Loan Security Valuation Flashcards

Question

Under VPGA 2, what must you state if you have made a special assumption?

Answer 1

Special assumption value must be accompanied with a comment on any material difference between the reported value with and without the special assumption.

Answer 2

1. Disclosure of involvements 2. Valuation methodology 3. If recently transacted, the extent to which that has been accepted as Market Value. 4. Comment on environmental consideration 5. Comment on suitability for loan security purposes. 6. Factors which could affect price.

Answer 3

As valuations are an opinion of value there will always be a degree of uncertainty. Material uncertainty is where the degree of uncertainty in a valuation falls outside the parameters that might normally be expected and accepted. For example, the asset/liability may be very unusual or unique so the market may be limited in regards to relevant transactions that can be analysed to provide reliable inputs into the valuation. Therefore, it is important that the context of the judgement is clearly expressed.

Answer 4

A valuation report must not be misleading or create a false impression (as per VPS 6) so the valuer should expressly draw attention to, and comment on any issues resulting in MVU as at the specified valuation date. The comment should not be about the general risk of future market movements / inherent risk involved in forecasting future cash flows but should be related to the risk surrounding the valuation of that asset. MVU should be expressed in qualitative and narrative terms to indicate the valuer's confidence in the valuation opinion. In most cases it is either inappropriate or impractical to reflect MVU in the valuation figure quantatively. If it is, it must be adequately explained with any limitations highlighted. In some cases it may be appropriate to agree with the client realistic/relevant alternate valuations using special assumptions. A valuation report should not have a standard general caveat to deal with MVU but should include further specific commentary about the circumstances in question.

Answer 5

As per VPGA 10, you cannot state a range of values even if there is MVU. The valuer has to provide a single figure in order to comply with the client's requirements and TOE. Similarly, the use of qualifying words such as 'in the region of' would not normally be appropriate to convey MVI without further explicit comment, and such wording should not be used for this purpose. Where different values may arise under different circumstances, it is preferable to provide them on stated special assumptions.

Answer 6

MVU should be expressed in qualitative and narrative terms to indicate the valuer's confidence in the valuation opinion. In most cases it is either inappropriate or impractical to reflect MVU in the valuation figure quantatively. If it is, it must be adequately explained with any limitations highlighted.

Answer 7

a. Private placement – sale of stocks/bonds/securities to a private investor rather than on the open market b. Mortgages – legal agreement where a lender lends money at interest in exchange for taking title of the debtor’s property c. Bond issues – Investment securities that represents a loan made by an investor to a borrower (typically issued by governments or corporations; so the government or corporation gets the loan from an investor who buys the bond)

Answer 8

a. Affect demand b. Affect income levels c. Affect rents that are charged and therefore ability for tenants to pay d. Essentially they impact the discount rate and therefore have different levels of risk associated with them

Answer 9

* Ensure correct methodology and requirements are used in line with the lender's requirements (different lenders have different requirements). * They also confirm any special assumptions, limitations, and the extent of investigations to be undertaken, which helps manage the client's expectations. * In accordance with the Red Book (in particular PS1, PS2 and VPS1) formal written terms are required to identify the client, any reliance parties, and to ensure the report is correctly addressed. * Additionally, they ensure the valuation falls within the scope of the valuer's PII

Answer 10

Residential LTV - 60%-85% but with first time buyers up to 95% Commercial LTV - 50-70% Affordable / social housing - 50-65%

Answer 11

( Loan amount / Property value ) x 100 So if the property is worth £1,000,000 and the loan is £650,000 then the LTV is 65%

Answer 12

* market risk * legal and title risk - i.e., restrictive covenants, rights of way, tenancies * planning risk - where there is reliance on future development or change of use, I would caution the lender if planning has not been obtained * property specific risk - physical condition, building defects, non-standard construction type, high flood risk, asbestos * MVU - i.e., if property is unusual and there are limited transactions (as per VPGA 10) * any assumptions made * security suitability risk - whether the property is suitable for use as loan security

Answer 13

A Loan Security Valuation (LSV) helps mitigate risk for the lender by providing an independent, professional opinion of the value of the asset offered as security. This ensures the lender can make informed decisions about the amount they are willing to lend and the suitability of the asset as security.

