Valuation Methods and Techniques COPY

Question 1

What is the Red Book?

Answer 1

It provides a set of valuation standards to comply with when undertaking a Red Book valuation.

Question 2

What is the structure of the Red Book?

Answer 2

Part 1 - Introduction
Part 2 - Glossary
Part 3 - Professional Standards (PS)
Part 4 - Valuation Technical and Performance Standards (VPS)
Part 5 - Valuation Practice Guidance Applications (VPGA)
Part 6 - International Valuation Standards (IVS)

Question 3

What is PS1? Is it mandatory to comply with?

Answer 3

PS1 - lists the exemptions from Red Book Valuation.

Question 4

What are the exceptions from the Red Book for WRITTEN valuations?

Answer 4

Negotiation and litigation advice
Valuer performing a statutory function e.g. rating but not for inclusion in tax return
Valuation purely for internal purposes - without liability and not communicated to 3rd party
Agency work except when a purchase report is required and includes a valuation
Valuation advice provided in anticipation of giving evidence as an expert witness

Question 5

Is a RCA a written opinion of value?

Answer 5

No and therefore it is not covered by the Red Book

Question 6

What is PS 2?

Answer 6

PS2 - Ethics, competency, objectivity and disclosure
Comply with ethical standards and rules of conduct
Valuer must always act objectively and independently and not be influenced
Must comply with minimum ToE
Must be able to demonstrate professional competence

Question 7

What is VPS 1?

Answer 7

Minimum matter to be confirmed in ToE in writing to the client prior to undertaking a Red Book Valuation

Question 8

What are the minimum requirements in ToE?

Answer 8

• Name and status of valuer
• Client and any other intended users
• Identification of the assets to be valued – if a portfolio then lotting of assets should be considered
• Purpose of the valuation
• Basis of value
• Valuation date
• Extent of investigation
• Nature and source of the information to be relied upon
• Assumptions and special assumptions to be made
• Restrictions for use, distribution and publication
• Currency
• Format of the report
• Confirmation of Red Book / IVS compliance
• Fee basis
• Complaints handling procedure to be made available
• Statement that the report may be subject to compliance by the RICS – audited
• Limitation on liability agreed

Question 9

What is an assumption?

Answer 9

Reasonable for the valuer to accept that something is true without the need for specific investigation e.g. building is structurally sound

Question 10

What is a special assumption?

Answer 10

Something that is taken to be true and accepted as fact, even though it is not true

Question 11

What is an example of a special assumption?

Answer 11

Assume the property has planning consent which it does not

Assume the property is let at the date of the valuation

Question 12

What is in VPS 2?

Answer 12

Inspections, Investigations, Restricted Information (Desktop Valuations) and Records

Question 13

What does VPS 2 tell you about inspections?

Answer 13

Valuers must take steps to verify the info being relied upon to ensure it is adequate for purpose

Question 14

What is a desktop valuation?

Answer 14

Where no inspection has been undertaken

Question 15

What four factors should be considered when undertaking a valuation based on restricted information i.e. a desktop valuation?

Answer 15

 The nature of the restriction must be agreed in writing in the ToE
 The possible valuation implications of the restriction confirmed in writing before the value is reported
 The valuer should consider whether the restriction is reasonable with regard to the purpose of the valuation
 The restriction must be referred to in the report

Question 16

Is a valuation based on restricted information (desktop) Red Book?

Answer 16

YES, unless one of the five specific exemptions

Question 17

Can a revaluation without re-inspection be undertaken?

Answer 17

Yes but only if the valuer is satisfied that there have been no material changed to the property or nature of its location since the last inspection. This must also be confirmed in the ToE.

Question 18

Do records need to be held?

Answer 18

Yes of all inspections, investigations and other key inputs in an appropriate business format

Question 19

What does VPS 3 advise on?

Answer 19

Valuation Reports - minimum requirements and draft valuation advice

Question 20

As a minimum what should be included in a valuation report?

