Valuation Flashcards
Q) When is the Profit Method used and how is this undertaken?
The profits method is derived from trade related properties where the value is derived from the business and its trading potential.
This trading potential is the profit that a reasonably efficient operator would expect to realise from occupying the property.
Examples of when the profits method would be used would include for hotels, schools, cinemas and theatres.
The common characteristics of these properties is where the property has been designed for a specific use and the value is linked to what the owner can generate from the property.
The value therefore reflects the trading potential of the property and it includes the property interest, business and locational good will and fixtures and fittings all reflected as a single figure.
What is the residual method and how is this applied?
The main aim of the residual method of valuation is to establish how much a purchaser should pay for a development site.
The gross development value is established first of all and there after all the costs associated with undertaking the development are then deducted.
This leaves a surplus amount remaining which is also known as the residual value.
This represents how much the developer can afford to pay for the development site or property.
The GDV or gross development value forms a key part of the calculation and this is the aggregate market value of the development based on the special assumption that the development is complete at the date of valuation.
The costs considered and deducted from the GDV will include – site preparation, construction, sales and marketing, contingency, financing fees and developers profit
When is the Profit Method used and how is this undertaken?
The Income and expenditure forecast is based on historical and comparable information.
This forecast represents the fair maintainable turnover and fair maintainable operating profit that a reasonably efficient operator would hope to achieve.
This is therefore considered a reasonably accurate forecast of the properties trading potential.
The actual performance is compared with similar trade properties to determine whether the fair maintainable turnover is realistic based on current market conditions.
As a final step the fair maintainable operating profit is capitalised at the appropriate rate of return to reflect the risks and rewards of the property to determine its trading potential. Evidence of accurate comparable market data should be analysed and applied.
What is the depreciated replacement cost method of valuation and how does this work?
The depreciated replacement cost method provides an indication of value based on the buyer paying no more or no less than the cost to obtain the asset based on the current equivalent.
The involves calculating the replacement cost of the asset with its modern equivalent including deductions for physical deterioration and all other relevant forms of obsolescence.
This method is known as the method of last resort and used when it is impractical to use all other valuation methods.
The cost approach is used to value unusual properties where there is no active market such as mosques, wharfs or refineries.
Under the cost approach the capital value is determined by calculating the cost of building the equivalent asset and the purchase land value.
The replacement build cost should be calculating using new and cost effective building materials and techniques.
The total value of the new property is then adjusted for deterioration using evidential information and recent transaction values to calculate the land purchase cost.
What is the comparable method of valuation and how does this work?
The comparable method primarily uses sales data of properties that have recently been sold focussing on assets that have a similar size, location, condition, features and specifications.
The comparable method is underpinned by comparable evidence which is identified, analysed and applied to the real estate that is to be valued and is therefore fundamental to producing a sound valuation that can stand scrutiny from the client and market.
The valuer will compile a schedule of evidence that will contain details about the property such as building age, quality, location, tenure, size, transaction price, date of sale, price per sq.ft - all of which can be used for the purposes of comparison with other similar properties.
The comparables gathered should be comprehensive that is to say there should be several comparables rather than this being singular, they should be recent and therefore representative of the current market conditions), very similar and consistent with local market practice.
What are the different Purposes of valuation?
Valuation for Financial Reporting
Valuation for Commercial Secured Lending Purposes
Valuation for Residential Mortgage Purposes
Valuation for Capital Gains Tax, Inheritance Tax, Stamp Duty Land Tax
Valuation for Compulsory Purchase and Statutory Compensation
What is the Red Book?
he RICS Red Book contains mandatory rules and best practice guidance for members who undertake asset valuations
The Red Book includes:
International Valuation Standards – 31st January 2020 Edition
Red Book UK – Issued since 2015
Key Sections of the Red Book include:
Introduction
Mandatory Valuation Standards
Advisory Valuations Standards
Valuation for Financial Reporting
Valuation of Charity Assets
Valuation for commercial secured lending purposes.
Valuation for compulsory purchase and statutory compensation
What steps would you take following your valuation instruction?
Get details of property
Conflict check
Letter of instruction - signed
Purpose of Valuation
Information gathering – including purchase price
Rating, planning, environmental
Inspection & Measurement
Research market
Valuation
Write report
Check valuation
Report to the client
Invoice
What points would you expect to see covered in a Banks Letter Of Instruction on a valuation for secured lending?
Borrower
Property
Purpose
Conflicts
Details of loan
Who the report is to be addressed to
Special Assumptions
Details on where to get information/how to get access.
What the report should contain – description; areas; condition; tenancies & lease; environmental conditions, The market, Relevant Risks, Valuation amount, Any Fees that are applicable
What are the different methods of valuation?
Comparable
Income method (Investments Method)
Profits
Residual
DRC Depreciated Replacement Costs (Contractors Method)
What is meant by the term Market Value?
The estimated amount for which an asset should exchange on the date of valuation 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”
What is the definition of market rent?
The estimated amount for which a property, or space within a property should lease (let) on the date of valuation between a willing lessor and a willing lessee on appropriate lease terms in an arm’s length transaction and after proper marketing wherein the parties had acted knowledgably, prudently and without compulsion”
What is Hope Value?
Hope value is the term used to describe the market value of land based on the expectation of getting planning permission for development on it. This differs from the existing use value which is what the land or property is worth in its current form.
What is Marriage Value?
The extra value that arises from the merger of two physical or legal interests
Definition Of Special Value?
An extraordinary element of value over and above market value.
What does TEGOVA stand for?
- The European Group Of Valuer’s Association unites 70,000 national valuer’s associations from 38
countries. - The organisation seeks to make valuation compatible across the EU.
- TEGOVA aims include:
o A common European Valuation Report for Residential Property.
o New Guidance Notes and Information Papers on subjects of real interest to practicing valuers.
o A comprehensive approach to Valuation Methodology including detailed exposition of key
concepts such as income approach and depreciated replacement cost.
What is the IVSC?
- The International Valuation Standards Committee.
- It’s principle interest is to publish valuation standards and procedural guides for valuation of assets for
financial statements. - The IVSC recognises two specific International Valuation Standards:
o IVS1 – Market Value basis of Valuation.
o IVS2 – Valuation bases other than Market Value. - The IVSC also recognises two applications:
o IVA1 – Valuations for Financial Reporting.
o IVA2 – Valuation for Lending Purposes.