Answer 14

1. Comment on costs 2. Implication of cost overruns 3. Comment on viability 4. Sensitivity analysis for residual valuations 5. Comment on development timelines

Answer 15

Hart v Large (2012) highlights the duty of care owed by valuers to their clients. It involved a surveyor's failure to account for structural issues in a property valuation, which led to financial loss for the client. The court found the surveyor negligent for not conducting a thorough inspection and failing to disclose risks. The case reinforces the need for a duty of care to clients, through diligence, transparency and competence to protect clients from financial harm in property valuations.

Answer 16

Market volatility refers to the fluctuations in market prices and conditions, which can be driven by various factors such as economic changes, interest rates, and external events (e.g., political instability and natural disasters). These fluctuations can have a direct impact on property values, and can influence the stability of investment returns and loan security valuations. In order to mitigate this risk I regularly monitor macroeconomic factors. For example I keep up to date with the Bank of England interest rate changes. This is important as fluctuations can directly impact borrowing costs, which in turn influence demand for property and the yields achieved on investment properties. An increase in interest rates for instance could reduce demand for property as borrowing becomes more expensive, potentially leading to a decline in property values. By staying informed about these factors and applying this knowledge to valuations, I can better assess the risk of market volatility.

Answer 17

I conduct thorough inspections I clearly communicate any risks (MVU when required) I carry out my required CPD hours to ensure I am knowledgeable on best practices, market conditions and economic factors I clearly document my methodology used for the valuation I am transparent and accountable as I provide clients with all the relevant information, including any assumptions made to avoid misunderstanding I partake in internal and external audits of my work to adhere to legal and industry standards

Answer 18

* Essential to ensure that the client understands how the valuation figure has been derived and the context in which it should be relied upon. * I ensure transparency by clearly outlining the basis of value used (typically MV as defined by the Red Book) and by detailing the methodology adopted. * Assumptions must be stated clearly to avoid any ambiguity by helping manage the client's expectations / limiting the valuer's liability by defining the parameters within which the advice is valid - supports compliance with Red Book * Special assumptions should be agreed in TOE and stated clearly in the report. * Could link to my 90 day and 180 day marketing period special assumptions for Pillaton

Answer 19

For Pillaton the property was vacant at the time of inspection. The lender requested two special assumptions in regards to restricted marketing periods, one assuming a 180 day marketing period and the other a 90 day. In line with VPGA 2 of the Red Book, I clearly stated both special assumptions in the TOE and clearly stated them in the report. I explained how each special assumption impacted the valuation, and why the discount has been applied in the 90 day scenario, supported by relevant comparable evidence and market commentary.

Answer 20

* SWOT helps to identify the Strengths, Weaknesses, Opportunities, and Threats relating to the subject property, which in turn supports the lender in understanding the risk profile associated with the asset being used as loan security. * For example, in a valuation I undertook for a vacant office in Newton Abbot (Devon Square), I identified a potential opportunity for conversion to residential (due to neighbouring properties being of a similar nature). The SWOT analysis in this case helped highlight that while the property had some strengths (central location, off-road parking), the lack of planning, local market demand, and condition posed certain weaknesses and threats that could impact resale value in the event of default. Including this analysis in my report provided the lender with a balanced view, rather than just a valuation figure — and helped them assess how well the property aligned with their risk appetite. It also demonstrated that I had considered both internal property-specific risks and external market influences, in line with Red Book guidance and VPGA 2.

