Valuation - Level 1 Flashcards
1
Q
• What is contained in the RICS Valuation – Global Standards, Effective from 31 January 2020
A
- PS-1 and PS-2
- VPS 1 – 5
- VPGA’s 1 – 10
- Incorporates IVS.
2
Q
• What is contained in RICS Valuation – Global Standards, 2017: UK National Supplement
A
- UK PS – 1 and UK PS – 2
- VPS 1 – 3
- UK VPGA’s 1 - 18
3
Q
• Tell me about RICS Guidance Note Valuation of Development Property, 1st edition, October 2019.
- Devlopment Valuation Process.
- Establishhing the facts.
- Assessing Development Potential.
- Valuation Approaches.
- Risk analysis and ressidual profit.
- Reporting the valuation.
A
- Development Valuation Process:
- Valuer to have an understanding of the process.
- Several basis of value could be adopted for the process especially if a mixed use development.
- In general there are normally two main methods being the market comparison method and the residual method.
- Establishing the facts
- Valuer to have knowledge of the site and the development components.
- Local market intelligence is a key element.
- Assumptions and special assumptions made.
- Assessing Development potential
- Fully explore a number of different options.
- Assess the characteristics and surrounding area.
- Factor supply and demand.
- Any land assembly required.
-
Valuation: The market approach:
* Market approach is based on comparables is the preferred method - Valuation: The residual method:
- GDV – Total Development Costs (including profit) = residual land value.
- The basic residual method used for less complex sites.
- Discounted Cash Flow is used for more complex methods.
- Cash flow models reflect assumptions on the timing of revenue and expenditure.
- Risk Analysis and residual profit:
- Sensitivity analysis used to show how changes in inputs affect the value.
- Risk analysis techniques rely on valuer assumptions.
- Reporting the valuation:
- The basis of value must be clearly stated.
- All assumptions/special assumptions must be stated.
- A statement on the valuation approach is important.
4
Q
• Tell me about RICS Guidance Note: Comparable Evidence in real estate valuation, 1st Edition, 2019.
- General Principles off Comparable Evidence.
- Comparable evidence in real estate valuation.
- Sources of comparabel evidence.
- Hierarchy of Evidence.
- Recording comparable evidence.
- Alaysis off comparable evidence.
- Dealing with a shortage of evidence.
A
- General Principles of comparable evidence:
- Several Comparables.
- Very similar or identical.
- Recent transactions.
- Arms length transaction.
- Verifiable.
- Comparable evidence in real estate valuation:
- Generally will be a limited number of comparables.
- A lack of evidence.
- Might be a special purchaser who will pay over market value.
- A lack of similar or identical properties.
- Comparables may not be fully transparent.
- Common approaches are Market Approach, Investment Approach and Cost Approach.
- Sources of comparable evidence:
- Market evidence.
- Direct transactional evidence.
- Publicly available information.
- Published databases.
- Asking prices.
- Historic evidence
- Hierarchy of Evidence.
- Comprises – Direct comparables of completed transactions of identical of similar properties.
- General Market data – information from published sources.
- Historic evidence.
- Other sources – Transactional evidence from other real estate types and locations.
- Recording comparable evidence:
- Must be recorded clearly and kept on file.
- Ideally on a spreadsheet
- The comparables should then be ranked
- Analysis of comparable evidence:
- Establish a common measurement.
- Make adjustments for location, specification, condition and size.
- Adjust any lease terms.
- Adjust for timing of sales.
- Dealing with a shortage of evidence
- May have to look further afield for evidence.
- May have to look at other approaches.
- May have to use the method of last resort.
5
Q
• Tell me about RICS Guidance Note: Valuation of Individual New-Build Homes 3rd Edition, 2019?
- New Build Benefits.
- First Ownder benefits.
- Resale Benefits.
- Reviewing the instructions.
- Inspection - Assessing the property and the development.
- Alaysing the market and other considerations.
- Modern Methods of Construction.
- Comparable evidence.
- Assessing Market Value.
A
- New build benefits:
- Environmental impact of buildings.
- Too reduce carbon emissions.
- Innovative forms of construction.
- Evolving building regulations requirements.
- Improved specification.
- Incentives.
- New build premium.
- First-owner benefits
- Access to new build finance.
