Valuation Specific Questions Flashcards
What are other valuation purposes?
Tax
Probate
Shared Ownership
Tell me about RICS Valuation global standards
- Applies the International Valuation Standards (IVS).
- Mandatory rules and best practice for valuations.
Tell me about RICS Valuation UK national supplement
- Supplement to Global Valuation Standards
Tell me about five methods of valuation
- Comparable
- Investment
- Residual
- Profits
- Depreciated Replacement Cost (DRC)
- Comparable
• valuation by comparison with similar properties that have been sold establishing value by comparison with those properties that have been sold.
- Investment
• Is used to value tenanted property for which there is good market comparable evidence of rents paid by tenants and of capital sales
used where there is an income stream to value
need to be able to assess market rent and yield
- Residual
- assesses market value of land where there is potential for land to be put to a higher value use
- GDV – all costs to develop (inc profit) = residual land value
- Profits
• used for income-producing properties that enjoy a monopoly
- 3 years accounts
- establish fair maintainable trade
- Deduct costs = fair maintainable operating profit
- FMOP x YP = CV
- Depreciated Replacement Cost (DRC)
- wouldn’t pay more for an existing property - than amount it would cost to buy an equivalent site in terms of size and location plus the cost of constructing an equivalent building
- used when physical buildings sold as part of a business - typically when the buildings are constructed solely for that type of business and could only be used for an alternative business after substantial alterations.
Tell me about market value
- The estimated amount for which an asset should exchange
- valuation date
- willing buyer and a willing seller
- arm’s length transaction
- proper marketing
- where the parties had each acted knowledgeably
Tell me about market rent
- The estimated amount for which an interest in real property should be leased
- valuation date
- willing lessor and willing lessee
- appropriate lease terms
- arm’s length transaction
- proper marketing
- where the parties had each acted knowledgeably
Tell me about assumptions
- where it is reasonable to accept that something is true without the need for specific investigation
Tell me about special assumptions
- assumes facts differ from those existing at the valuation date
- or would not be made by a typical market participant in a transaction on valuation date.
Tell me about the investment method
Used to value income stream
Used to value tenanted property for which there is good market comparable evidence of rents paid by tenants and of capital sales.
- The valuer needs comparable evidence of market rents and capitalisation rates
Tell me about reinstatement method
- Used to calculate an insurance figure
GEA - table
GIA - online calculator
Tell me about minimum terms of engagement
- Nationwide has standard terms of engagement
- Identification of valuer
- Identification of client
- Identification of intended users
- Identification of asset
Tell me about Automated Valuation Models
- AVM used as evidence in support of a valuation
- valuer should decide on the weight to give AVM outputs when assessing the total body of comparable evidence available.
Brighton Road CR8 how did you identify the structural alterations?
- I am familiar with the typical layout of this type of property
- I identified where the original wall had been due to the suspected RSJ spanning the ceiling supported either side of the room with pillars
- I took measurements and noted to the FF a wall lay in the same position
- 2x chimney breasts
Brighton Road CR8 How did you verify the data you used?
- Phoned agent
- HMLR
Brighton Road CR8 Talk me through the TMW guidance.
- From Vex
o Conveyancer - ensure statutory and LA approvals have been obtained. - Information to the contrary must be referred back to the Valuer as this could impact the valuation/recommendation.
Brighton Road CR8 How did you factor market conditions into your analysis?
- Summer 2020
- The market was positive for houses due to outside space
- Therefore values were increasing and I valued in the middle/upper scale of the range to reflect this
- Also utilised u/o comps to indicate recent transactions
Brighton Road CR8 How did you analyse the comparables?
- Ranked in matrix
- Selecting comps
- Verifying evidence
- hierarchy of evidence
- Recording comparable evidence
- Analysis of comparable evidence
Brighton Road CR8 How did you use AVM figures to support your valuation?
- Used figure to support the val by including it in the rationale as additional evidence
- Also included the confidence rating
Felnex Avenue SM6 Talk me through your examination of the UK Disclosure of Incentives Form.
