Valuation Level 1 Flashcards
What is 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.
What is Market Rent?
‘the estimated amount for which an asset or liability should be leased for at 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.
What is the red book?
Mandatory rules and best practice for members who undertake valuations
When is the red book used?
Mandatory for all valuations except
- valuation for internal purposes
- valuation for agency work
- valuation required by law
What are the 3 approaches to valuation?
MIC
Market approach
Income approach
Cost approach
What are the 5 methods of valuation?
PRICD
Profits method
Residual method
Investment method
Comparable method
Depreciated Replacement Cost Method
Describe the comparable method?
looks at similar properties within the same area that has been recently sold
Describe the investment method?
Used when there is an income stream to value, rental income is capitalised
Describe the profits method?
Used to value a property when the value depends on the trading potential of the business
Used for pubs, stations and hotels.
applies an all-risk YP (years’ purchase)/multiplier to the fair maintainable operating profit to provide a capital value.
Describe the depreciated cost replacement method
used where there is no active market for the
asset being valued such as lighthouse or oil refinery.
It is calculated in two steps
valuing the land in the current use
add cost of replacing the asset plus fees and less a discount for depreciation.
Describe residual method?
how much a purchaser should pay for a development site
GDV - less costs gives site value
What is the structure of the Red Book?
Introduction
Glossary
Professional Standards
Valuation Performance Standards (VPS)
Valuation Practice Guidance Applications (VPGA)
International Valuation Standards
What was the aim of the Red Book Update?
Reflect changes to the International Valuation Standards 2022
What is a recent change to the Global Redbook?
VPGA 2 - ESG and Sustainability should form an integral part of the report.
The need to agree clear and unambiguous terms of engagement
Explain the two professional standards?
PS1 - compliance with standards and practice statements when written valuation is provided.
PS2 - ethics, competency and disclosure
- comply with Rule of Conduct
- must act independently and objectively
- comply with terms of engagement
What goes into terms of Engagement?
In line with VPS1
- identify and status of valuer
- client
- asset to be valued
- purpose of valuation
- basis of value
- fee basis
- PII confirmation
What is in a valuation report?
in line with VPS 3
- identity of Valuer
- asset to be values
- basis of value
- information relied upon
- valuation approach & reasoning
- valuation figures
- market commentary
What are the different purposes of valuation?
- financial reporting
- secured lending
- tax purposes capital gains
What would you expect to see covered in a Banks Letter of Instruction?
Borrower
Property
Purpose
Details of Loan
Special assumptions
What does VPS 2 cover?
Inspections, Investigations and Records
Vaulers must take steps to verify all the necessary information being relied upon to ensure information is adequate
Can you carry out a re-valuation without inspecting the property?
A revaluation without a re-inspection must not be undertaken unless the valuer is satisfied that there have been no
material changes to the physical attributes of the property, or the nature of its location, since
the last assignment.
It is recognised that the client may need the valuation of its property updated at regular
intervals and that re-inspection on every occasion may be unnecessary. Provided that the valuer
has previously inspected the property, and the client has confirmed that no material changes
to the physical attributes of the property and the area in which it is situated have occurred, a
revaluation without re-inspection may be undertaken. The terms of engagement must state that this assumption has been made.
What does VPS 4 cover?
Basis of Value
What is Investment Value?
The value of an asset to a particular owner used to measure worth against a clients criteria
What does VPS 5 cover?
Valuation approaches and methods - choosing and justifying valuation approaches.
What does VPGA 8 cover?
Valuation of real property interests with emphasis on ESG and sustainability
When might a conflict of interest occur?
Having a longstanding professional relationship with the prospective borrower or owner of a property.
How could Investment Value differ?
an opportunistic investor may view a property to purchase, renovate and sell whereas a passive investor may view the same property to hold for long term income
so the investment value will vary depending on each investors objectives.
if you had a long standing professional relationship with the borrower or owner of a property could you accept an instruction?
In line with the RICS Professional Statement on Conflict of Interest 2017 I would not advise a client where a conflict was involved.
If you were carrying out a Bank security valuation what would the bank generally want their cover to cover?
Market value or loan amount.
Can special purchase be reflected in market value?
No as market value represents the amount would most likely be achievable for an asset across a wide range of circumstances.
Can you reflect hope value in market value?
You can but you need to be reasonably certain, for example if there was a parade and to my left all the properties to the left had planning permission for an extra floor then there would be hope value for the subject property.
