Valuation - Level 1 Flashcards
What is a RICS registered valuer?
Valuer registration is our quality assurance mechanism that monitors all registered RICS members who carry out Red Book valuations and ensures consistent standards.
What is PI for?
PI ensures that;
a firm is protected from a financial loss it can’t meet from it’s own resources in the event of a claim.
insured M or F against consequences of liability to pay damages to third parties for breaches of professional duty
Ensures firms clients do not suffer loss they cannot meet.
What does PI need for the RICS?
Needs to meet RICS min policy wording.
What are the minimum limits for indemnity cover?
Firm’s turnover in the preceding year
Turnover - £100,000 or less. Minimum limit of indemnity - £250,000
Turnover - £100,001 to £200,000. Minimum limit of indemnity - £500,000
Turnover - £200,001 and above. Minimum limit of indemnity - £1,000,000
Who can undertake Red Book Valuations?
Registered valuers under the Valuer Registration Scheme.
What are the 5 methods of valuations?
5 methods -
Residual Method Comparable Investment Method/Income Method Profits Method Depreciated replacement cost/Contractors method.
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 focusing 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 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 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.
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 Investment Method used and how is this undertaken?
The investment method is used where there is an income stream to value, i.e. the property is tenanted. This can include commercial, residential, retail, industrial and agricultural properties.
Use comparable evidence to find a suitable yield with which to capitalise the income stream
What are the different valuation approaches?
Income approach – converting current and future cash flows into a capital value (investment method, Residual and Profits method)
Cost approach ¬– reference to the cost of the asset whether by purchase or construction i.e. DRC method
Market approach – Using comparable evidence available i.e. comparable method
What’s the difference between an assumption and a special assumption?
An assumption is something can be assumed as being reasonably true, without investigation e.g. property is structurally sound. Special Assumption is something that has been deemed as true for the purpose of the valuation, but is not actually true at that moment in time. E.g. planning permission. VP
Do all valuations have to be red book?
No there are exceptions to the red book these are in PS1 – Statutory Guidance Advertising/Brokerage Internal use Negotiations Expert Witness
How do you calculate a Years Purchase from a yield?
Dividing 100 by the yield
