Valuation (Level 2)

Question 1

Tell me why terms of engagement are important.

Answer 1

Terms of engagement are important because they set out the needs and requirements of the client for the instruction to the valuer and crucial information that can be referred back to later:

• Identification of the client, the valuer and any other users
• Purpose of the valuation
• Basis of value adopted
• Nature and extent of the valuer’s work
• Restrictions

Question 2

What checks do you undertake before accepting a valuation instruction?

Answer 2

CIT Test
- Competence – do you have the necessary competence to carry out the valuation
- Insurance – do you have the necessary PI cover in place
- Terms of Engagement – agreeing the terms of engagement before accepting the valuation

Question 3

How do you ensure you know who your client is when undertaking a valuation instruction for a smaller company/individual?

Answer 3

Smaller Companies or Individuals – Know Your Client Test

• Proof of Address
• Formal ID
• Bank Details
• Company Registration Details

Question 4

How do you ensure you know who your client is when undertaking a valuation instruction for a large company?

Answer 4

Larger Companies – Dun & Bradstreet Report / Companies House

Question 5

Are there any additional requirements when undertaking a valuation in which the public has an interest or third parties may rely?

Answer 5

For valuations that may have 3rd party reliance:
- Clearly stated in the terms of engagement
- there must also be disclosure of any circumstances where the valuer or the firm will gain from the appointment beyond a normal fee or commission

Question 6

Are there any additional requirements for loan security valuations?

Answer 6

Prior to accepting the instruction - The valuer should request details of the terms of the lending facilities being contemplated by the lender

Question 7

What are the key elements included within terms of engagement?

Answer 7

• Identification of the client, the valuer and any other users
• Purpose of the valuation
• Basis of value adopted
• Nature and extent of the valuer’s work
• Restrictions

Question 8

What does the Red Book say about terms of engagement?

Answer 8

• A mandatory requirement for all valuations

Terms of engagement should
o enhance client understanding of the service to be provided
o provide assurance that work by RICS members meets the highest professional standards
o address and disclose specific issues for that instruction

The minimum standards for Terms of Engagement are set out in VPS 1

Question 9

What does the Red Book say about inspections?

Answer 9

• Inspections and investigations must always be carried out to the extent necessary to produce a valuation
• The valuer must take reasonable steps to verify the information relied on in the valuation

Standards for inspections are set out in VPS 2

Question 10

What does the Red Book say about reporting requirements?

Answer 10

• A valuation report must clearly set out the conclusions of the valuation that is not ambiguous or misleading
• Deal with all matters agreed in the terms of engagement

Question 11

What are the differences between a desktop and a full valuation report?

Answer 11

• A desktop valuation is undertaken without physical inspection of the property whereas a full valuation report will require the inspection of the property

Question 12

Tell me about how you ensure that information relied upon in your valuation is appropriate and reliable?

Answer 12

• Source – ensure the information relied upon is from credible and verifiable sources
• Time – ensure that the information is as up to date as possible
• Relevance – ensure that the information is relevant and applicable to the property or asset in question

When using comparable evidence consider the Hierarchy of Evidence and the RICS Guidance Note: Comparable Evidence in Real Estate Valuation (2019)

Question 13

Student Accommodation Development, Oval

Would any of the other four methods have been appropriate?

Answer 13

No – I was assessing the value of land with development potential and wanted to determine the residual land value

Question 14

Student Accommodation Development, Oval

Did you make any adjustments to the comparables?

Answer 14

I placed a greater weight on the rental values with higher occupancy rates – this was because they were achieved rental figures rather than requested ones and reflected more achievable rents

Question 15

Student Accommodation Development, Oval

How did you account for financing costs?

Answer 15

I made an assumption of 6% of GDV – this was based on a finance agreement Linkcity had recently agreed on a similar development opportunity with the same proposed deal structure

Question 16

Student Accommodation Development, Oval

What are the standard ancillary costs?

Answer 16

Construction Costs:
- Design and build
- Contingency (5-10% of total construction cost)
- Professional Fees (10-20% of construction cost)
- Remediation works
- Demolition
- Surveys

Development Costs:
- Developer’s profit
- Planning s106, CIL
- Finance

Acquisition Costs – Purchaser’s Costs 6.8%

Question 17

Student Accommodation Development, Oval

What’s the relationship between a yield and a capitalisation rate?

Answer 17

Yield – is an output of a valuation or development appraisal

Yield = annual income/total cost

Capitalisation Rate – is an input of a valuation or development appraisal

Cap Rate = net operating income/property value

A yield helps to determine a capitalisation rate

Question 18

Residential for Sale Development, Stratford

Was this a single residential unit, a whole building, or a development
site?

Answer 18

This was for a vacant residential building with multiple units – the purpose of valuation was to establish the market value of the existing building

Question 19

Residential for Sale Development, Stratford

What are the risks in using Rightmove as a source of comparables?

Answer 19

• Time delay, sometimes the listings are not up to date
• Asking prices not achieved prices

Question 20

Residential for Sale Development, Stratford

How can you manage those risks of using Rightmove?

Answer 20

• Time delay can be managed by focusing on the most recent listings as your comparable evidence
• Place greater weight on the achieved prices rather than the asking prices – try to establish the achieved price by contacting the agent

Question 21

Residential for Sale Development, Stratford

Did you look at the local market relationship between asking and sold
prices? Did you factor that into your work?

Answer 21

Yes I placed a greater weighting on the achieved prices than the asking prices

Question 22

Residential for Sale Development, Stratford

Why did you not use the investment method?

Answer 22

There was not an existing income stream for the property.