Valuation - Level 1 Flashcards
Tell me what the 5 methods of valuation are
- Comparative method
- Investment method
- Profits method
- Residual method
- Contractors method (depreciated replacement costs)
Red Book Global approaches:
1. Income
2. Cost
3. Market
Tell me about how you would value a building using the profits/contractors/investment/comparable/residual method of valuation
Comparable:
- Six step methodology
- Search and select comparables > confirm/verify details > assemble comps in schedule > adjust using hierarchy of evidence > analyse to form opinion of value > report value and prepare file note
Investment:
- Used when there is an income stream to value
- The rental income is capitalised to produce a capital value
- Three versions = conventional investment method > term and reversion method > hardcore method
Profits:
- Used where the value of the property depends upon the profitability of its business and its trading potential
e.g. pubs, petrol stations, hotels etc
- EBITDA is capitalised at the appropriate yield to achieve market value
Residual:
- Most common purpose is for a specific valuation of a property holding to find the market value of the site based on market inputs
- Deduct total development costs from GDV to establish site value having allowed for normal purchasers’ costs
DRC:
- Only used where direct market evidence is limited or unavailable for specialised properties
- Two steps
- Value of land in its existing use (assume planning permission exists) > Add current cost of replacing the building plus fees less a discount for depreciation and obsolescence
How do you decide which valuation method to apply?
Term and reversion for under-rented
Layer/hardcore for over-rented
Residual for site value
What is a years purchase multiplier?
The multiplier of the net annual income to determine the capital value
Give me an example of a good covenant and how this might impact a valuation
An example of a good covenant would be Apple
Investors may view a strong covenant position as a positive factor due to the security of the rental income against the covenant of the company, this can increase the attractiveness of the property to investors and drive the value higher
What is PII?
Professional Indemnity Insurance
Why do surveyors need PII?
To protect clients, surveyors and third parties against negligence claims where there is a duty of care breached and a claim for damages arises
Tell me about the RICS requirements in relation to PII?
Mandatory for surveyors working in practice
All policies must be underwitted by an RICS approved insurer
Current min requirements based on a firm’s turnover:
100k or less = £250k cover
100k-200k = £500k cover
200k and above = £1 mil cover
What level of PII cover does your firm have?
£1,000,000, £2,000,000, £5,000,000 and £10,000,000
If PII above £10m is required referral to inhouse legal counsel is required.
Where in your valuation report do you state any limitations on liability?
Included in instruction letter and terms of business
What limitations does Hart v Large have on your valuation practice?
Hart v Large established the principle of margin for error in valuations. The Court held that a valuer is not liable for every inaccuracy in a valuation report, and that a reasonable margin for error must be allowed.
The margin for error is the range within which a valuer’s opinion can be considered reasonable, given the circumstances of the valuation.
Limitations on practice include:
1. Duty of care - the case reinforced the duty of care that valuers owe to their clients, and established the principle that valuers must act with reasonable skill and care.
2. Standard of care - the case established the standard of care that is expected of a valuer, which is that of a reasonably competent valuer in the same field
3. Margin of error - the case established the principle of allowing a margin for error in valuations, which acknowledges that valuations are estimates and are subject to some degree of uncertainty
4. Scope of liability - the case clarified the scope of a valuer’s liability which is limited to losses that are directly caused by the valuer’s negligence or breach of contract
What aspect of Hart v Large allowed the judge to award damages without applying the SAAMCO cap?
The valuer had breached their duty of care to the client by failing to inspect the property, which was a fundamental part of the valuation exercise. The valuer’s negligence had caused the claimant to suffer a loss that was directly attributable to the valuer’s breach of duty, and that the loss was not outside the scope of the valuer’s duty.
What is the SAAMCO cap?
Legal principle that limits the liability of professional advisers for losses suffered by their clients.
In the SAAMCO case, the court held that the liability of a professional adviser is limited to the scope of their advice, and tat they cannot be held liable for losses that are outside their scope of advice.
Under the SAAMCO cap, is a valuer liable for losses due to a downturn in the market?
No, as this would be considered outside of the scope of advice.
Under the SAAMCO cap, is a valuer’s liability usually limited to the overvaluation on the valuation date?