Answer 21

I adopted this approach and method as the property was owner-occupied and not producing any rental income at the valuation date. In accordance with Red Book VPS 5 and VPGA 2, the market approach is appropriate where there is sufficient, reliable comparable evidence of recent open market transactions of similar properties. In this case, there had been several recent sales of comparable offices in the local area, which allowed me to benchmark the subject property’s location, size, specification, and condition against those comparables. Since there was no passing rent or lease structure, income-based methods such as the investment or DCF approach were not appropriate. The comparable method allowed for a direct analysis of unit rates on a £/psf basis and adjustments for characteristics such as parking provision, building condition, and development potential. This approach ensured the valuation reflected the amount the property would achieve in an arm’s length transaction, aligning with the definition of Market Value under VPS 4, and provided a robust and transparent basis for loan security purposes.

Answer 22

To ensure that the comparable evidence I use is both relevant and reliable, I follow the guidance set out in the RICS Valuation – Global Standards (Red Book), particularly VPS 2 (Inspections) and VPS 3 (Valuation Evidence). Relevance is determined by the nature, location, condition and use of the subject property. I look for comparables that are broadly similar in characteristics and have transacted on the open market under arm’s-length conditions. The timeframe for comparables depends on the property type and market activity — generally, I aim to use sales within two years and lettings within one year, though this can be tightened or widened depending on market volatility or availability of data. In terms of reliability, I always seek to verify the transaction details directly with the agent involved, including price, incentives, and any atypical conditions. I ensure this is documented on file, including email or telephone confirmations, in accordance with professional record-keeping obligations. Additionally, I consider the number of comparables available and how consistent they are with each other. If the evidence is limited or shows significant variation, I will state this clearly in the valuation report and may include a sensitivity analysis or commentary on material valuation uncertainty, in line with VPGA 10, if appropriate

Answer 23

In the Devon Square valuation, the agent’s marketing mentioned potential for residential conversion, which could materially affect value. I conducted due diligence by checking the local authority’s planning portal, confirming no valid consents were in place. I then contacted the lender to clarify whether they required a special assumption of planning permission. They confirmed they did not, and requested a valuation based on the property’s existing use as an office. I therefore adopted the market approach and comparable method, excluding any planning uplift. I documented the development reference and my reasoning in the report to ensure transparency and compliance with VPGA 2. This approach ensured the valuation was robust, evidence-based, and aligned with VPS 4, accurately reflecting the property’s true risk profile.

Answer 24

In the Briars Ryn, Pillaton valuation, the lender requested Market Values based on both a 180-day and a 90-day marketing period, each requiring a special assumption. I considered the 90-day marketing period to be unreasonable, not due to lack of demand — as there is good appetite for properties of this type in the local market — but because 3 months is a very limited timeframe when accounting for the full sales process. Even with a motivated buyer, the time required for marketing exposure, viewings, offer negotiation, legal due diligence, and exchange of contracts often exceeds 90 days. Based on my professional judgement and market experience, I applied a 10% discount to reflect the increased likelihood that a vendor would need to accept a lower offer to achieve a sale within that timeframe. In contrast, I deemed the 180-day marketing period reasonable, as this reflects a typical exposure and sale timeframe for a property of this nature in the local market. This is in line with the definition of Market Value under VPS 4, which assumes sufficient time to market the property properly and complete a transaction under normal conditions.

Answer 25

When undertaking valuations for loan security purposes, I always start by ensuring compliance with the RICS Valuation – Global Standards (Red Book), specifically VPGA 2: Valuations for Secured Lending, which provides guidance on adapting valuations to suit lender requirements while maintaining professional standards. Upon instruction, I carefully review the lender’s terms of engagement or valuation template to identify any specific requirements that differ from standard Red Book assumptions. If such requirements arise, I confirm with the client whether they require a departure from standard Market Value or if a special assumption should be applied. I document these clearly in the report and within the Terms of Engagement, as per PS 1 and PS 2. For example, in the Briars Ryn, Pillaton valuation, the lender requested values based on both 180-day and 90-day marketing periods. I treated these as special assumptions and clearly stated them in the report. I also provided reasoned justification for the discount applied to the 90-day figure. This approach ensures I meet the lender’s specific needs while still producing a valuation that is transparent, well-reasoned, and Red Book compliant.

