Valuation - Level 3 Flashcards
When would you choose a term and reversion approach?
Lease extension valuation
What are the bases of value?
- Market value
- Market rent
- Fair value
- Investment value
What are the 5 methods of valuation and explain
- Comparable
- Investment method
- Profits method
- Residual method
- Depreciated replacement cost
What is the yield for lease extensions and why?
5% flats
4.75% Houses
Earl Cadogan Vs Sportelli
- the deferment rate.
What is the heirarchy of evidence?
Demonstrates the best comparable evidence sources.
Three categories. E.g. Best open market sales. Least - arbitration results.
When would you carry out a Depreciation Replacement Cost valuation?
Buildings where there is not normally a transactional market.
E.g. brewery/ unique properties
When might you use the profits method of valuation?
When valuing a restaurant, hotel or pub.
If you were doing an investment valuation, when might you use the hardcore method?
When a property is being overrented.
When would you use the residual method of valuation and what are its main components?
- Used to value property with development potential or vacant land.
Purchase price/site acquisition value = GDV - (Construction + Fees + Profit)
What is fair value and when would you use it?
The price that would be received to sell an asset between market participants at the measurement date.
Give an example of a special assumption.
Assuming planning permission, when it is yet to be granted.
Assuming a property is vacant when it is let.
What is a special purchaser?
A particular buyer for whom an asset has a special value because advantages would arise from its ownership.
What is a marketing period?
The length of time a property to predicted to be marketed for before sale.
Define market value.
The estimated amount for which an asset should exchange
on the valuation date,
between a willing buyer and a willing seller
in an arm’s length transaction
after proper marketing.
What is marriage value?
Additional value created by the combination of two or more assets or interests. E.g. lease extension.
What is a protected or regulated tenancy?
A tenancy which started before the 15 January 1989 - governed by Rent Act 1977.
- Tenants had strong rights in relation to rent, security of tenure and succession rights.
- The rent must be fair and is determined by the Valuation Office.
What is the investment (or worth) value?
The value of an asset to the owner or prospective owner for individual investment objectives.
What is Liquidation value?
The likely price of an asset when it is allowed insufficient time to sell on the open market.
Exposure to potential buyers is limited.
What is Equitable value?
The estimated price for the transfer of an asset or liability between identified knowledgeable and willing parties that reflects the respective interests of those parties.
What is the Comparable Method and when would you use it?
- Using comparable data, based on the subject property’s characteristics to assess the value.
- Most common
- E.g. Houses, shops
- Provides an estimated market value.
What is the Cost and when would you use it?
based on the supposition that no one would pay more for an existing property than the amount it would cost to buy an equivalent site in terms of size and location plus the cost of constructing an equivalent building
The DRC method requires the valuer to consider 3 components:
the cost or value of an equivalent parcel of land;
the cost of constructing a replica or simple substitute building or a modern equivalent building; and
an allowance for depreciation.
What is the Investment Method and when would you use it?
It is used where it is possible to assess the relationship between price paid by buyers and the expected income to be derived from ownership.
- The Future rental income, which discounted back to the present day = Net Present Value
What is the Profits Method and when would you use it?
The profits method is a method used for income-producing properties that, due to location or some other factor, enjoy a monopoly.
- It is not used when a valuation is possible by comparison or by use of the income approach.
- E.g. hotel, gold course
What is the Residual Method and when would you use it?
-The residual appraisal method is also cost-based and is used to assess the market value of land or land and buildings where there is potential for the land to be put to a higher value use
What are the main drivers that impact value?
- Age
- Location
- Tenure
- Condition
- Lease terms
- Size
What is the latest valuation standards?
RICS Valuation - Global Standards 2020
What are the different parts of the Red Book?
- Professional Standards
- Valuation Technical and Performance Standards (VPS)
- Valuation Applications (VPGA)
What method of valuation and basis of valuation would you use for bank lending?
Market Value/rent
Comp method
Investment method
Why is independence and objectivity important?
Ensures that a valuation is carried out to the appropriate level and standard.
What are Automated Valuation Models (AVM)?
A service that can provide a value for a property using mathematical modelling combined with a database.
What are the sections you include in a residential property valuation report?
- Identification and status of valuer
- Identification of client
- Purpose of Valuation
- Identification of asset valued
- Basis of value adopted
- Valuation date
- Extent of investigation
- Nature and course of the information relied upon
- Assumptions and special assumptions
- Valuation approach and reasoning
- Date of the valuation report
- Comment on material uncertainty and limitations
What is loan security?
