorporate the core principles of valuation standard setting & the core principles of valuation.
Which sections of the Red Book are mandatory and which are advisory?
Professional Standards PS 1-2 are mandatory.
VPS 1-5 are mandatory unless stated otherwise.
Valuation Practice Guidance Applications – VPGA 1-10 are advisory.
What does PS1-2/VPS1-5/VPGAs relate to?
Professional Statements:
* PS 1: Compliance with standards where a written valuation is provided.
* PS2: Ethics, competency, objectivity & disclosures.
Valuation Technical & Performance Standards
* VPS 1: Terms of engagement
* VPS 2: Inspections, investigations and records
* VPS 3: Valuation reports
* VPS 4: Bases of value, assumptions & special assumptions
* VPS 5: Valuation approaches & methods
Valuation Practice Guidance Applications – VPGA 1-10: Provide guidance on best practice. They typically relate to valuations for specific purposes or of specific asset types e.g. Secure lending.
What type of advice does the Red Book cover?
Professional standards, technical standards, performance or delivery.
If you provide preliminary advice / draft valuation report, what should you state in writing to your client?
- The opinion is provisional & subject to completion of the final report.
- The advice is provided for the client’s internal purposes only and any draft is not to be published or disclosed.
- If any matters of fundamental importance are not reflected, their omission must be declared.
Tell me what the definition of MR/MV/investment value/fair value?
- Market Rent – amount for which an interest in real property should be leased on the valuation date between a willing lessor & willing lessee on appropriate lease terms in an arm’s length transaction, after proper marketing & where each parties acted knowledgeably, prudently & without compulsion.
- Market Value – The estimated amount for which an asset or liability should exchange on the valuation date between a willing buyer & a willing seller in an arm’s length transaction, after proper marketing & where each parties acted knowledgeably, prudently & without compulsion.
- Investment Value – The Value of an asset to the owner or a prospective owner for individual investment or operational objectives.
- Fair Value – The price that would be received to sell an asset, or paid to transfer a liability, in an ordinary transaction between market participants at the measurement date.
What type of valuations might be relied upon by a third party?
A regulated purpose valuation
What is the difference between an assumption and a special assumption?
An assumption is a supposition that is taken to be true. It involves facts, conditions or situations affecting the subject of, or approach to a valuation. They do not need to be verified by the valuer as part of the process.
A special assumption either assumes facts differ from the actual facts existing at the valuation date or that they would not be made by a typical market participant in a transaction on the valuation date.
If you have previously valued an asset, do you need to make any additional disclosures and what might they be?
Yes; The relationship with the client & previous involvement, rotational policy, time as signatory, 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?
An arrangement for a valuation to be periodically reviewed at intervals not greater than seven years by another member.
When might a conflict of interest exist in relation to a valuation instruction?
Acting for 2 or more parties competing for an opportunity.
Valuing a property previously valued for another client.
Valuing both parties interest in a leasehold transaction.
What must be included in your terms of engagement / valuation report?
Where is this covered in the Red Book?
Identification & status of the valuer clients and any other intended user, identification of the asset, valuation currency, purpose of valuation, Basis of value adopted, valuation date, nature & extent of valuer’s work, nature & sources of information relied upon, all assumptions, format of report, restrictions of use, confirmation the valuation will be undertaken in accordanc1e with the IVS, basis on which the fee will be calculated. Firms’ complaints handling procedure, statement that compliance of the standards is subject to monitoring, statement setting out any limitations.
Under VPS 1 - ‘Terms of engagement’
What is a restricted valuation service and can you provide one?
e.g. short timescale. Yes, but you must make it clear when confirming acceptance in the terms of engagement 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?
Include them in the terms of engagement and in report
Can you revalue a property without inspecting?
Not unless the valuer is satisfied there have been no material changes to the physical attributes of the property, or the nature of its location since the last assignment.
What RICS guidance relates to the use of comparable evidence?
‘Comparable Evidence in Real Estate Valuation’ 2019
What is an internal valuer?
A valuer employed by the enterprise that owns the asset, or the accounting firm responsible for preparing the enterprise’s financial records.
Can an external valuer provide an internal purposes valuation?