It is usually limited to the ‘advice gap’ between the value of the property as it was and the value as it should have been if the valuation had been accurate.
What would you do if you received notice of a PII claim from a client or their solicitor?
- Notify PII insurer
- Gather all relevant information
- Engage legal counsel
- Cooperate with your insurer
- Maintain professional standards
Is there a difference between being negligent when undertaking a survey/valuation and providing negligent advice?
Yes, when a surveyor is negligent in their work, it means they have failed to exercise reasonable care and skill in carrying out the survey or valuation. Negligence in this context refers to a failure to meet the required standard of care for a competent valuer/surveyor.
On the other hand, providing negligent advice refers to a situation where a surveyor provides advice or guidance that is incorrect, incomplete or misleading, and which leads to the client suffering a loss or damage.
Whilst there is overlap, negligence in the survey/valuation process relates to errors or omissions in the physical inspection or valuation of the property, while negligent advice relates to errors or omissions in the advice or guidance provided to the client.
What is the Red Book?
Professional standards and guidance document produced by the RICS for valuers which sets out mandatory rules, best practice guidance and technical standards that RICS members must follow when undertaking property valuations and related services.
Why does the Red Book exist?
To ensure that property valuations are carried out to a high standard of professionalism and consistency, and to provide a framework for best practice in the industry.
Tell me about a factor which may impact value
Sustainability
Poor = lower value and vice versa
What is your duty of care as a surveyor when undertaking a valuation?
To exercise reasonable skill and care in carrying out a valuation. This means that members are to follow the professional standards set out in the RICS Red Book and to ensure that work is carried out to a high standard of professionalism and competence.
To whom do you owe this duty of care?
Client
Third parties who may rely on the valuation
Why is independence and objectivity important when valuing?
They help to ensure that the valuation is fair, unbiased and accurate.
Is there a separate UK Red Book?
Yes
What is the UK valuation guidance called?
RICS Valuation - Global Standards (UK National Supplement, 2018)
Effective from 14th January 2019
Why does the UK guidance exist?
The UK Red Book augments the Red Book Global requirements for valuations in the UK and is not a substitute for it
It provides specific requirements for members on the application of RICS Valuation - Global Standards to valuations undertaken subject to UK jurisdiction.
When was the Red Book last updated?
2021 with effect from 31st January 2022
Does this differ from when IVS were last updated?
No
What changes were made?
The need for compliance with RBG and adequate Terms of Reference to reflect this (PS 1 and VPS 1):
- Terms of Reference must be clear and unambiguous in that valuations are either RBG compliant or not
Valuation for financial reporting purposes (VPGA 1):
- References to IFRS 13 and IFRS 16 and the need to provide reasonably possible fair value measurements
Sustainability and ESG factors, particularly regarding:
- Definitions (glossary) to be provided
- Inspections and reporting (VPS 2 and VPS 3) - valuer’s should have regard to the relevance and significance of ESG and Sustainability factors which should form an integral part of the valuation approach and reasoning. This will necessitate the collection of appropriate data
- Valuation for secured lending purposes (VPGA 2) - noting that ESG and Sustainability factors should form an integral part of the valuation approach, commentary may also be required on the maintainability of income, and future cost liabilities to meet changing regulations and investor expectations
Which do you follow - the latest IVS or the Red Book Global?
Both
Which sections of the Red Book are mandatory and which are advisory?
Mandatory - Parts 3, 4 and 6
What does PS1-2/VPS1-5/VPGAs relate to?
PS 1 = compliance with standards and practice statements where a written valuation is provided
- RBG is mandatory for all valuations except the following FIVE exceptions:
1. Advice is expressly provided in preparation for, or during the course of negotiations or litigation
2. The valuer is performing a statutory function except for the provision of a valuation for inclusion in a statutory return to a tax authority
3. The valuation is provided for a client purely for internal purposes, without liability, and not communicated to any third party
4. The valuation is provided as part of agency and brokerage work in anticipation of receiving instructions to dispose of, or acquire, an asset, except when a purchase report is required which includes a valuation
5. The valuation advice is provided in anticipation of giving evidence as an expert witness
PS2 = ethics, competency, objectivity and disclosures
VPS 1 = Terms of engagement
VPS 2 = Inspections, investigations and records
VPS 3 = Contents of valuation reports
VPS 4 = Bases of value, assumptions and special assumptions
VPS 5 = Valuation approaches and methods
VPGA 1 = Valuation for inclusion in financial accounts
VPGA 2 = Valuations for secured lending
VPGA 8 = Valuation of real property interests
VPGA 10 = Matters that may give rise to material valuation uncertainty (in terms of wider context relates to significant economic or other factors affecting value)
If you provide preliminary advice / draft valuation report, what should you state in writing to your client?