Answer 20

• Name and status of valuer
• Client and any other intended users
• Identification of the assets to be valued
• Purpose of the valuation
• Basis of value
• Valuation date
• Extent of investigation
• Nature and source of the information to be relied upon
• Assumptions and special assumptions to be made
• Restrictions for use, distribution and publication
• Instruction undertaken in accordance with IVS standards
• Valuation approach and reasoning
• Valuation figure(s)
• Date of valuation report
• Comment on market uncertainty
• Statement setting out any limitations on liability that have been agreed

Question 21

Can draft valuation advice be given?

Answer 21

Yes but must be marked as DRAFT and for internal purposes only

Question 22

Can draft valuation advice be relied upon?

Answer 22

No

Question 23

Can draft valuation advice be published or disclosed?

Answer 23

No

Question 24

What must draft valuation be subject to?

Answer 24

To the completion of the final report

Question 25

Can a draft valuation be discussed with the client?

Answer 25

Yes but the valuer cannot be influenced by the client in any way in respect of the final valuation figure stated in the report

Question 26

Can changes be made to a draft valuation?

Answer 26

Yes but any changes made to draft valuation must be noted on file and reasons provided and any additional information supplied by the client as a result of the discussion regarding the draft report must be stated in the report.

Question 27

What does VPS 4 include?

Answer 27

Bases of Value, Assumptions and Special Assumptions

Question 28

What is the definition of Market Value?

Answer 28

Market Value - the estimated amount for which an asset or liability should exchange:  On the valuation date  Between a willing buyer and willing seller  In an arm’s length transaction  After proper marketing  When the parties had each acted knowledgably, prudently and without compulsion

Question 29

What is the definition of Market Rent?

Answer 29

• Market Rent - the estimated amount for which an interest in real property should be leased:  On the valuation date  Between a willing lessor and willing lessee  On appropriate lease terms  In an arm’s length transaction  After proper marketing  When the parties had each acted knowledgably, prudently and without compulsion

Question 30

What is the definition of Investment Value?

Answer 30

• Investment Value - the value of an asset to a particular owner, or a prospective owner for individual investment or operational objectives  May differ from market value  This is sometimes used as a measure of worth to reflect the value against the client’s own investment criteria

Question 31

What is the definition of Fair Value?

Answer 31

• Fair Value (IFRS 13) - the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date  This basis of valuation is now required if IFRS have been adopted by the client  It is adopted by the International Accounting Standards Board  The RICS view this definition as being generally consistent with the definition of Market Value.

Question 32

What is VPS 5?

Answer 32

Valuation Approaches and Methods

Question 33

What does VPS 5 say?

Answer 33

* Valuers are responsible for choosing and justifying their valuation approach * In some cases, more than one approach may be appropriate

Question 34

What does PART 6 - International Valuation Standards address?

Answer 34

* General Standards – addresses matters such as ToE, approaches, bases and methods of valuation, as well as reporting * Asset Standards – provide requirements relating to specific asset types e.g. real property and development property

Question 35

Are the IVS mandatory?

Answer 35

Yes

Question 36

Are VPGA mandatory?

Answer 36

No

Question 37

How many VPGAs are there?

Answer 37

10

Question 38

What does VPGA 1 tell you?

Answer 38

Valuations for inclusion in financial reports

Question 39

What bases of value is adopted for IFRS financial accounts?

Answer 39

Fair Value

Question 40

What does VPGA 2 cover?

Answer 40

Valuations for secured lending - dealing with conflicts of interest and reporting

Question 41

What must be disclosed under VPGA 2?

Answer 41

Any previous, current or anticipated involvement with the prospective borrower or the property to be valued must be disclosed to the lender

Question 42

What is the definition of previous involvement?

Answer 42

Previous involvement is defined as being within the past 2 years, but under certain circumstances it can be longer

Question 43

If a conflict cannot be avoided then what should happen?

