Valuation Flashcards
(64 cards)
Can you outline the three approaches to valuation?
*Market approach: Uses comparable sales or rental evidence to determine value. Suitable for residential, commercial, and investment properties.
*Income approach: Based on the income-generating potential of a property. Includes methods like investment method and DCF (Discounted Cash Flow). Used for leased commercial properties.
*Cost approach: Calculates the cost to replace or reproduce an asset, minus depreciation. Used for specialised assets where comparable are limited (e.g., infrastructure, hospitals).
What are the five methods of valuation, and when would you use each one?
*Comparable method – Used for properties with sufficient market evidence (e.g., residential and commercial sales).
*Investment method – Used for income-producing properties (e.g., rented offices, retail units).
*Residual method – Used for development land to determine the land value after deducting development costs and profit.
*Profits method – Used where value of the property is based on profit, such as hotels, pubs, and care homes (based on a percentage of trading profit).
*Cost method – Used for specialised properties where neither comparable nor income-based methods are viable (e.g., schools, hospitals).
How do you determine the most appropriate valuation method for a specific property?
*Consider the purpose of valuation
*Assess the availability of market evidence
*Evaluate the type of property (e.g., leased properties suit the income approach, while unique properties may need cost or profits methods).
*Examine wider factors such as lease structure, use class, and planning considerations.
Why is adherence to the Red Book important for valuation professionals?
*Ensures professionalism, independence, and credibility in valuation work.
*Provides a standardised approach, ensuring clients receive consistent and transparent reports.
*Helps mitigate valuation risk and potential conflicts of interest.
Can you outline the key sections that should be included in a Red Book-compliant valuation report?
*Instruction details – Client name, purpose, and valuation date.
*Scope of work – Basis of value (e.g., Market Value, Fair Value).
*Methodology – Justification for valuation approach.
*Assumptions & Special Assumptions – Key considerations affecting valuation.
*Market analysis – Supporting evidence (e.g., comparables, market trends).
*Valuation conclusion – Stated value and rationale.
*Compliance statement – Confirmation of Red Book adherence.
What is the difference between a Red Book-compliant valuation and an informal valuation?
*Red Book-compliant valuation: Formal, regulated, and follows strict reporting and ethical guidelines. Used for secured lending, financial reporting, and legal purposes.
*Informal valuation: Less detailed, may not follow Red Book standards, and often used for internal purposes or advisory work.
How does lease term impact valuation?
*Short leases: Typically reduce value due to lack of long-term income security.
*Long leases: Enhance value, especially with strong covenants.
*Break clauses and upward-only rent reviews can also influence value.
How do location and use class affect the valuation of a property?
*Prime locations command higher values due to demand and accessibility.
*Use class restrictions can limit alternative uses, impacting value.
*Proximity to transport, amenities, and economic activity also plays a key role.
What market factors should be considered when conducting a valuation?
*Supply and demand in the local property market.
*Economic factors (e.g., interest rates, inflation).
*Government policies (e.g., tax, planning regulations).
*Investor sentiment and financing availability.
What sources of evidence would you use to support a valuation?
*Comparable transactions from reliable market data sources.
*Rental evidence from lettings of similar properties.
*Yields and investment data for income-based valuations.
*Cost estimates for new developments or specialist assets.
What are the two types of valuer?
*Internal Valuer - employed by company, internal use only
*External Valuer - no material links to asset or client
What are the first 3 steps to undertake before commencing a valuation?
- Competence - are you competent to undertake this work?
- Independence - any conflicts of interest?
- Terms of engagement
Name some statutory due diligence for valuations?
Asbestos register
Business rates/Council tax
Contamination
Equality Act 2010
EPC rating
Flooding
Fire Safety
Health and Safety
Legal title and tenure
Public right of way
Planning history and compliance
Why is statutory due diligence carried out?
This is required to check that there is no material matters that could impact upon the valuation
Steps of a Valuation Instruction?
Receive instruction
Check competence
Check no conflict of interest
Issue terms of engagement
Signed Terms of engagement
Gather information
Undertake due diligence
Inspect and measure
Research market and comparable evidence
Undertake valuation
Draft report
QA of report
Finalise and sign report
Report to client
Issue invoice
Save valuation for record purposes
5 main methods of valuation?
Comparative method
Investment method
Profits method
Residual method
Contractor’s method
What is the methodology of the comparative method?
- Search and select comparables
- Confirm/verify any details and analyse headline rent to give a net effective rent
- Assemble comparables in a schedule
- Adjust comparables using the hierarchy of evidence
- Analyse comparables to form opinion of value
- Report value and prepare file note
What is the hierarchy of evidence?
*Category A - direct comparables:
Completed transactions of near identical/similar properties which information available
*Category B - general market data that can provide guidance:
Information from published sources or commercial data bases
*Category C - other sources:
Transactional evidence from other real estate types
What does the Comparable evidence Guidance note outline?
‘Comparable Evidence in Real Estate Valuation, 1st Edition 2019’
Outlines the principles in the use of comparable evidence, provides advice on situations with limited availability of evidence
How to search for relevant comparables?
*Recent market activity - search agents boards
*Speak to local agents
*Auction results (be careful as gross price)
*In house records/databases eg Egi, Costar
When identifying/analysing comparable evidence, the potential valuer should seek to ensure?
*Comprehensive - have you for all the facts, several comps
*Similar transaction if not identical
*Recent transactions
*Verifiable as far as is practicable
When would the investment method of valuation be used and how?
When there is an income stream to value
The rental income is capitalised to produce a capital value
How would you apply the conventional investment method?
Rent received/market rent x years purchase = Market Value
When and how would you use the Term and Reversion Method?
*When property has an existing lease that is below market rent
*Capitalise the current rent with time remaining on the lease
*Capitalise the future rent, but discount it back to present value
*Present value of term + Present value of reversion
