Valuation (Level 2) Flashcards
Tell me why terms of engagement are important.
Terms of engagement are important because they set out the needs and requirements of the client for the instruction to the valuer and crucial information that can be referred back to later:
- Identification of the client, the valuer and any other users
- Purpose of the valuation
- Basis of value adopted
- Nature and extent of the valuer’s work
- Restrictions
What checks do you undertake before accepting a valuation instruction?
CIT Test
- Competence – do you have the necessary competence to carry out the valuation
- Insurance – do you have the necessary PI cover in place
- Terms of Engagement – agreeing the terms of engagement before accepting the valuation
How do you ensure you know who your client is when undertaking a valuation instruction for a smaller company/individual?
Smaller Companies or Individuals – Know Your Client Test
- Proof of Address
- Formal ID
- Bank Details
- Company Registration Details
How do you ensure you know who your client is when undertaking a valuation instruction for a large company?
Larger Companies – Dun & Bradstreet Report / Companies House
Are there any additional requirements when undertaking a valuation in which the public has an interest or third parties may rely?
For valuations that may have 3rd party reliance:
- Clearly stated in the terms of engagement
- there must also be disclosure of any circumstances where the valuer or the firm will gain from the appointment beyond a normal fee or commission
Are there any additional requirements for loan security valuations?
Prior to accepting the instruction - The valuer should request details of the terms of the lending facilities being contemplated by the lender
What are the key elements included within terms of engagement?
- Identification of the client, the valuer and any other users
- Purpose of the valuation
- Basis of value adopted
- Nature and extent of the valuer’s work
- Restrictions
What does the Red Book say about terms of engagement?
- A mandatory requirement for all valuations
Terms of engagement should
o enhance client understanding of the service to be provided
o provide assurance that work by RICS members meets the highest professional standards
o address and disclose specific issues for that instruction
The minimum standards for Terms of Engagement are set out in VPS 1
What does the Red Book say about inspections?
- Inspections and investigations must always be carried out to the extent necessary to produce a valuation
- The valuer must take reasonable steps to verify the information relied on in the valuation
Standards for inspections are set out in VPS 2
What does the Red Book say about reporting requirements?
- A valuation report must clearly set out the conclusions of the valuation that is not ambiguous or misleading
- Deal with all matters agreed in the terms of engagement
What are the differences between a desktop and a full valuation report?
- A desktop valuation is undertaken without physical inspection of the property whereas a full valuation report will require the inspection of the property
Tell me about how you ensure that information relied upon in your valuation is appropriate and reliable?
- Source – ensure the information relied upon is from credible and verifiable sources
- Time – ensure that the information is as up to date as possible
- Relevance – ensure that the information is relevant and applicable to the property or asset in question
When using comparable evidence consider the Hierarchy of Evidence and the RICS Guidance Note: Comparable Evidence in Real Estate Valuation (2019)
Student Accommodation Development, Oval
Would any of the other four methods have been appropriate?
No – I was assessing the value of land with development potential and wanted to determine the residual land value
Student Accommodation Development, Oval
Did you make any adjustments to the comparables?
I placed a greater weight on the rental values with higher occupancy rates – this was because they were achieved rental figures rather than requested ones and reflected more achievable rents
Student Accommodation Development, Oval
How did you account for financing costs?
I made an assumption of 6% of GDV – this was based on a finance agreement Linkcity had recently agreed on a similar development opportunity with the same proposed deal structure
Student Accommodation Development, Oval
What are the standard ancillary costs?
Construction Costs:
- Design and build
- Contingency (5-10% of total construction cost)
- Professional Fees (10-20% of construction cost)
- Remediation works
- Demolition
- Surveys
Development Costs:
- Developer’s profit
- Planning s106, CIL
- Finance
Acquisition Costs – Purchaser’s Costs 6.8%
Student Accommodation Development, Oval
What’s the relationship between a yield and a capitalisation rate?
Yield – is an output of a valuation or development appraisal
Yield = annual income/total cost
Capitalisation Rate – is an input of a valuation or development appraisal
Cap Rate = net operating income/property value
A yield helps to determine a capitalisation rate
Residential for Sale Development, Stratford
Was this a single residential unit, a whole building, or a development
site?
This was for a vacant residential building with multiple units – the purpose of valuation was to establish the market value of the existing building
Residential for Sale Development, Stratford
What are the risks in using Rightmove as a source of comparables?
- Time delay, sometimes the listings are not up to date
- Asking prices not achieved prices
Residential for Sale Development, Stratford
How can you manage those risks of using Rightmove?
- Time delay can be managed by focusing on the most recent listings as your comparable evidence
- Place greater weight on the achieved prices rather than the asking prices – try to establish the achieved price by contacting the agent
Residential for Sale Development, Stratford
Did you look at the local market relationship between asking and sold
prices? Did you factor that into your work?
Yes I placed a greater weighting on the achieved prices than the asking prices
Residential for Sale Development, Stratford
Why did you not use the investment method?
There was not an existing income stream for the property.
