Valuation Flashcards
This deck will cover questions encountered for Levels 1 -3 for Valuation Competency
Can you explain what a Special Purchaser is?
Where a particular asset has special value to a particular purchaser because of advantages arising from its ownership that would not be available to other buyers in a market.
What is the All Risks Yield (ARY)?
This is a yield which reflects all the prospects and risks attached to a particular investment
What is a true yield?
This yield assumes that rent or any income is paid in advance and not in arrears
Define what a yield is?
It is the annual return on an investment expressed as a percentage of capital value.
How do you calculate the yield?
The income/capital value (price paid) x100%.
Stand back and look and see if the yield looks reasonable based on the type of investment.
What are the five methods of valuation?
Comparable
Investment
Residual
Depreciated Replacement Cost
Profits
What is another name for the DRC method of valuation?
Contractors Method
What is another name for the Profits Method of valuation?
Receipts and Expenditure
What are the different valuation approaches?
- Market
- Income
- Cost
What is the definition of Market Value?
Estimated amount for which an asset or liability should exchange on the valuation date between a willing buyer and willing seller in an arm’s length transaction, after proper marketing and where the parties had each acted knowledgeably, prudently and without compulsion.
Where can you find the definition of Market Value?
VPS 2 Basis of Value in the RICS Red Book
What is the RICS Red Book?
The Red Book is a set of global standards which set out procedural rules and guidance for written valuations.
What is full title or what is another name for the RICS Red Book?
RICS Valuation Global Standards 2025 31 January
What is the purpose of the Red Book?
To provide greater consistency, objectivity and transparency with valuations.
Why does the Red Book get updated?
The International Valuation Standards (IVS) are updated every two years and as such the RICS Red Book is updated to align with the updated IVS.
What does IVS stand for?
International Valuation Standards
Who creates the IVS?
The International Valuation Standards Council (IVSC) - which includes members including RICS.
What does ESG stand for?
Environmental, Social and Governance.
What does PS 1 mean in the Red Book?
Professional Standard 1 which requires compliance with the set standards where a written valuation is provided.
What does PS 2 mean in the Red Book?
Professional Standard 2 which covers ethics, objectivity and disclosures
Why would you adopt a gross yield?
To determine the market value without any deductions for purchasers costs and taxes.
Name some factors that you would adjust for when using the comparable method of valuation?
- Locality
- Size
- Age
- Build/Construction type
- Accommodation
- State of repair
- Material condition
- Any changes in the market since the transaction
- Level of parking.
When might a valuation not be found in the Red Book?
- When carrying out a market appraisal
- Litigation of rent reviews
- Internal valuations
- Expert witness - duty to the court
- Statutory Valuations
Can you give some examples as to why a valuation may be needed?
- Taxation (CGT, IHT, Business Rates, Council Tax)
- Loan security
- Mortgages
- For property Insurance
- Financial Planning.
What does investment value mean?
The value of an asset to the owner or a prospective owner for individual investment or operational objectives.
What does Fair Value or Fair Market Value mean?
The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between willing market participants at the measurement date (IFRS 13).
When is Fair Value needed?
Used for accounts and various accounting purposes
What are Terms of Engagement (TOEs)?
The contract with a client detailing the work assignment. It can be used as an important defence against any hypothetical negligence claims.
What is the cost approach based on?
Gives an indication of value using the economic principle that a buyer would pay no more for an asset than the cost to get an equal asset by construction or purchase. E.G. Residual method and Depreciated replacement cost method.
When would DCF be a suitable alternative to the traditional valuation methods?
To determine market value and investment value (or worth).
Why would you not use DCF?
The method is too long and time consuming. It may also go into a level of detail that the client did not need or request.
What is the income approach based on?
Capitalisation or conversion of present and future incomes to a single capital value
Two methods: 1.) capitilaisation of a conventional market based income. 2.) discounting a income projections
Deciding by consideration of what is standard in the market.
E.g. investment and profits method
How do you carry out a valuation using the comparable method?
- Look at subject property (sale and letting evidence)
- Find and Select comps (verify info)
- Analyse comps
- Display comps and subject in a summary matrix/table
- Apply appropriate weighting to chosen comps
- Value property by adjusting sales prices of these comps
- Stand back and look to see if reasonable.
In the hardcore method of valuation, what does top slice mean?
Top slice is the amount of rent that is above the market rent.
What valuation technique might you use to value a shop or office which is under-rented?
The Term and Reversion Method.
