Valuation Level 1 Flashcards
(48 cards)
Tell me what the 5 methods of valuation are
Comparable method
Investment method
Residual method
Profits method
Contractors method
When would you use the investment method
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.
When would you use the comparable method
The comparable method is the most widespread valuation method, typically to assess the market rent and market value of both commercial and residential properties. It can also be used to assess the market value of farms, farmland and land with development potential.
When would you use the Profits Method
The profits method, or receipts and expenses or income and expenditure method, is also used for income-producing properties. However, these are typically referred to as being specialist properties, such as hotels, golf courses, petrol stations, care homes and some restaurants.
These types of properties are only usually sold as part of a business and are designed specifically for the intended use. Their value will depend on business profitability and trading potential, also known as intangible goodwill.
When would you use Depreciated replacement cost/contractor’s method
The depreciated replacement cost (DRC) method is used for owner-occupied or specialised property that is rarely sold on the open market. It is also known as the method of last resort and should not be used where there are market sales of comparable properties. It could, of course, be used as a check valuation against another method- Churches, Oil refineries and airports!
When would you use Residual method
The residual method is typically used for property or land with development potential. The output is market value of the land and it requires valuers to make a variety of assumptions around input costs.
Tell me about how you would value a building using the
profits
The profits method involves establishing fair maintainable operating profit (FMOP) capable of being generated by a reasonably efficient operator (REO). This is based upon assessment and analysis of fair maintainable turnover (FMT), requiring sound knowledge of accounting principles and market norms for the specific industry sector. A market-based profit multiplier is then used to convert FMT into a capital value
Tell me about how you would value a building using the contractors
The DRC method is based upon the assumption that the market will pay no more for the existing property than the amount it would cost to buy an equivalent site, plus the cost of constructing an equivalent building.
The basic steps involved include assessing the cost to replace the land and the building – with a modern equivalent, including all associated costs – before making appropriate deductions for depreciation and obsolescence.
Tell me about how you would value a building using the investment
Tell me about how you would value a building using the comparable
Tell me about how you would value a building using residual method
First assess the development potential of the land, i.e. highest value use. They then I would calculate the value of the finished scheme, i.e. gross development value (GDV) based on market comparables. All development costs are then deducted from GDV, including developer’s profit and finance costs check with comparable methods.
How do you decide which valuation method to apply?
Property Type, Use, Availability of comparables.
Issues with the Comparable Method
limited transaction, lack of up-to-date evidence, existence of a special purchaser – which may lead to a price paid which is above the market tone due to circumstances specific to one party – lack of similar evidence given the complex nature of real estate, and limited market transparency.
What is a years purchase multiplier?
What is PI Insurance (PII)?
Professional indemnity insurance protects you against claims for loss or damage made by clients or third parties as a result of the impact of negligent services you provided or negligent advice you offered.
Why do surveyors need PII?
1- its the rules, trading without PII is agaisnt RICS Regulations
2-
What is RICS Minimum PII
Firm’s turnover in the preceding year Minimum limit of indemnity
£100,000 or less £250,000
£100,001 to £200,000 £500,000
£200,001 and above £1,000,00
RICS Maximum level of uninsured excess
Limit of indemnity Maximum uninsured excess
£10,000,000 or Less The greater of 2.5% of the sum insured, or £10,000
£10,000,001 and above No set limit
How did the decision in Hart v Large affect PII?
What level of PII cover does your firm have?
The Environment Agency Self Insure
How would you distinguish limitations on liability in your valuations?
Where in your valuation report do you state any limitations on liability?
What relevance does Hart v Large have on your valuation practice?
The Hart v Large case emphasises the importance for surveyors of:
-Being clear and advising clients on the survey level and scope of inspection, limitations and caveats
-Recommending justifiable further investigation
-Considering whether any new information provided after inspecting or reporting affects their original advice, and updating their advice if it is justified to do so
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What aspect of Hart v Large allowed the judge to award damages without
applying the SAAMCO cap?
The main breach of duty by Mr. Large was his failure to recommend that the Claimants obtain a professional consultant’s certificate, which would provide protection against defects that a competent surveyor might miss in a newly rebuilt house. The Judge concluded that this failure constituted ‘negligent provision of advice’, making Mr. Large liable for all losses caused by the inadequate advice, rather than ‘negligent provision of information’, which would limit damages as per the SAAMCo test.
