Valuation Definitions Flashcards
(42 cards)
When do you require a Redbook Valuation?
Tax planning, probate valuation, secured lending,
Why would you undertake a probate valuation?
Probae valuation is undertaken when a person dies. It includes everything the person owned minus debts. It is undertaken to establish the value subject to Inheritance tax or income tax.
What are the 4 exemptions from the RICS Redbook Valuation?
Internal purposes;
Marketing appraisal;
Statutory purpose/claims (e.g. arbitrations);
Litigation in court (e.g. expert witness)
What is the Net Internal, Gross External, and Zone areas?
Net Internal - useable area measured to the internal finish across all floors
Gross External - enclosed area of the building, Incl the thickness of the external walls and internals (footprint)
Zone Areas - In commercial terms, Zoning is used to measure retail properties, allocating different values
Identify 8 headings you would expect to find in the Terms of Engagement?
Instruction
Purpose of Letter
Scope of work
Assumptions & Special Assumptions
Valuation Date
Identification of Valuer
Conflicts of Interest
Professional Indemity Insurance
Complaints Handling Procedure
What is a special assumption?
An assumption that either assumes facts that differ from the actual facts existing, or assumptions that would not be made by a typical market participant. For example special assumption of vacant possession, despite being within a 1991 Act.
What is the difference between terms of business and terms of engagement?
Terms of Business relates to your firms overall general conduct, such as confidentiality, payment terms, anti-money laundering, complaints handling, termination.
Terms of Engagement are more job specific outlining the scope of work, instruction, nature of the work.
What is the Valuers registration scheme? (VRS)
VRS is a quality assurance scheme which monitors RICS members undertaking valuation.
It was launched to provide public confidence, maintain parity, transparency and enable scrutiny of the RICS and the valuation process.
Define Market value?
The estimated amount for which an asset or liability should exchange on the valuation date between a willing buyer and a willing seller in an arm’s length transaction after proper marketing and where the parties had each acted knowledgeably, prudently and without compulsion.
Define Market Rent?
The estimated amount for which a property would be leased on the valuation date between a willing lessor and a willing lessee on appropriate lease terms in an arm’s length transaction, after proper marketing and where the parties had each acted knowledgeably, prudently and without compulsion.
What other bases of valuation other than Market Rent and Market Value could be used in a Valuation?
Detailed in VPS 4: Investment Value, Fair Value (‘equitable’), Marriage value, liquidation value
Why do you make assumptions in a valuation?
Assumptions are necessary to estimate a basis of value, and make a fair judgement
What is your firms complaints handling procedure?
Procedure handling procedure detailed on the S&P website.
Nick Greene, email provided which is monitored. Option to post hard copy, and will respond within 5 working days to acknowledge receipt.
Investigation involved reviewing S&P files on matter and interviewing associated employees where appropriate. Can take 40 working days to resolve.
If not satisfied, advised to approach the Property Redress Scheme.
When would you use Term and Reversion Valuation
Investment valuation, valuing income stream.
When you believe the property is let at a greater or lower value than current Market Value, but there is an expectation that the rent will be adjusted to reflect MR in future
What is a yield in a Term and Reversion
The yield is the risk associated with achieving the Years Purchase (YP) in Perpetuity
How does a rent review and break clause effect Term and reversion
A rent review clause would provide a deadline for the current rent, and would enable the reversionary investment to achieve market rent sooner, reducing the risk/yield
Can you explain what is meant by ‘term’ and by the ‘reversion’
The ‘term’ is the initial block of income which we know to be true.
The ‘reversion’ is the income in ‘perpetuity’ and achieves Market Rent
e.g. If you know the current income for a leased property is £100k per annum, this is the ‘term.’ If there is a rent review in 2 years time, then the term would be £100k for 2 years.
If we know Market Rent is £150k, then following the RR in 2 years time, your second block of income would be a reversionary rent of £150k in perpetuity.
When is a Discounted Cash Flow approach used?
Discounted cash flow finds the net present value of future cash flows using a discount rate. It enables investors to determine whether the future cash flow is greater than the initial investment
When is the Investment method used?
Investment method is used to value an income stream or rental income to produce capital value
What is YP?
‘Years Purchase’
Used in Investment Method Valuations
It is the number of years it takes for an investment property to repay its initial capital value
Define the Net Present Value?
Sum of future cash flows, discounted to get the present value
When NPV is positive = exceed investors target
When NPV is negative = Not achieved investors target
What are some of the minimum requirements (key headings) to include in a Valuation report?
Identification of valuer
Identification of client
Purpose of valuation
Valuation date
Basis of value
Nature and source of information relied upon
Assumptions and Special Assumptions
Restrictions on use and distribution
Amount of the valuation
Valuation approach and reasoning
Date of the report
What is the All Risks Yield (ARY)?
ARY is the rate that reflects the overall risks associated with the investment (e.g. tenants covenant, yield, market risk)
What are the Professional Standards (PS) in the RICS red book?
They are mandatory
PS1 - Members and firms who undertake written valuations are required to comply with RICS standards and IVS
PS2 - Members practicing as valuers must have the appropriate experience, skill and judgement and work in an ethical manner
