Valuation Definitions Flashcards
When do you require a Redbook Valuation?
Tax planning, probate valuation, secured lending,
Why would you undertake a probate valuation?
Probae valuation is undertaken when a person dies. It includes everything the person owned minus debts. It is undertaken to establish the value subject to Inheritance tax or income tax.
What are the 4 exemptions from the RICS Redbook Valuation?
Internal purposes;
Marketing appraisal;
Statutory purpose/claims (e.g. arbitrations);
Litigation in court (e.g. expert witness)
What is the Net Internal, Net External, and Zone areas?
Net Internal - useable area measured to the internal finish
Net External - enclosed area of the building, minus the thickness of the external walls, but not internal walls/etc
Zone Areas - In commercial terms, Zoning is used to measure retail properties, allocating different values
Identify 8 headings you would expect to find in the Terms of Engagement?
Instruction
Purpose of Letter
Scope of work
Assumptions & Special Assumptions
Valuation Date
Identification of Valuer
Conflicts of Interest
Professional Indemity Insurance
Complaints Handling Procedure
What is a special assumption?
An assumption that either assumes facts that differ from the actual facts existing, or assumptions that would not be made by a typical market participant. For example special assumption of vacant possession, despite being within a 1991 Act.
What is the difference between terms of business and terms of engagement?
Terms of Business relates to your firms overall general conduct, such as confidentiality, payment terms, anti-money laundering, complaints handling, termination.
Terms of Engagement are more job specific outlining the scope of work, instruction, nature of the work.
What is the valuers registration scheme? (VRS)
VRS is a quality assurance scheme which monitors RICS members undertaking valuation.
It was launched to provide public confidence, maintain parity, transparency and enable scrutiny of the RICS and the valuation process.
Define Market value?
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 and where the parties had each acted knowledgeably, prudently and without compulsion.
Define Market Rent?
The estimated amount for which a property would be leased on the valuation date between a willing lessor and a willing lessee on appropriate lease terms in an arm’s length transaction, after proper marketing and where the parties had each acted knowledgeably, prudently and without compulsion.
What other bases of valuation other than Market Rent and Market Value could be used in a Valuation?
Detailed in VPS 4: Investment Value, Fair Value (‘equitable’), Marriage value, liquidation value
Why do you make assumptions in a valuation?
Assumptions are necessary to estimate a basis of value, and make a fair judgement
What is your firms complaints handling procedure?
Procedure handling procedure detailed on the S&P website.
Nick Greene, email provided which is monitored. Option to post hard copy, and will respond within 5 working days to acknowledge receipt.
Investigation involved reviewing S&P files on matter and interviewing associated employees where appropriate.
If not satisfied, advised to approach the Property Redress Scheme.
When would you use Term and Reversion Valuation
When you believe the property is let at a greater or lower value than current Market Value, but there is an expectation that the rent will be adjusted to reflect MR in future
What is a yield in a Term and Reversion
The yield is the risk associated with achieving the Years Purchase (YP) in Perpetuity
How does a rent review and break clause effect Term and reversion
A rent review clause would provide a deadline for the current rent, and would enable the reversionary investment to achieve market rent sooner, reducing the risk/yield
Can you explain what is meant by ‘term’ and by the ‘reversion’
The ‘term’ is the initial block of income which we know to be true.
The ‘reversion’ is the income in ‘perpetuity’ following a rent review clause.
e.g. If you know the current income for a leased property is £100k per annum, this is the ‘term.’ If there is a rent review in 2 years time, then the term would be £100k for 2 years.
If we know Market Rent is £150k, then following the RR in 2 years time, your second block of income would be a reversionary rent of £150k in perpetuity.
When is a Discounted Cash Flow approach used?
Discounted cash flow finds the net present value of expected future cash flows using a discount rate. It enables investors to determine whether the future cash flow is greater than the initial investment
When is the Investment method used?
Investment method is used to value an income stream or rental income to produce capital value
What is YP?
‘Years Purchase’
Multiplier giving capital value
Define the Net Present Value?
Sum of future discounted cash flows to get present value
When NPV is positive = exceed investors target
When NPV is negative = Not achieved investors target
What are some of the minimum requirements (key headings) to include in a Valuation report?
Identification of valuer
Identification of client
Purpose of valuation
Valuation date
Basis of value
Nature and source of information relied upon
Assumptions and Special Assumptions
Restrictions on use and distribution
Amount of the valuation
Valuation approach and reasoning
Date of the report
What is the All Risks Yield (ARY)?
Rate of interest used in the valuation of an investment at market rent
It must reflect all the risks, uncertainties and likely beneficial prospects of the investment.
What are the Professional Standards (PS) in the RICS red book?
They are mandatory
PS1 - Members and firms who undertake written valuations are required to comply with RICS standards and IVS
PS2 - Members practicing as valuers must have the appropriate experience, skill and judgement and work in an ethical manner
What is the difference in Valuation date between secured lending and probate valuation?
Probate = Date of Death
Secured Lending = Date of Inspection or date of report
How might you adjust a comparable residential property to march what you are valuing?
Type, relevance, date of sale, market conditions, location
You have valued a farm with an SLDT, and you used term and reversion. How did you decide on a suitable discount rate?
You calculate the reversionary yield which takes into account the risk for future income, and possibility of achieving market rent through rent reviews
What is an internal and external valuer?
Internal: Employed by a company to value the assets of the company, for internal use
only, no third party reliance
External: No material links with the asset or client
Give an approximate timeline of a standard valuation?
Receive written instructions
Check competence and independence
Issue and then receive signed TOE
Gather information – title documents and plans, tenancies, plans, planning information
Due diligence
Inspect and measure
Market research and obtain, verify and analyse comparable evidence
Draft report
Peer review
Finalise and sign
Report to client
Issue invoice
Give some examples of Due Dilligence you would undertake before/during a valuation?
Consider the following:
- tenure
-occupation
-electricity lines
-contamination
-radon
-council tax/business rates
-title burdens
-planning history, restrictions (e.g sssi, listed)
Flooding
How do you calculate the yield in the investment method?
income/value * 100 = yield
YP in perp = 100/yield
What is the Parry’s table and when is it used?
It is a useful tool for more Complex investment method valuations and you need to account for the likes of inflation, taxes. interest rates.
What other activities should you apply the RICS red book valuation standards to, other than tax, probate and and loan security?
purchase reports, investment performance, stock exchange, financial reporting
Why is ‘present value’ of money more valuable than future value?
Inflation erodes spending
Cost of capital
Investment risk
What is the relationship between ARY and Risk?
ARY and Risk are directly proportional. When the risk increases, the ARY increases
Which is more secure, the ‘term’ or ‘reversion’ income and why?
The ‘term’ income is more secure/lower risk therefore the ARY is lower
How do you calculate the Market value in a term & reversion?
You add up the capital value of the income blocks (i.e. the ‘term’ and also the ‘reversion’ income).
What is a Tenants Covenant?
What is an Assumption?
A supposition taken to be true, that does not need to be verified by a valuer as part of the valuation process
Something which can be taken as true, without requiring evidence of the truth.