- Assessed the warranty
- Assessed the incentives
- GR, ULT and SC
- GR review mech
- Assisted purchase schemes (e.g HTB)
- Marketed price
- Construction
Felnex Avenue SM6 Why did you use a range of comparables?
- To provide a robust rationale and account for the new build premium
- To assess other NB sites in the vicinity
Felnex Avenue SM6 What were the benefits of the first ownership/scheme premium/incentives?
- New condition
- Warranty
- EPC rating/ cheaper to run
- Access to NB finance
- Access to gov initiates eg HTB
- Access to incentives
Tell me why terms of engagement are important.
Sets out:
- Clients requirements
- valuation requirements/process
- reporting of the valuation.
- scope of service
- liability
What checks do you undertake before accepting a valuation instruction?
- CoF
- Mandate
- Type of instruction
- Area
- Type of property
How do you ensure you know who your client is when undertaking a valuation instruction?
- Confirm using the instruction sheet
- Confirms details
Are there any additional requirements when undertaking a valuation in which the public has an interest or third parties may rely?
- Disclosures must be made in the terms of engagement,
Talk me through an example of when you have agreed terms of engagement with a client.
- Nationwide utilises standard terms of engagement
- single document,
- VPS 1 - mandatory requirements
- covering letter reference Terms of Engagement’.
What are the key elements included within terms of engagement?
- Purpose of the Valuation
- The interest to be valued
- Identification of the asset or liability to be valued
- Valuation date
- Identification and status of the valuer
- Special Assumptions
- Assumptions
What does the Red Book say about terms of engagement?
- VPS 1
- convey understanding of valuation requirements
- terms should be understood
What does the Red Book say about inspections?
- VPS 2
- EXTENT - must be carried out to extent necessary to produce a valuation
- LIMITATIONS - limitations on the inspection must be identified and recorded in the terms of engagement
What does the Red Book say about reporting requirements?
- VPS 3
- The report must:
o clearly set out conclusions
o deal with matters in ToE
What are the differences between a desktop and a full valuation report?
- Desktop is based on the limited information available without inspecting the property
Tell me about how you ensure that information relied upon in your valuation is appropriate and reliable?
- Phone agent
- Use HMLR data
- Cross ref floor areas with EPC floor area
Bruton Road SM4 Why did you use the comparable and investment methods?
- I utilised the comparable method due the number of arms length transactions available and therefore it was a robust methodology
- I utilised the investment as I was providing a rental valuation and I was able to capitalise the rental income as a method to support my comparable method valuation
Bruton Road SM4 Talk me through your investment method valuation
- Capitalise the rental income
- Freehold (income is in perp) so use formula 100/i
- i = yield (use 5.5% - based on market evidence and lonres)
- 100/5.5 = 18.1818 (YPperp)
- £9000 (Annual rent) x 18.1818 = £170,000 (rounded capital value)
Leasehold example
- (if leasehold would use YP formula YP = 1-PV/i
- Say 100 years lease
- £9000 (Rent) x 18.0958 (YP100years@5.5%) = £162,862
Bruton Road SM4 How did you verify the comparable evidence?
- HMLR
- Spoke to agents
Bruton Road SM4 How did you comply with RICS comparable evidence guidance?
- Sourcing/Selecting comps
- Verifying evidence
- Order evidence in a hierarchy of evidence
- Recording comparable evidence
- Analysis of comparable evidence
Bruton Road SM4 Talk me through how you established an appropriate yield.
- I established the yield through my own market knowledge
- This is influenced by the work I undertake in my patch
- Rightmove also provides a yield for every BTL valuation I undertake, thus I am constantly assessing the yield in my patch
- Additionally, I referred to yield data sources e.g Lonres
- Use sales comps
- Use agents details
- Rent/ capital value = yield
Look at sales and rental comps (see if recently sold/let)
Grange Road SE25 Talk me through your use of relativity graphs.
