Valuation Flashcards
(9 cards)
Please explain your understanding of the residual valuation method?
The residual valuation method is used to establish how much a purchaser should pay for a development site. The gross development value is established first of all and there after all the costs associated with undertaking the development are then deducted. This leaves a surplus amount remaining which is also known as the residual value. This represents how much the developer can afford to pay for the development site or property. The GDV or gross development value forms a key part of the calculation and this is the aggregate market value of the development based on the special assumption that the development is complete at the date of valuation. The development costs are then deducted from the GDV and typically include site preparation, construction, sales, marketing, contingency, financing fees and developers profit.
When is the Profit Method used and how is this undertaken?
The profits method is used for trade related properties where the value is derived from the business and its trading potential. This trading potential is the profit that a reasonably efficient operator would expect to realise from occupying the property. Examples of when the profits method would be used would include for hotels, schools, cinemas and theatres. The common characteristics of these properties is where the property has been designed for a specific use and the value is linked to what the owner can generate from the property. The value therefore reflects the trading potential of the property and it includes the property interest, business and locational good will, fixtures and fittings all reflected as a single figure. The Income and expenditure forecast is based on historical and comparable information. This forecast represents the fair maintainable turnover and fair maintainable operating profit that a reasonably efficient operator would hope to achieve. This is therefore considered a reasonably accurate forecast of the properties trading potential. The actual performance is compared with similar trade properties to determine whether the fair maintainable turnover is realistic based on current market conditions. As a final step the fair maintainable operating profit is capitalised at the appropriate rate of return to reflect the risks and rewards of the property to determine its trading potential. Evidence of accurate comparable market data should be analysed and applied.
What is the depreciated replacement cost method of valuation and how does this work?
The depreciated replacement cost method provides an indication of value based on the buyer paying no more or no less than the cost to obtain the asset based on the current equivalent. The involves calculating the replacement cost of the asset with its modern equivalent including deductions for physical deterioration and all other relevant forms of obsolescence. This method is known as the method of last resort and is used when it is impractical to use all other valuation methods. The cost approach is used to value unusual properties where there is no active market such as mosques, wharfs or refineries. Under the cost approach the capital value is determined by calculating the cost of building the equivalent asset and the purchase land value. The replacement build cost should be calculated using new and cost effective building materials and techniques. The total value of the new property is then adjusted for deterioration using evidential information and recent transaction values to calculate the land purchase cost.
What is the comparable method of valuation and how does this work?
The comparable method primarily uses sales data of properties that have recently been sold focussing on assets that have a similar size, location, condition, features and specifications. The comparable method is underpinned by comparable evidence which is identified, analysed and applied to the real estate that is to be valued and is therefore fundamental to producing a sound valuation that can stand scrutiny from the client and market. The valuer will compile a schedule of evidence that will contain details about the property such as building age, quality, location, tenure, size, transaction price, date of sale and price per sq ft which can be used for the purposes of comparison with other similar properties. The comparable data gathered should be comprehensive meaning there should be several similar properties being considered, they should also be recent and therefore representative of the current market conditions and consistent with local market practice.
What are the different purposes of valuation?
Valuation for Financial Reporting.
Valuation for Commercial Secured Lending Purposes.
Valuation for Residential Mortgage Purposes.
Valuation for Capital Gains Tax, Inheritance Tax, Stamp Duty Land Tax.
Valuation for Compulsory Purchase and Statutory Compensation.
What are the different methods of valuation?
Comparable Method – This method involves comparing the subject property to recent sales of similar properties in the area. Adjustments are made for differences in size, location, condition, tenure and other factors. It is widely used for mortgage valuations, property sales, and investment analysis.
Income Method – This approach values a property based on its ability to generate income. The annual rental income is divided by an appropriate capitalization rate (yield) to determine the market value. The income method is often used for properties such as rental housing, office buildings, retail buildings and hotels.
Profits Method – This method values the property based on the business’s profitability rather than just rental income. The gross turnover is assessed, and operating costs are deducted to estimate the Fair Maintainable Operating Profit (FMOP). This method is often used where businesses operate from a property that is designed and built for this specific purpose such as hotels, pubs, cinemas, petrol stations, and care homes. A multiplier (or years’ purchase factor) is applied to determine the final value.
Residual Method – This method is used to determine the value of land by estimating the Gross Development Value (GDV) and then deducting costs, including construction, planning, and profit margins to determine a residual value that the site can realistically be purchased for and determine if the site is financially viable.
Depreciated Replacement Cost Method – This approach estimates the cost of rebuilding the property at today’s prices, then applies depreciation to reflect its current condition. The DRC method is used when there are no comparable sales or rental data available.
What is meant by the term Market Value?
The estimated amount for which an asset should exchange on the date of valuation between a willing buyer and a willing seller in an arm’s length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently and without compulsion
What is Hope Value?
Hope value is the term used to describe the market value of land based on the expectation of getting planning permission for development on it. This differs from the existing use value which is what the land or property is worth in its current form.
What is Marriage Value?
The extra value that arises from the merger of two physical or legal interests
