You should be able to name the reasons why you would carry out a valuation.
Purpose of ValuationLoan security
Insurance
Accounts Purposes
Open Market Transactions
Once you know the purpose of the valuation. You can then proceed to decide which method you need to use. The Five Methods of Valuation are as follows:
Comparable method
This method is used to value most common types of property, such as houses, shops and offices space. On the basis that there is a comparable property. The best comparable factors should be selected and analysed, and thereafter adjustments can be made for their differences. Finally, the estimated market value can be created.
Investment
Use to find the market value of a freehold or leasehold interest in property from its potential to generate future income with the Hardcore or Topslice method. Investment valuation is useful in comparing the returns on a property to other investments such as equity, stocks, bonds or even interest deposit accounts.
Residual
The Residual method can be used to value property with development potential or purchase cost of land. The calculation is essentially GDV (Gross Development Value) less GDC (Gross Development Cost). The residual sum remaining is maximum purchase price for the land.
Depreciated Replacement Cost
The Contractor’s method is a cost method of valuation, and can sometimes be used when the other methods cannot be used. If a property has a specialist nature, meaning there are no or very few market transactions then this method will be used. The method looks at all the costs of providing a modern equivalent property, and thereafter adjusting it to reflect the age of the subject property.
Profits
The Profits method is often applied when there are no comparable rental/sale transactions are available, and it’s often used for pubs, hotels etc. The method estimates a business’s gross profits and thereafter deducts all working expenses excluding any rental payments made; this gives the divisible balance.
Links:
RICS website is very useful in general
The Red book is essential reading for this topic
http://www.rics.org/uk/knowledge/professional-guidance/red-book
Five methods of valuation is another useful resource:
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