Valuation - level 2 Flashcards
What are the 5 methods of valuation?
Comparable
Investment
Residual
Profits
Costs / DRC
Comparable method
Comparable - using transactional evidence of similar properties in the same or surrounding location transacted at the time or close to the time of valuation
Investment - the determination of the value of an interest in land by the capitalisation of actual or estimated rental income. The choice of yield is made by comparison with such other investments as bear the nearest relationship in such matters as the physical characteristics, use, degree of risk and life of investment.
Residual - the estimated total cost of the work, including fees and other associated expenditure, interest, developer’s risk and profit, is deducted from the gross value of the project.
Profits - all proper annual costs are deducted from the total earnings e.g. working expenses, cost of borrowed money and depreciation, the balance is divided between tenant’s share and rental value. Capital value can then be calculated using the investment method.
Costs - capital value is found by adding the cost of constructing a similar building making an allowance for age and obsolescence to the value of the land for its existing use.
How do you decide which valuation method to use?
Comparable method - for valuing market rent and market value
Investment method - for valuing income streams
Residual - for development land/property
Profits - specialised property e.g. hotels and petrol stations
Costs / DRC - specialised property e.g. oil refineries and airports
What is year’s purchase multiplier
The amount by which the net income is multiplied to arrive at capital values - investment method
What is a good covenant and how might this impact value?
A tenant of sound standing is often referred to as a good covenant.
Reflected in the yield i.e. harder yield if strong covenant, softer yield if weak covenant.
What is PI Insurance?
Professional Indemnity Insurance
Why do surveyors need PII?
To protect against potential negligence claims
How did the decision in Hart v Large affect PII?
It gave claimants the ability to claim for more than direct loss and departed from the established principle in the Morrow case which limited damages to the actual loss.
How would you distinguish limitations on liability in your valuations?
Clause to exclude personal liability
Proportionate liability clause - you are only responsible for the portion of loss you caused
Liability cap - either a fixed amount i.e. a multiple of the fee charged or an aggregate amount for all claims or combination of both
NB must be fair and reasonable
What is the SAAMCO cap?
2 types of cases:
Advice - potentially all of the loss is recoverable
Information - only the part attributable to the valuer
The SAAMCO cap limits the amount a lender can recover to the extent by which the valuer overvalued the property
What is run off cover?
Purpose - provide protection after ceasing of operations
Duration - RICS requires 6 years but can be as long as 15 years in some instances
Amount - £1m for consumer claims; Proportionate for type of commercial work undertaken
What is the Red Book?
Purpose - The Red Book sets out mandatory practices for RICS members who undertake valuation services.
In summary, the Red Book ensures that RICS members adhere to consistent and rigorous valuation practices, maintaining trust and confidence in the profession.
