Valuation Level 1

Question 1

Tell me what the 5 methods of valuation are

Answer 1

Comparable method
Investment method
Residual method
Profits method
Contractors method

Question 2

When would you use the investment method

Answer 2

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.

Question 3

When would you use the comparable method

Answer 3

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.

Question 4

When would you use the Profits Method

Answer 4

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.

Question 5

When would you use Depreciated replacement cost/contractor’s method

Answer 5

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!

Question 6

When would you use Residual method

Answer 6

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.

Question 7

Tell me about how you would value a building using the
profits

Answer 7

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

Question 8

Tell me about how you would value a building using the contractors

Answer 8

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.

Question 9

Tell me about how you would value a building using the investment

Question 10

Tell me about how you would value a building using the comparable

Question 11

Tell me about how you would value a building using residual method

Answer 11

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.

Question 12

How do you decide which valuation method to apply?

Answer 12

Property Type, Use, Availability of comparables.

Question 13

Issues with the Comparable Method

Answer 13

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.

Question 14

What is a years purchase multiplier?

Question 15

What is PI Insurance (PII)?

Answer 15

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.

Question 16

Why do surveyors need PII?

Answer 16

1- its the rules, trading without PII is agaisnt RICS Regulations
2-

Question 17

What is RICS Minimum PII

Answer 17

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

Question 18

RICS Maximum level of uninsured excess

Answer 18

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

Question 19

How did the decision in Hart v Large affect PII?

Question 20

What level of PII cover does your firm have?

Answer 20

The Environment Agency Self Insure

Question 21

How would you distinguish limitations on liability in your valuations?

Question 22

Where in your valuation report do you state any limitations on liability?

Question 23

What relevance does Hart v Large have on your valuation practice?

Answer 23

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
-c

Question 24

What aspect of Hart v Large allowed the judge to award damages without
applying the SAAMCO cap?

Answer 24

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.

Question 25

What is the SAAMCO cap?

Answer 25

The SAAMCO cap states that in an “information” case, a claimant cannot recover losses that would have occurred even if the information had been correct.
The SAAMCO principle is based on the idea that a professional adviser owes their client a duty to take reasonable care, but that duty doesn’t extend to every kind of harm that the claimant may suffer. For example, if an adviser provides information that is only one of many factors a client considers, then the adviser is only liable for the financial consequences of that information being incorrect.

It is important to note that the SAAMCO Cap is based on the principle that providing a valuation
is only, in legal terms, providing ‘information’. The cap does not apply if a valuer goes beyond the
provision of information and advises a client whether to proceed with a transaction.

Question 26

Under the SAAMCO cap, is a valuer liable for losses due to a downturn in
the market?

Answer 26

No

Question 27

Under the SAAMCO cap, is a valuer’s liability usually limited to the overvaluation on the valuation date?

Answer 27

For example, if a valuer values a property at £140,000 but the court decides the valuation was
negligent and the actual value was £100,000, the maximum damages for which the valuer
can be liable is £40,000 (plus interest), even if the client’s losses are higher than that amount

Question 28

What would you do if you received a notice of a PII claim from a client or their solicitor?

Answer 28

Notify my Line manager and as the Environment agency self insure

However I understand it would be important to ensure that the claim is immediately reported to the insurers if you become aware of a claim or a circumstance which may give rise to a claim. Notification must be made irrespective of your views on liability or the amount involved

Question 29

What is run off cover?

Answer 29

Run-off cover, also known as extended reporting period (ERP), is a type of insurance that protects people from claims made against them after they’ve retired, sold, or closed their business

Commercial claims: Firms must have adequate and appropriate cover for six years.
Consumer claims: Firms must have cover for a minimum of six years, with an aggregate limit of £1 million.

Question 29

Is there a difference between being negligent when undertaking a
survey/valuation and providing negligent advice?

Question 30

What is the Redbook

Answer 30

The Red Book, otherwise known as the RICS Valuation – Global Standards, sets out the standards that valuers should follow

Question 31

Why does the Red Book exist?