Answer 26

Yes, a good example of this was the valuation I undertook at Devon Square, Newton Abbot, for loan security purposes. The lender's specific requirements influenced both the assumptions I made and the valuation method I adopted. The property was an owner-occupied office, and the marketing particulars referenced potential for residential conversion. As this could significantly affect value, I undertook due diligence by checking the local authority planning portal and confirmed there was no valid planning permission in place. I raised this with the lender and asked whether they wanted me to adopt a special assumption of planning consent being granted. They confirmed in writing that they did not require this, and instead asked for the valuation to be based on the property’s existing use as an office. The lender also confirmed there were no lease agreements in place, and that the property should be valued with vacant possession. Based on this, I adopted the market approach and comparable method, analysing recent open-market transactions of similar vacant offices in the area. The lender’s specific instructions clarified the basis of valuation and ensured that no planning or income-based assumptions were applied. This ensured my valuation was fully compliant with VPGA 2 and reflected an accurate risk profile for the lender.

Answer 27

In the Devon Square, Newton Abbot valuation, I was instructed by the lender to provide not only the Market Value, but also the Market Rent and Insurance Reinstatement Cost. Providing the Market Rent is important as it allows the lender to assess the income-generating potential of the asset, particularly if they anticipate the property may be let in the future or if the borrower defaults and the lender needs to take possession. It also informs key financial metrics such as rental yield, helping the lender assess whether the property could support future loan repayments. The Insurance Reinstatement Cost is equally important. It ensures that the lender can verify whether the borrower’s building insurance cover is adequate to fully reinstate the property in the event of total or partial destruction. This helps protect the lender’s collateral position, as underinsurance could lead to significant financial loss if the property were damaged. Including these additional figures gives the lender a more holistic understanding of risk, covering both asset protection and potential income streams, which directly supports their lending decision and risk assessment.

Answer 28

In the Briars Ryn, Pillaton valuation, I was instructed to provide two different Market Value figures based on special assumptions of marketing periods: one assuming a 180-day marketing period and the other a 90-day marketing period. To ensure the valuation was appropriately adjusted for these periods, I used my professional judgement, market knowledge, and experience to assess how each marketing period would affect the likelihood of achieving a sale at full market value. For the 180-day period, I deemed it a reasonable timeframe for the property to be sold at full market value, given local market conditions and comparable sales in the area. Therefore, no adjustment was made to the Market Value. For the 90-day period, I considered this timeframe to be unreasonably short for a property of this type and location. A quicker sale would likely lead to price concessions or a need for more aggressive marketing. As a result, I applied a 10% discount to the Market Value to reflect the increased risk of achieving a sale at a lower price within such a constrained period. I communicated this adjustment clearly in the valuation report by detailing the special assumptions made, explaining my reasoning behind the discount for the 90-day period, and how it reflected the impact of a limited marketing period. I also made sure to highlight that the 180-day period was considered reasonable, and thus no adjustment was needed for that assumption. To ensure the lender understood the implications of these adjustments, I included a detailed narrative within the report, outlining the specific risks associated with a shorter marketing period and how it would likely affect the property’s marketability and price. I also confirmed these assumptions and adjustments with the lender in writing, ensuring full transparency in my methodology and ensuring the lender’s decision-making was fully informed by these factors.

Answer 29

When valuing a property for loan security, assessing its long-term marketability is a key aspect of ensuring that the lender’s risk is fully understood. I take a comprehensive approach, considering both market conditions and the property’s unique characteristics. Several factors influence my opinion, including location, construction, condition, market trends, covenant strength, and economic conditions. I compile a comprehensive risk assessment for the lender, highlighting the property’s strengths and weaknesses, potential risks, and any mitigating factors to ensure they have a full understanding of the property’s marketability and the associated risks.

Answer 30

Discuss NatWest report?

Loan Security Valuation Flashcards

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