Answer 43

The valuation instruction should be declined

Question 44

What examples does VPGA 2 give of involvement that may result in a conflict of interest?

Answer 44

 Having a longstanding professional relationship with the prospective borrower or owner  When the valuer will gain a fee from introducing the transaction to the lender  If there is a financial interest in the property holding or prospective borrower  When the valuer is retained to act in the disposal or letting of the completed development on the subject property

Question 45

Who's responsibility is it to decide whether or not to accept a secured lending instruction

Answer 45

The valuers having regard to the RICS Rules of Conduct

Question 46

If the valuer and client agree that any potential conflict can be avoided by introducing arrangements to manage the instruction, what must they do?

Answer 46

The arrangements must be recorded in writing and included in the ToE and the valuation report.

Question 47

What additional information must be reported in a secured lending valuation report on top of the minimum requirements?

Answer 47

- Disclosure of any involvement identified in the ToE, or that has been subsequently discovered, or any arrangements agreed for avoiding the conflict of interest. Alternatively, a statement that the valuer is not involved. - Valuation methodology adopted, supported where appropriate or requested, with the calculation - Where the property has been recently transacted or a provisionally agreed price has been disclosed, the extent to which that information has been accepted as market value. - Where the enquiry does not reveal any information, the valuer will make a statement to that effect in the report - Comment on any environmental consideration - Comment on the suitability of the property for mortgage purposes - Any circumstances of which the valuer is aware that could effect the price - Any other factors that potentially conflicts with the definition of MV or its underlying assumptions - Any other relevant normal valuation enquiries undertaken

Question 48

Where MV for secured lending purposes is arrived using a special assumption, what should be included in the valuation report?

Answer 48

VPGA 2 states: where MV for secured lending purposes is arrived using a special assumption, a comment must be made in the report on any material difference between the reported value with and without that assumption

Question 49

What does VPGA 2 say about sustainability?

Answer 49

• It acknowledges that sustainability factors are becoming a more significant influence and valuations for secured lending should always have appropriate regard to their relevance to the instruction

Question 50

What does VPGA 10 cover?

Answer 50

Matters that may give rise to material valuation uncertainty - overriding requirement is that a valuation report must not be misleading

Question 51

Can a standard caveat be used regarding valuation uncertainty under VPGA 10?

Answer 51

No it should not be used

Question 52

Under VPGA 10 what should a valuer comment on in relation to uncertainty?

Answer 52

The valuer should clearly draw attention to, and comment on, any issues resulting in material uncertainty in the valuation on the specified date relating to the risk surrounding the valuation of the asset.

Question 53

What were some of the reasons for the new 2017 edition of the Red Book?

Answer 53

To reflect significant changes to the IVS which were introduced in 2017 • To provide a consistent language and make clear that individual PS and VPS are both mandatory and VPGA are advisory on a global basis

Question 54

What changes were made in the 2017 version?

Answer 54

• Glossary now defines ‘valuer’ and ‘valuation’. The terms ‘internal’ and ‘external’ valuer are retained. • Former ‘exemptions’ to the use of the Red Book are now known as ‘exceptions’ • It also includes the new requirements for members dealing with Conflicts of Interest and the adoption of the International Property Measurement Standards • Clear advice is given on dealing with valuation uncertainty • When the use of the Red Book is not mandatory, as set out in VPS 1, the emphasis is on the preparation of appropriate terms of engagements to suit the specific case in an acceptable business format • VPS 1 includes 3 additional requirements for ToE: - Clearly identify the asset to be valued and if a portfolio is to be valued then lotting should be considered. - Valuation currency must be stated and the limit on liability recorded. • VPS 2 confirms that proper records of the inspection and any investigations must be kept in an appropriate business format • VPS 4 only refers to one definition of Fair Value based on the IASB definition - VPS 4 states that ‘forced sale’ is not a ‘basis of valuation’ but a ‘premise of value’.