- Incentives being offered.
- No chain.
- 10 year warranty.
- Resale Benefits
- Latest specification.
- Reduced running costs with modern building standards.
- High energy efficiency rating.
- Local infrastructure with new homes.
- Reviewing the instructions:
- Private clients – UK VPGA 11 RICS Valuation Standards: UK Supplement 2018 will not apply.
- Allocate sufficient time to research, inspect and prepare the valuation.
- Must be vigilant for signs of criminal activity.
- Where a property has not been constructed the special assumption to be included that the property has been completed.
- Inspections: Assessing the property and the development
- Where access is limited you must state the limitations within the report.
- RICS members must outline any assumptions or special assumptions.
- Absence of enough information and access a member may choose to decline the instruction.
- RICS members must take care when visiting sites and reference to the Surveying Safely Guidance Note.
- Make note of all plot characteristics that could affect the value such as railway line, overhead cables, views etc
- Awareness of local surroundings with transport and other amenities.
- Analysing the market and other considerations:
- Having awareness of local supply and demand.
- Potential impact of employment opportunities.
- Disregard any premium that is paid by a special purchaser.
- Market turbulence making comparables difficult.
- Site mix between private and social housing.
- Onerous ground rent provisions and high service charges.
- Government schemes such has shared ownership and help to buy.
-
Modern methods of construction
* Pre manufactured methods of construction which are build off site. - Comparable evidence:
- Three categories of evidence.
- On-site comparables.
- Off-site comparables for other new build sites.
- Second hand evidenc
- Assessing market value
- Have regard to incentive and perks for new build sales.
- Added value of better specification.
- New build benefits.
- Affordability premium with mortgages.
- You must show reasoning behind your valuation.
6
Q
• Tell me about RICS Guidance Note: Risk, liability and insurance in valuation work 2nd edition, January 2018.
- The Courts approach to valuers’ liabilities.
- Liabiility Caps.
- Third Party reliance on valuation.
- Contractual terms.
- Professional indemnity insurance (PII).
A
- The Courts approach to valuers’ liabilities:
- Breaches of contract – Where a valuer has not carried out the terms of the contract.
- Negligence – Where the valuer has been negligent in their duties.
- Standard of Care – The courts expect a standard of care.
- Damages – The remedy for breach of contract and tort is damages.
- The purpose of the valuation – Terms must state the purpose for the valuation
- Liability Caps:
- RICS recommends the use of liability caps.
- Terms of engagement to include a liability cap statement.
- Legally liability caps are enforceable providing they are properly incorporated.
- Liability caps must be explained and visible rather than hidden in the small print
- Third Party reliance on valuation:
- RICS recommend only to permit third party reliance on an informed bases.
- RICS recommends that valuers do NOT permit third party reliance and that terms exclude third party reliance.
- Member PII may impose specific conditions.
- RICS recommends that where members do permit third party reliance then the third party is bound by the terms and any liability cap
- Contractual terms
- Recording the contractual terms is required by the Red Book.
- Engagement letter to include a clause that prevents any partners or employees being liable.
- A clause stating proportionate liability.
- State the scope of work within the terms and state items that are not being carried out.
- Include clause that prevents third party reliance.
- State within the terms of the Governing Law and Jurisdiction.
- Professional indemnity insurance (PII).
- Rule 9 of the RICS rules of conduct requires Professional Indemnity Insurance.
- Amount of PII cover must be adequate for the work being carried out.
- RICS requires run off cover.
7
Q
Explain to me the importance of PS 1 Compliance and PS 2 Ethics, Competency, Objectivity and Disclosures of the Red Book.
A
- PS1 – Compliance – Members and firms must comply by the rules of the red book.
- PS2 – Ethics, Objectivity and Disclosures –
- Ethics
- Members must behave in an ethical manner and must not be swayed in any way.
- Objectivity
- Must have the relevant experience.
- Disclosures
- Must immediately report any conflicts of interest.
8
Q
Tell me about your CPD record 11/08/20, 12/08/20 & 13/08/20?
- Module 1 - Mandatory Requirements.
- Module 2 - Conventionaal Valuation Methhods and their application.
- Module 3 - Investment Valuation techniques.