- Inputted Valuation date and ULT
- Use the average relativity %
- Can be used to adjust long lease value of subject and comps
- E.g. 86 (Relativity %) x £200,00 (long lease value) = Short lease value
OR
- The relativity value can then be used to adjust comps with varying lease lengths to virtual freehold
- Provides an adjusted comp range
Grange Road SE25 What was the significance of the 75 years unexpired ease term?
- Below 80 years marriage value is payable
- As defined in the Leasehold Reform, Housing and Urban Development Act 1993
Grange Road SE25 Talk me through your use of the Nationwide lease enfranchisement calculator
- Provides an estimated range for the lease extension premium
- Inputted:
o Ground rent
o ULT
o Long lease value of the property - I then deducted this figure from the long lease value of the subject making an allowance for fees
Grange Road SE25 How did you calculate the costs to extend the lease?
- Using relatively tables (above)
- Nationwide lease enfranchisement calculator (above)
- Cross referenced with online lease extension calculator
Grange Road SE25 What advice did you provide? (short lease value)
- Advised the valuation figure for the subject property
- Reflecting the 75 year ULT
- I also advised that ULT was below 80 years and this has been considered in my valuation any if the lease details were different refer back to me
o It is understood that the unexpired term of the lease is between 70 and 85 years (see Section 3); this must be confirmed by the Conveyancer and any information to the contrary must be referred back to the Valuer as the valuation/recommendation may change. This Lease length detracts from marketability and value of the security will fall exponentially as the term diminishes; this has been reflected in the valuation.
Grange Road SE25 How is the premium payable for a new lease calculated?
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
Grange Road SE25 What is marriage value?
- Marriage value is the difference in value of the interests of the owners before and after the exercise of leaseholders rights
- Under leasehold reform, Housing and urban development 1993
- Comes into effect below 80 years
- 50% payable to landlord
Deferment rate
cadogan v sportle
fLATS 5%
Houses 4/75%
Take me through the process of a valuation
COMPETENCE - Check competence and independence
ToE - ToE issued
DILLIGENCE - DUE DILIGENCE
INSPECT - Inspect and measure
VALUE - RESEARCH MARKET, analyse undertake val
REPORT Complete valuation report, check and issue
C T D I V R
(CT Didn’t Invent Virtual Reality)
What is yield?
- a return measure for an investment
- over a set period of time
- expressed as a percentage
How can the investment method be expressed in a simple calculation?
Market Rent (Net of Outgoings) X Years Purchase (YP) = Market Value
What does the leasehold reform aim to do? (Law commission report)
- Existing leaseholders - right to extend lease by 990 years
- New home buyers - no longer having to pay ground rent
- new houses must be sold freehold
- ground rent phased out -existing leaseholders will also be able choose to extend the length of their lease and it will be set at zero pounds.
Leasehold Reform (Ground Rent) Bill
No ground rents in new residential long leases properties
Due soon
RICS Valuation of residential leasehold properties for secured lending purposes
valuation of leasehold interests expressly for secured lending purposes
guide to the valuation of leasehold properties for secured lending purposes, in
particular those that have a diminishing lease term of less than 80 years remaining, when marriage value
becomes payable and, in many markets, there starts to be a material impact on market value.
Talk me through an investment calculation
What do relativity curves do?
- A relativity curve indicates relative leasehold value at any point in a lease terms compared to a freehold value
- The website graphs of relativity pulls together various relativity graphs and provide an average relativity across various data sets
Valuers use such graphs to determine the value of a hypothetical leasehold interest in a property, compared to its freehold value. The graphs express the value of a dwelling held on an existing lease at any given unexpired term divided by the value of the same dwelling in possession to the freeholder, expressed as a percentage
How did you adjust the yield? / What impact does this have?
Higher yield for riskier investment (eg short lease)
Lower yield for better prospects e.g. good area with value likely to rise
Rent/CV = Gross initial all risk yield
What is YP?
Number of years for income to equal CV
YP is the present value of £1pa
YP = 1-PV/i