Yes but it must be clear in the terms of engagement
What happens if market conditions change between the valuation date and report date?
Attention should be drawn to this. The valuer should draw the client’s attention to the fact values change and may not be valid at an earlier or later date.
Is special value from a special purchaser reflected in MV?
No – Special value = an amount that reflects particular attributes of an asset that are only of value to a special purchaser.
Where does the definition of fair value come from?
Does this differ from MV?
International Financial Reporting Standards – IFRS
Ordinarily there is no difference.
When is fair value used?
To estimate the price at which an orderly transaction to sell the asset would take place between market participants at the measurement date under current market conditions.
What are the 3 approaches under VPS5?
The market approach – based on comparing.
The income approach – based on capitalization.
The cost approach – based on replacement cost.
What is the Valuer Registration Scheme?
The RICS quality assurance mechanism monitors all registered RICS members who carry out valuations within the scope of Red Book in order to ensure consistency.
Those who register can use the @RICS registered valuer’ on their business & marketing materials
Are there any instances where certain sections of the Red Book may not apply?
Yes
5 exceptions under PS 1:
1 - Advice is for negotiation
2 - Valutaion is for inclusion in a statutory return to a tax authority
3 - Valuation is provided to a client purely for internal purposes
4 - Valuation is part of agency & brokerage work in anticipation of recieving instructions to dispose or acquire , except when a purchase report is required.
5 - Valuation advice is in anticipation of giving evidence as an expert witness.
What are these and which sections don’t apply?
Various sections of VPS 1 – Terms of engagement
* If no opinion of value is to be provided - Basis of value adopted
* If the reviewer is not required to comment on the valuation date – Valuation date
* If it has specifically been agreed & recorded that a report shall be provided without reasons -Valuation approach & reasoning.
* If the valuer is not required to provide their own valuation opinion – Amount of the valuation.
What is the basis of value under UK GAAP FRS 102?
Fair value
What is a SORP?
Statement of recommended practice – recommendations & requirements setting out how to prepare ‘true & fair’ accounts.
When would you use EUV?
Existing Use Value – If the current use is the highest & best use.
What is the definition of EUV?
The value of the land in its existing use.
What additional criteria apply to secured lending valuations?
Any valuation for secured lending purposes arrived at by making a special assumption must be accompanied by a comment on any material difference between the reported value with & without that special assumption.
What information should you specifically request for a secured lending valuation?
The name of the intended lender.
Whether there has been a recent transaction or an agreed price.
Details of the terms of the lending facilities being contemplated by the lender.
What is a regulated purpose valuation?
A set of valuation purposes defined by RICS upon which third parties rely.
What is a yield?
A measurement of investment return, expressed as a percentage of capital invested. Income is divided by price.
What is a Net Initial Yield?
The current annualized rent divided by capital value net of any purchasers’ costs.
What is a reversionary yield?
Market Rent is divided by the current price on an investment let at a rent below the MR.
What is an equated yield?
A yield which takes into account growth in future income
What is an equivalent yield?
Average weighted yield when a reversionary property is valued using an initial and reversionary yield.
How would a yield reported from auction differ from a Net Initial Yield?
Auction costs are c.2% and so the costs deducted will affect the NIY
What purchaser’s costs do you deduct from a valuation?
Stamp duty land tax (SDLT) & agent and legal fees.
When do you deduct purchaser’s costs from a valuation?
At the end of an investment valuation to calculate the Market Value & to allow comparison with other asset types.
How would you value a property in uncertain market conditions - does the Red Book give any guidance?
It may become necessary to recalibrate or make adjustments to the valuation inputs.
Draw attention to this with the client.
How could you value a long leasehold interest?
Deduct the ground rent to calculate the net rent received. Capitalize this at a yield for the length of the lease to create market value.
How does a term and reversion differ to a DCF?
T&R values reversionary investments. Term is capitalized until the next rent review. Reversion to MR Is valued in perpetuity at a reversionary yield.
DCF – A growth explicit method. Projects estimated cash flows over hold period and an exit yield. The CF is then discounted back.
What is the difference between a growth explicit and a growth implicit yield?
Conventional method assumes growth implicit valuation. DCF is growth explicit as it needs to be explicitly identified.
