Valuation - Level 2 Flashcards
Tell me why terms of engagement are important
Good terms of engagement can help to avoid later misunderstandings with a client, ensuring that both parties are clear about the scope and nature of the service being commissioned and the framework within which it has been agreed to be carried out.
If asked to provide examples of elements included in terms of engagement:
- Identity of the client
- Identity of the person who has overall responsibility
- Conflict of interest checked
- Relevant legislation and standards to be adhered to
- Scope of inspections and data collection
- Assumptions
- Fee agreement
- Complaints handling procedure
What checks do you undertake before accepting a valuation instruction?
Check whether the valuer is suitably qualified, experienced and knowledgeable to provide advice.
Check for conflicts of interest in line with the RICS professional statement; if any are identified then they need to either be managed or the instruction declined.
Check if any third parties or the public will have an interest in the valuation, as this may require additional disclosures
Check if my firm holds sufficient PII to cover the potential liability stemming from the instruction. A liability cap may need to be considered to limit risk in certain circumstances.
How do you ensure you know who your client is when undertaking a valuation instruction?
If it is a new client, I would request identification documents from the person or entity instructing me to undertake the valuation. I would verify this against publicly available information, such as company registries.
Following this, I would undertake a conflict of interest and anti-money laundering checks.
Are there any additional requirements when undertaking a valuation in which the public has an interest or third parties may rely?
Where the valuation is of an asset that has been previously been valued by the valuer, or the valuer’s firm for any purpose, additional disclosures such as the relationship with the client and previous involvement, rotation policy, time as signatory and proportion of fees are to be stated in the terms of engagement.
Talk me through an example of when you have agreed terms of engagement with a client
Following initial contact with the client, I gathered information about the property and the purpose of the valuation. After this, I prepared a proposal that outlined the scope of work, fees and timeline stating that the valuation would be carried out in accordance with the RICS RBG. The terms of engagement were agreed by the client and signed and returned which enabled me to commence with the instruction.
What are the key elements included within terms of engagement?
- Identity of the client
- Identity of the person who has overall responsibility
- Conflict of interest checked
- Relevant legislation and standards to be adhered to
- Scope of inspections and data collection
- Assumptions
- Fee agreement
- Complaints handling procedure
What does the Red Book say about terms of engagement?
Terms of engagement are written confirmation of the conditions that either the member proposes or that the member and client have agreed shall apply to the undertaking and reporting of the valuation.
IVS 101 refers to terms of engagement as the scope of work which describes the fundamental terms of a valuation, such as the asset being valued, the purpose of the valuation and the responsibilities of parties involved in the valuation.
What does the Red Book say about inspections?
Inspections must always be carried out to the extent necessary to produce a valuation that is professionally adequate for its purpose. Any limitations or restrictions on the inspection must be identified and recorded in the terms of engagement and also in the report.
What does the Red Book say about reporting requirements?
The valuation report should convey a clear understanding of the opinions being expressed by the valuer and should be couched in terms that can be read and understood by someone with no prior knowledge of the subject asset or liability. The format and detail of the report is a matter to be agreed between the valuer and the client in the terms of engagement.
What are the differences between a desktop and a full valuation report?
A desktop valuation is a more limited form of valuation that is done without physically inspecting the property. The valuer will rely on photographs, online data and market information to estimate the value of the property.
In contrast, a full valuation report is a comprehensive assessment of the property value and involves inspection.
Tell me about how you ensure that information relied upon in your valuation is appropriate and reliable?
Ensure that the information is from reliable and trusted sources as well as verifying the information relied upon with the relevant agents and Land Registry data.
Run through your valuation of the Light Industrial Unit in Uxbridge
Following a conflict of interest check and the signing of Heads of Terms, I inspected the property along with a RICS Registered valuer as a supervisor. On the inspection, I took detailed notes, photographs and measured on a GIA basis. The subject property was arranged to provide a light industrial/warehouse unit and occupied by a tenant with 7 years to expiry.
Upon my return to the office, I collected a range of statutory information as well as comparable rental and investment data to establish my opinion of market rent and market value. I determined that the property was under rented and therefore adopted a term and reversion approach capitalising the term at an initial yield to the next rent review that was in 2 years time.
Follow up points:
- Inspection notes included: cracking of car park surface, general wear and tear to the walls and floors of the industrial accommodation and staining on the roof lights.
- Ancillary office space was also measured on a GIA basis
What was the criteria when searching for comparable evidence?
Rental and sales data in similar industrial markets
Regard to the hierarchy of evidence
Adjustments made due to access restraints of the subject property
What would you do if there were no recent transactions data for the past 20 months?
I would consider the use of another method of valuation, such as the profits method
Which yield did you apply?
I capitalised the term of 2 years to the next rent review at an initial yield and the reversion to market rent valued in perpetuity at a reversionary yield