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APC (Scotland) > Valuation > Flashcards

Valuation Flashcards

1
Q

What is the Red Book and why do we need it?

A

The RICS Valuation - Global Standards (A.K.A the Red Book)
- Provides a global framework of standardised valuation procedures and standards

That are necessary for installing
- consistency, high standards, and public trust in valuation

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2
Q

When is a Red Book Valuation compulsory?

A

Legal and accountancy related procedures:

Probate
Capital Gains Tax
CPO’s
Divorces
Property Disputes
Sales by charities or NPO’s
Valuation of Bank, mortgage, or lending securities

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3
Q

When is a Red Book Valuation not required?

A

Advice given during negotiations or litigation
Internal use with no liabilities
Performing Statutory Functions
Market appraisals

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4
Q

What are some of the headings in a Red Book Valuation report?

A

Introduction
Property description
Purpose of Valuation
Basis of Valuation
Special assumptions
Valuation date
Market commentary
Evidence
Signatures

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5
Q

Headings within a Red Book Valuation Terms of Engagement?

A
  1. Identification and status of valuer
  2. Identification of the client(s)
  3. Identification of other intended users
  4. Identification of the asset(s)/liability(ies) being valued
  5. Currency
  6. Purpose
  7. Basis of value (see VPS 4)
  8. Valuation date
  9. Nature and extent of investigations and limitations
  10. Nature and source of information relied upon
  11. Assumptions and special assumptions
  12. Format of the report
  13. Restrictions on use, distribution and publication
  14. Confirmation of compliance with IVS
  15. Fee basis
  16. Reference to complaints handling procedure
  17. Statement relating to monitoring by RICS
  18. Any limitations on liability agreed
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6
Q

What are the 5 methods of valuation?

A

Comparable Method
Investment Method
Profits Method
Depreciated Replacement Cost Method
Residual Method

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7
Q

Before accepting a valuation, what should you do?

A

Establish purpose of valuation
If it’s Red Book or not
Conflict of interests check
Check for legal requirements
Check 3rd party interests
Check exceptions do not apply
Ensure sufficient PII is in place

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8
Q

What are the Valuation Technical and Performance Standards?

A

VPS1 - Terms of engagement

VPS2 - Inspection, investigation and records

VPS3 - Valuation reports

VPS4 - Bases of Valuation, assumptions, special assumptions

VPS5 - Valuation approaches and methods

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9
Q

What are ‘PS’, ‘VPS’, and ‘VPGA’s’?
Are they mandatory?

A

PS = Performance Standards (Mandatory)

VPS - Valuation technical and performance standards (Mandatory)

VPGA’s = Valuation practise guidance - applications (Guidance)

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10
Q

What is a special purchaser?

A

A buyer for whom an acquisition has special value not available to others in the open market.

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11
Q

What are assumptions?

What are special assumptions?

A

Assumptions -
Conditions or situations affecting the property which (by agreement) are assumed to be true

Special Assumptions -
Assumes facts that differ from actuality, are true

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12
Q

What are the bases of value?

Where are they defined?

A

Market Value
Market Rent
Investment Value
Equitable Value
Synergistic Value - aka marriage value
Liquidation Value

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13
Q

What makes a good comparable?

A

Similar in:
- Size
- Nature / Condition
- Ownership / Tenure
- Geographical distance / Location
- Disposal method

As close to the Valuation Date as possible

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14
Q

What is the residual method of valuation?

How does it work?

A

The residual method of valuation establishes how much a developer should pay for a site with development potential.

The residual method of valuation calculates the gross development value, minus the associated development costs and the developers profit.

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15
Q

What is the comparable method of valuation?

A

The comparable method of valuation provides an indication of value through obtaining comparable evidence.

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16
Q

What is the Profits method of valuation?

How does it work?

A

The profits method of valuation establishes the trading potential of a business in trade related properties, such as cinema’s or schools.

The profits method calculates the gross annual income, minus all associated costs, and them multiplies by the relevant multiplier.

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17
Q

What is the Depreciated Replacement Cost Method of Valuation?

How does it work?

A

The depreciated replacement cost method of valuation provides an indication of value based on a buyer paying no more or less than the cost to obtain the asset based on the current equivalent.
It is often used to value properties where this is no active market, such as a mosque.

The depreciated replacement cost method of valuation is calculated by identifying the cost of building the equivalent building, plus the cost of purchasing the land.

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18
Q

What is hope value?

A

Hope Value is a term used to describe the market value of land based on the expectation that planning permission will be granted to develop on it.

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19
Q

What is marriage value?

A

An additional element of value created by the combination of two or more assets, where the combined value is greater than the sum of the separate values

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20
Q

What is special value?

A

Special value is an extraordinary element of value over and above market value.

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21
Q

Market Value

A

The estimated 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.

22
Q

Market value IHT

A

The Inheritance Tax Act 1984 sec.160 definition of market value is: ‘The price which the property might reasonably be expected to fetch if sold in the open market at the time of valuation; but that price shall not be assumed to be reduced on the ground that the whole property is to be placed on the market as one and the same time.’

23
Q

Comparable evidence

A

Essentially, the comparable method can be used where there is a good body of recent, reliable comparable rental, yield or sales evidence. A comparable is defined as an item of information used during the valuation process as evidence to support the valuation of another, similar item.

24
Q

Limitation to comparable method

A

Challenges that candidates may face when using the comparable method include: limited transaction, lack of up-to-date evidence, existence of a special purchaser – which may lead to a price paid which is above the market tone due to circumstances specific to one party – lack of similar evidence given the complex nature of real estate, and limited market transparency.