Security given to the lender, sometimes called collateral.
The asset acts as protection for the lender.
When have you previously used an AVM?
Supporting evidence for a LSV
What are the main components of a residual valuation?
Purchase price/site acquisition value = GDV - (Construction + Fees + Profit)
What is GDV?
Gross Development Value
The potential sale price, following development to an interested party.
What are the Red Book Valuation Practice standards?
Mandatory
Valuation technical and performance standards
What are the Red Book VPGAs?
Advisory
Valuation Practical Guidance Applications
What is professional scepticism and when should it be used?
An attitude that includes a questioning mind and critical analysis of data during the valuation process.
What 3 steps must you take before accepting an instruction?
- Competence
- Independence
- Terms of Engagement
What are the five steps for comparable valuation?
- Search and select comparables
- Assemble comps schedule
- Adjust comparables using the hierarchy of evidence
- Analysis comparables to form opinion of value
- Report value and prepare file note
What is the hierarchy of evidence for comparable evidence?
The relative weight attached to different types of evidence
A. Open market transaction data/ direct comparables
B. General market data / databases
C. Transactional evidence from other locations
What is the RICS guidance note for comparable valuation?
RICS Guidance Note - Comparable evidence in real estate valuation (1st edition) 2019
What are the factors to consider when determining a yield to use for Investment Method?
- Quality of location
- Use of the property
- Lease terms
- Prospects for rental and capital growth
What is Discounted Cash Flow?
Growth explicit investment method of valuation
What is the purpose of RICS Valuation - Global Standards?
C.O.T
Consistency
Objectivity
Transparency
When were the RICS Valuation - Global Standards updated?
31 January 2020
How would you ensure a surveyor is appropriately qualified to carry out a valuation?
Check on RICS website to see if they are registered.
How would you gather appropriate comparable data?
Hierarchy of evidence
A. Open market transaction data/ direct comparables
B. General market data / databases
C. Transactional evidence from other locations
What is the hierarchy of evidence?
Demonstrates the relative weight attached to different types of evidence
What does the Leasehold and Reform Housing and Urban Development Act 1993 Part 1 Chapter 2 allow?
Gives individuals tenants the right to acquire a new lease.
What is the premium payable for a new lease?
1) The diminution of the landlords interest
(the difference between value of landlord interest in current lease
And
The value of the landlords interest after grant of the new lease)
+
2) 50% of marriage value
+
3) Compensation for loss for new lease
What is a Reinstatement Cost Assessment?
Valuation to assess the total cost for rebuilding the whole property - declared value
What are the key principles of the RICS Comparable Evidence in Real Estate Valuation 1st Ed?
Use of comparable evidence in valuation
- encourage consistency
- address issues of avilability
- consider potential sources and their relative importance
What are the IVS?
International Valuation Standards
Once a Reinstatement Cost Asessment has been carried out, how is it used?
The declared value is increased by 15-50% to get the sum insured and used to assess the insurance premium
What three forms do the Global Standards for Valuation take?
The three forms the Global Standards for Valuation take are:
Professional Standards - centred on ethics and conduct, underpinned by knowledge and competence
Technical standards – centred on common definitions and conventions, underpinned by consistent application through recognised approaches
Performance or delivery standards – centred on rigour in analysis and objectivity of judgment, backed by appropriate documentation and clarity when reporting.
What are the RICS Valuation - Global Standards used for?
RICS Valuation - Global Standards are used for:
With its focus on practical implementation, RICS Valuation – Global Standards, commonly referred to as the RICS Red Book Global, applies the latest international standards and supplements them with additional requirements and best practice guidance that, when combined, provide the highest levels of assurance regarding professionalism and quality.
RICS Valuation - Global Standards are used by competent surveyors to produce valuations.
What are the mandatory professional standards?
The mandatory professional standards are:
PS 1 – Compliance with standards where a written valuation is provided
PS 2 – Ethics, competency, objectivity and disclosures.
Global professional and ethical standards as they expressly apply to valuers are denoted by the use of a PS reference number and are mandatory (unless otherwise stated) for all members providing written valuations. They define the parameters for compliance with the Red Book Global, including adoption of the International Valuation Standards; set out the associated RICS regulatory requirements; and clarify the detailed application of the RICS Rules of Conduct when members are undertaking valuation work.