Buy to Let Property Valuation Made Simple

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.



Easily being able to access information with regards to the market is essential in making decisions. Indeed, the internet has revolutionised the availability of such information on property prices and has made it accessible to everyone; whereas before only people in the industry had such detail. This has had the fortunate effect of creating more transparency within the industry.



In the UK, there are two prominent methodologies for deducing the value of a buy to let property:



(i) The comparable method - most commonly used by property investors but requires regular sales to be occurring to be effective;



(ii) The income / yield method - inherited from the commercial property sector (and also advocated by several prominent stock market investors including Warren Buffet and George Soros): the yield is calculated by dividing the annual income by the overall asset value. Whilst future capital growth should always remain a fundamental part of any buy to let investor's strategy - cash flow is paramount and ensuring that you are making a healthy profit every month will ensure your longevity, regardless of how the market is behaving. Note that we refer to a gross figure here (costs such as management, insurance, maintanence, repairs etc would have to be deducted).



Property surveyors base their assessment of value not only on comparable evidence of similar transactions but also on their professional assessment of current market sentiment as well as the volume of properties available and being traded. There are also a number of external factors that bear on the individuals undertaking a property transaction that can effect valuations, for example: the general state of the economy, interest rates, government / taxation policies etc.



If surveyors are taking 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. At the same time, 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 distorted, both parties must be well informed and acting in an arms length relationship.



*** RESEARCHING A PROPERTY'S VALUE (DUE DILIGENCE) ***



The most fundamental stage of evaluating an investment property's potential is the conduct of due diligence. Broad based data on property transactions is available through many websites and trends can be obtained via contacting the Department for Communities and Local Government. Whilst several of the indices are questionable in terms of their approach to valuing house prices, they are a great way to get a general movements (we would recommend viewing 3 to 4 simultaneously rather than focusing on just one).



Detailed 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 time on the market; sales vs. asking price ratios; estate agent sentiments; re-mortgages to name a few). Agents are generally willing to help with information on transactions in their area provided they are approached tactfully and are not restricted from giving information on a transaction by confidentiality. Rental evidence is, in addition, readily available via local lettings agents, Rightmove, 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 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 formal legal checks.





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Access the original interview here:

http://www.psinvestors.co.uk/blog/2010/02/interview-with-rics-surveyor/



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