Answer 31

to Promote and support High standards in valuation delivery and ensure consistency.
The Red Book ensures that RICS members have a detailed process for providing a consistent, accurate, and professional valuation service. It also provides an audit trail that can be measured against the Red Book standards, and it details all the factors and assumptions considered when reaching a value

ensures valuations can withstand scrutiny

Question 32

Tell me about a factor which may impact value.

Answer 32

Location, Accessibility and Aspect
Similar types of properties in different areas command significantly different prices. Buyers may pay more for a similar property in a more desirable area. It may be that accessibility to transport links or good schools affects desirability. Aspect may include a view or a south-facing garden.

Supply and demand - Increased demand and lack of supply can increase property prices If demand increases and supply is fixed, the price of the commodity will rise as more people try to buy.

Environmental factors – susceptibility to flooding, flood risk area decreases value

Question 33

What is your duty of care as a surveyor when undertaking a valuation?

Answer 33

Duty of care The duty in ‘tort’ assumed by a professional to observe the skill and care of a ‘reasonable’ professional in providing professional services

Question 34

What are the differences between CIL and S106?

Answer 34

CIL and S106 planning obligations are separate infrastructure funding sources. S106 agreements address site-specific mitigation required to make a new development acceptable in planning terms. Whilst CIL addresses the broader impacts of the development.

Question 35

What is a sensitivity analysis?

Answer 35

Sensitivity analysis, also known as a “what-if” analysis, is a method that determines how changes in input values affect the results of a mathematical model.

Question 36

When was the Red Book last updated?

Answer 36

October 19, 2023

The Red Book Global Standards are also being updated in 2024. The draft timeline for updates is:
Early summer 2024: Consultation
Autumn 2024: Publication
January 31, 2025: Effective date

Question 37

What are the VPS 1-5

Answer 37

The VPS are the standards that define the technical and performance aspects of valuations:
VPS 1: Terms of engagement, or scope of work
VPS 2: Inspections, investigations, and records
VPS 3: Valuation reports
VPS 4: Bases of value, assumptions, and special assumptions
VPS 5: Valuation approaches and methods

Question 38

When Was IVS last updated

Answer 38

New International Valuation Standards (IVS) were published 31 January 2024.

Question 39

What are the 3 approaches under VPS5?

Answer 39

The Market Approach

Income Approach

Cost Approach

Question 40

When would you use EUV?

Answer 40

Valuing Social housing

Answer 40

he Red Book, or RICS Valuation – Global Standards, covers most valuations performed by surveyors. However, there are some circumstances where certain sections of the Red Book may not apply, including:
Internal valuations
Valuations for internal purposes that have limited or no liability and are not communicated to a third party are not governed by the Red Book.
Estimated replacement cost
Sections VPS.1–5 do not apply when an estimated replacement cost figure for property is used, as this is not considered a “written opinion of value”.

Acting as an expert witness
VPS.1–5 may be unsuitable or inappropriate when acting as an expert witness.
Performing statutory functions

VPS.1–5 may be unsuitable or inappropriate when performing statutory functions.
The Red Book also excludes secured lending valuations, including residential mortgage valuations, and public sector financial reporting valuations.

Question 41

What is the definition of EUV?

Answer 41

Value of a site or property in its existing use or based upon an implementable planning consent excluding any hope value.

Question 42

what is a TP mutliplier

Answer 42

Years Purchase Multiplier is assess using comparable an appropriate yield,

Question 43

what affects YP

Answer 43

Current interest rates

Strength of tenants covenants

Question 44

What is Fair Value and where is it defined

Answer 44

IFRS 13 defines fair value, sets out a framework for measuring fair value, and requires disclosures about fair value measurements.

Question 45

What is the Valuer Registration Scheme?

Answer 45

The Valuer Registration Scheme is a quality assurance program that monitors the work of Royal Institution of Chartered Surveyors (RICS) members who perform valuations in the UK. The scheme’s objectives are to:
Ensure the quality of valuations
Raise the credibility of valuers
Provide clients with a clear indication of international standards
Boost consumer confidence in valuation advice
The scheme is mandatory for RICS members who carry out Red Book Valuations.