Valuation Flashcards
What RICS guide would you refer to for the Comparable method
Comparable Method Hierarchy of Evidence (from RICS Professional Standard - Comparable Evidence in Real Estate Valuation 2019):
- Category A - Direct Comparable evidence (example achieved prices of similar properties to subject)
- Category B - General Market data that can provide guidance (such as information from public sources which is verifiable)
- Category C - other sources (such as comparables from other asset classes and locations)
What are the 5 methods of valuation ?
IVS 105 - 5 methods of valuation:
* Comparable method
* Investment method
* Residual method
* Profit method - for trade-related properties - value by working out the adjusted profit and calculating the fair operating profit
* Depreciated Replacement cost method
What due diligence would you conduct for a valuation?
For Valuation - RICS Red book, UK National Supplement (2017)
UK VPGA 11 - Valuation of residential property
- Asbestos register
- Contamination
- Equality Act 2010 compliance
- EPC Rating
- Flood Risk
- Fire Safety Compliance
- Legal title and tenure
Define Market Value
Market Value - (IVS 104 paragraph 30.1)
- The 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
- where the parties had each acted knowledgeably, prudently and without compulsion
Tell me about Residual valuations and Development Appraisals - and what is the difference?
Residual value - (Market inputs) - GDV - Development costs = site value
Development Appraisal - (Client Inputs) GDV - development cost - site value = profits
What are the 3 important first steps to first undertake before a valuation
- Competence - am I competent to undertake the work?
- Independence - think first and then check for any conflicts or personal interests - Who and Why?
- Terms of Engagement
What are the different yields
- Yield calculated by income divided by price x 100
- Yields are a measure of investment return. Types of yields include:
Gross Yield - Not adjusted for purchasers costs
Net Yield - Adjusted for purchasers costs
Reversionary yield - MR divided by the current price let at below MR
Equivalent Yield - Average weighted yield. when a reversionary property is valued using an initial and reversionary yield
Initial Yield - Current income and Current Price
True Yield - rent in advance
Nominal Yield - rent in arrears
IRR - a rate that makes the net present value (NPV) of all cash flows equal to zero. Assesses profitability of an investment
Linear interpolation can be used to figure out IRR
Running yield - the yield at one moment in time
All risks yield - the remunerative rate of interest used in the valuation of fully let property let at market rent reflecting all the prospects and risks attached to the particular investment
Define Market Rent
- The amount for which an interest in property will be leased
- On the valuation date
- Between a willing Lessor and willing Lessee
- On appropriate terms in an arm’s length transaction
- After proper marketing
- With parties acting knowledgeably, prudently and without compulsion
Investment Value
Tell me how to use the Profits Method?
Profits Method
Used for valuations of trade related properties such as:
* Pubs
* Casinos
* Nurseries
Profits method approach
* Ask for audited accounts of the past 3 years
* Work out the adjusted net profit AKA Fair maintainable operating profit
* Capitalise the Fair maintainable operating profit at a suitable yield
Methodology:
* Annual turnover (income received) less costs/purchases = gross profit
- Less reasonable working expenses = unadjusted net profit
- Less operator’s remuneration = Adjusted net profit known as the Fair Maintainable Operating Profit (FMOP)
Define Fair Value?
a. The price that would be received to sell an asset
b. Or paid to transfer a liability
c. Orderly transaction
d. Between market participants
e. At measurement date
Define Investment Value?
a. Value of an asset
b. To a particular owner, or prospective owner
c. For individual investment or operational objectives
Define Equitable value?
The estimated price for the transfer of an asset or liability between identified knowledgeable and willing parties that reflects the respective interests of those parties
Define an assumption?
Something that you can reasonably assume to be true
Define a special assumptions?
Something that you know is not true