Clearly state in writing to your client that the advice or report is preliminary and subject to change.
Tell me the definition of MR/MV/IV
Market value:
‘The estimated amount for which an asset or liability should exchange’
Market rent:
‘The estimated amount for which an interest in real property should be leased’
Investment value:
‘The value of an asset to a particular owner, or prospective owner for individual investment or operational objectivies’
What is the difference between an assumption and a special assumption?
An assumption is a generally accepted statement or proposition that is taken to be true for the purposes of the valuation, while a special assumption is a specific assumption that is unique to the property being valued and agreed upon between the valuer and the client before the valuation is undertaken.
What sources of information would you consider when preparing a valuation report?
Sites such as land Registry, CoStar and EGI
Discussions with local agents
If you have previously valued an asset, do you need to make any additional disclosures and what might they be?
The specific disclosure will depend on the circumstance of the instruction, in general if there has been a change in circumstance or information that could affect the value of the asset since the previous valuation was conducted, the surveyor may need o discolse this information in their new valuation report.
When might a conflict of interest exist in relation to a valuation instruction?
When there is a personal or business relationship with the owner of the asset, or if there is a financial interest in the asset
A conflict may also arise where the surveyor has previously provided services to one of the parties involved in the transaction which could impact on objectivity
Where is this covered in the Red Book?
PS 2
What is a restricted valuation service and can you provide one?
A limited type of valuation that is less comprehensive than a full valuation.
A restricted valuation service may be appropriate in the circumstance that the valuation is provided for a client purely for internal purposes, without liability, and not communicated to any third party
How do you deal with limitations on inspection or analysis?
The surveyor should disclose any limitations in the valuation report and take them into account when making any assumptions or conclusions.
The surveyor should clearly state the extent of the limitations, how they may impact upon value and any assumptions that were made as a result. The surveyor should also indicate whether additional information or inspection would be required to provide a more comprehensive valuation.
Can you revalue a property without inspecting?
It is generally not recommended to revalue a property without inspecting as the condition and other physical characteristics of the property can have a significant impact on its value.
However, there may be circumstances where revaluing without inspection is appropriate/necessary:
- The property has been recently inspected and no significant changes have been made to its condition
- The property is located in an area where there has been minimal market movement, and recent sales data and other information are available to support the valuation
- The property is new, and its construction and other details are well-documented and can be verified through other means
What RICS guidance relates to the use of comparable evidence?
Comparable Evidence In Real Estate Valuation, 2019
What is an internal valuer?
A professional employed by a firm to provide valuation services on their behalf.
Can an external valuer provide an internal purposes valuation?
Yes, however, the scope and methodology may be different from a valuation provided for external purposes.
The external valuer should still follow professional standards and guidelines, such as the RBG, to ensure objectivity and reliability.
What happens if market conditions change between the valuation date and report date?
It could affect the accuracy and reliability of the valuation - in such cases, the valuer may need to adjust the valuation to reflect changes in market conditions.
The valuer should disclose the change in market conditions and the impact that it has had on the valuation in their report. The valuation date, assumptions and extent of market change should be clearly stated.
Is special value from a special purchaser reflected in MV?
Not necessarily - market value does not take into account the specific needs or preferences of a particular purpose, the focus is on what a hypothetical willing buyer and willing seller would agree on in an open market transaction
However, in certain scenarios special value may be taken into account in a valuation, for example, if the property is being sold to a particular purchaser for a specific use, and that use is likely to continue in the future, the valuer may consider the specific value that the purchaser places on the property.
Where does the definition of fair value come from?
IFRS 13:
‘The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction’
This basis of valuation is now required if the International Financial Reporting Standards have been adopted by the client