25
Q

Give an example of a special assumption

A

An assumption that either assumes facts different from the actual facts, or that would not be made a typical market participant in a transaction on the valuation date.
- Planning permission on the land has been granted
- Vacant property

26
Q

What date did the latest red book come into effect?

A

1 May 2024

27
Q

What are the three principle basis’ of value?

A

Market value
Equitable value
Investment value

28
Q

How many VPGA’s are in the RICS Red Book?

A

Valuation Practice Guidance Applications
VPGA 1 – Valuation for inclusion in financial statements
VPGA 2 – Valuation of interests for secured lending
VPGA 3 – Valuation of businesses and business interests
VPGA 4 – Valuation of individual trade related properties
VPGA 5 – Valuation of plant and equipment
VPGA 6 – Valuation of intangible assets
VPGA 7 – Valuation of personal property, including arts and antiques
VPGA 8 – Valuation of real property interests
VPGA 9 – Identification of portfolios, collections and groups of properties
VPGA 10 – Matters that may give rise to material valuation uncertainty

29
Q

Who must be responsible for a valuation?

A

A name individual, who must be an RICS Registered Valuer

30
Q

Can a property be revalued without re-inspection, if previously valued?

A

Yes, providing the valuer is satisfied that there have been no material changes to the physical attributes of the nature of its location since the last assignment

31
Q

What should be included in inspection notes?

A

Date
Weather
What is being inspected
Conditions

32
Q

What is an assumption?

A

When it is reasonable for a valuer to accept that something is true without the need for specific investigation or verification

33
Q

Give some examples of assumptions in valuation

A

Title (i.e. the property is held with vacant possession)
Planning (has appropriate planning for present use)
Condition of buildings
Condition of services

34
Q

What are the general principles of good comparable evidence?

A

It should be:
* Comprehensive, several rather than one
* Very similar or if possible identical
* Recent, i.e. reps the market on the valuation date
* The result of an arm’s length transaction
* Verifiable
* Consistent with local market practice
* The result of underlying demand. I.e. there were enough potential bidders to create an active market

35
Q

What factors affect land value?

A

Land use mix
Soil type
Capability
Aspect
Layout
Accessibility
Drainage
Irrigation
Proximity to markets
Size
Suitability and layout of buildings
Eligibility for support payments
Environmental or other statutory designations
Schemes
Tenure
Planning opportunities
Use of machinery
Water distribution and availability
sporting rights
Riparian ownerships
Minerals
Public development/compulsory purchase proposals

36
Q

What factors affect farm buildings value?

A

Age, construction type, layout, adaptability, access, compliance with farm quality assurance requirements, pollution hazards, electricity supply and other mains/private services, redevelopment/conversion opportunities.

37
Q

What factors affect residential property value?

A

Age, construction type, layout, adaptability, access, compliance with quality assurance requirements, pollution hazards, electricity supply and other mains/private services, redevelopment/conversion opportunities.

38
Q

What must you do to maintain RICS Registered Valuer status?

A

Take valuation to level 3 in APC. Pay annual registration fee to remain on the Valuation Registration Scheme, submit return annually showing properties valued.

39
Q

What is the definition of equitable value?

A

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.

40
Q

When might you take account of hope value?

A

Land for potential development, such as a farmer’s field on the edge of a town or land near a substation.
The prospect of marriage value e.g. a neighbouring property was up for sale and the two combined would be of greater value.

41
Q

What is existing use value?

A

The value of property in its current form.

42
Q

How would you value a tenanted farm?

A

Depends on the type of the tenancy and how easily vacant possession can be achieved.
Might value the farm on vacant possession and apply a discount rate based on the years until termination or in perpetuity if on a secure tenancy
You may then add a value based on capitalising the rent payable for the tenancy until the time that VP can be achieved.

43
Q

What is a typical rental return from a farm tenancy?

A

Currently 1-2%, historically between 4-5%

44
Q

What is the likely discount rate for tenanted farmland?

A

30-60%

45
Q

What factors affect the value of woodlands?

A

Location (proximity to timber markets)
Size (commercial or amenity?)
Drainage
Climate
Elevation
Exposure
Soil type
Terrain
Access: internal and external
Achaeoligical features
Water courses
Tree species
Timber volumes
Tree size and age
timber quality
Management to date
Tree health
Porximity to buildings
Rights of access
Environmental designations
Non-woodland development potential
Grants
Market factors: Supply and demand, interest rates, price of timber

46
Q

How would you assess the present market value of standing timber?

A

Calculate the volume of standing timber and multiply by the relevant timber price.

47
Q

What is the price for grazing in the area?

A

£4,500 - £5,000 per ac

48
Q

What is the price for good arable ground in your area?

A

£10,000 per ac

49
Q

How many acres are in an hectare?

A

2.47105 acres

50
Q

You’ve been asked to carry out a valuation that meets the RICS Global Standards of a large block of hill land. What is the process?

A

agree terms of engagement, fee, site inspection, write report, comparable evidence, sign by other reg Valuer

51
Q

You’re carrying out a valuation of a farm with a sitting tenant who has an SLDT, does this affect the final value?

A

Yes, discount accordingly

52
Q

Keppoch valuation - SLDT and grazing discount

A

applied a 5% discount as it was minimal risk and the remaining duration is short. If it was a longer duration you would use a higher discount factor to reflect the increased risk and more time until VP

APC (Scotland) (9 decks)

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