A
Valuation CPD record Module 1 discussed Mandatory requirements and guidance for valuations.
This included:
- A Red Book overview.
- UK Supplement to the Red Book.
- Purpose of the red book.
- RICS Professional Standards.
- Terms of Engagement.
- Inspections, Investigations and records.
- Valaution reports.
- Bases of Value
- Valuation approaches and methods.
- Assumptions and special assumptions.
- Valuation uncertainty.
Valuation CPD record Module 2 – Conventional Valuation Methods and their application.
This included.
- The comparative method.
- Comparable evidence and assembly of comparable evidence.
- Weighting and ranking of comparable evidence.
- Interpolation and Extrapolation.
- Zoning.
- Comparable Matrix.
- The investment Method.
- Use and basic form.
- Net income and Outgoings.
- Years Purchase and Yield.
- The Residual Method.
- Use and basic form.
- The residual approach to Valuation of Development Property.
- The residual approach to the calculation of Development Profit.
- Ransom Strips and Ransom Value.
- The Profits/Account Method.
- Use and Basic Form.
- Valuation Practice and Checks.
- The Contractors Method/Depreciated Replacement Cost.
- Use and basic form.
- RICS Guidance Note 2018.
Valuation CPD record Module 3 – Investment Valuation Techniques.
- Valuation Mathematics.
- Compounding.
- Nominal and Effective rates of interest.
- Discounting.
- Present Value of £1 per annum.
- Investment Yields/Discount Rates.
- Investment Qualities and Sources.
- Inflation-free Economy/the Yield Gap.
- Inflationary Economy/ the Reverse Yield Gap.
- Property as an investment.
- Conventional Growth Implicit Freehold Valuations.
- Market Rented Freeholds.
- Reversionary Freeholds.
- Term and Reversion (under-rented).
- Hardcore/Layer (under-rented).
- Equivalent Yield (under-rented).
- True equivalent Yield (TEY)
- Block Income (over-rented)
- Core Income (over-rented)
- Leasehold Interests
- YP Dual Rate.
- YP Dual Rate, tax adjusted.
- YP single rate
- Contemporary Growth Explicit Techniques.
- Market Value and Investment Value/Worth.
- Yield Construction/Discount Rates.
- Gross and Net Present Value.
- Internal Rate of Return.
- Valuation and Discounted Cash Flows.
9
Q
• There are 5 methods of valuation in the Red Book. Choose one and briefly tell me about it.
A
Residual Method.
GDV less Build Costs and Cost of Finance as well as developers profit = Land Value.
10
Q
• How can economic factors affect the valuation of land and buildings?
A
- The availability to obtain mortgages to purchase.
- The availability of maybe stat up loans to start a business and therefore affecting the leasing of commercial premises.
11
Q
• What relevance has PII to valuation?
A
- Without having adequate PII cover you should not undertake the valuation as you have a duty of care to your client.
12
Q
• What do you understand by a ‘hierarchy of evidence’?
A
Hierarchy of evidence is split into three categories:
- Direct transactional evidence – Identical or similar style of property.
- General market data – Published sources, indices, historic evidence.
- Other sources – Other transaction from different property types and locations.
1) Recent sales/lettings
2) Similar propertie
3) Similar size (residential)
To be completed.
13
Q
• What would you put in your terms of engagement? Why are they important?
A
Name & Address of Client.
Name of Surveyor and Qualifications.
Purpose of the inspection: Level 2 Homebuyers Report and Valuation.
Method of Value. – Market Value by the Comparative Method.
Date of Valuation.
Any Assumptions.
Special Assumptions.
Lease details if any.
They state exactly what you are doing and what teh client is receiving.
14
Q
• What 3 forms of liability cover do RICS recommend putting in your TOE?
A
- A clause excluding personal liability
- A proportionate liability clause. The purpose of this type of clause is to limit the amount the surveyor has to pay where both the surveyor and another party or parties (including the claimant) cause the loss which that claimant then seeks to recover.
- A simple liability cap.
15
Q
• In the Red Book what is VPGA 10? Can you elaborate?
A
- VPGA 10 relates to Matters that may give rise to material valuation uncertainty such as COVID and Brexit.
- During COVID RICS recommended that a specific clause was used during valuations to be inserted within reports.
