Platinum Author
The following article is based on an interview with Charles Dixon - a RICS (Royal Institute of Chartered Surveyors) professional from the South West of England with over 26 years of experience in the property industry.
*** THE MODERN DAY DEFINITION OF PROPERTY 'VALUE' ***
The UK property market has become a largely open and free market made up of thousands of individual transactions by people and organisations with wide-ranging objectives.
A free flow of information in the market is essential in the decision making process behind those transactions. The internet has revolutionised the availability of information on property prices and has made it accessible to everyone; whereas before only people in the industry had such information. This has enabled many more people to join the property owning community.
In the UK, there are two prominent methodologies for deducing the value of a buy to let property:
(i) The comparable ('comps') method - most commonly used by property investors but requires regular transactions to be happening to be effective;
(ii) The yield / income method - commonly used in the the commercial property sector (and also advocated by several prominent stock market investors including George Soros Warren Buffet): the yield is calculated by dividing the annual income by the overall asset value. Whilst capital growth gains should always remain a fundamental part of any buy to let investor's strategy - cash flow will always remain 'king' and ensuring that you are making a healthy profit every month will enable you withstand any shocks, regardless of how the market is behaving. Also note that we refer to a gross figure here (costs such as management, insurance, maintanence, repairs etc would have to be deducted).
Professional property surveyors base their assessment of value not only on comparable evidence of similar transactions (where available) but also on their assessment of current market sentiment as well as the volume of properties being traded. There are also a number of external factors that can effect valuations, for instance the general state of the economy, interest rates, government / taxation policies and environmental factors.
When surveyors adopt a conservative view, this should reflect a stringent approach that parties are taking in actual transactions and the uncertainty of the market of which they form part of. It is also important to bear in mind that many professional surveyors would agree that, in reality, value is what one person will pay to another for a property and, if value is not to be skewed, both parties must be well informed and acting in an arms length relationship.
*** DUE DILIGENCE ***
Due diligence is the fundamental stage of being able to deduce a property's potential. Broad based data on transactions is available through many websites and local trends can be obtained via contacting the Department for Communities and Local Government. Whilst several of these indices have been called into question with regards to their methodology, they are a great way to understand general movements (we would recommend regularly examining 3 to 4 on a simultaneous basis).
More specific local research can be obtained via subscription websites (such as 'Hometrack' which tracks prices in line with the Land Registry as well as several other factors including sales against asking price ratios; time on the market; estate agent sentiments; re-mortgages levels to name a few). Estate agents can be approached on the basis that they will be able to assist with your future deals; they are approached tactfully and are not restricted from giving information (such as client confidentiality, for example). Rental evidence is, in addition, readily available via local lettings agents, the Rightmove portal, local news sites, etc.
A common problem during a property downturn for investors as well as surveyors, when there are so few transactions in a market place, is to firmly establish the true open market value (OMV). Most RICS valuers would, nevertheless, have a solid understanding of the area through speaking to professionals; engaging in ongoing research (monitoring sales and remortgages for example); utilising the local government contacts they have and abiding to their own code of conduct (the RICS 'Red Book'). Depending on the purpose of the report, the surveyor will also consider most of the following when making a valuation decision:
- planning consents;
- short, medium and long term planning issues in the area;
- recent works of repair / improvement / refurbishment to the property;
- available consents;
- guarantees;
- boundaries and related responsibilities;
- location and routes of utilities;
- environmental issues;
- contamination issues;
- presence of mines;
- flood risks;
- subsidence risks;
- details of construction if it is non-standard.
Much of this information and more is available through a Local Authority search, website enquiries from various organisations or professional legal checks.
About this Author
The the original interview with Charles can be read here: http://www.psinvestors.co.uk/blog/2010/02/interview-with-rics-surveyor/.
Access more interviews and articles as well as FREE e-books, videos, interviews, fact sheets, landlord tools, our e-course and more via the 'Property Investor Hub' by clicking here: [http://www.propertyinvestorhub.co.uk/].
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