Introduction to Property Valuation
Questions and Answers
*Introduction to Property Valuation*
This set is best studied using the *"Flashcards"* option.
Press and hold an image to enlarge it on your phone.
Please note that powers in some formulas are represented in plain text using the caret
symbol. - answer*The caret symbol ^*
This means "to the power of". For example, all the below expressions mean the same
thing; 1.05 to the power of 2.
(1.05)² = (1.05)^2 = 1.05 x 1.05
*Reasons that money might be spent on property:*
• Investment
• Occupation
• Speculation - answer*Investment:* a lump sum (known as capital) is paid for
something with the aim of growing the invested sum over time.
*Occupation:* a person or business wants to occupy (live in or trade from) a property.
*Speculation:* spending money on a property in the hope that it will sell for a
considerably larger sum. Much riskier than investment.
*Price* - the actual amount something is selling for.
*Value* - An estimate of the price that would be paid for something if it were to be sold
(this is what valuation is all about!). - answerIn order to come up with a *value* (a fair
estimate) of the *price* that should be asked or paid for a particular property, a valuer
will research the *prices* that are being asked and paid for similar properties.
*Worth* - what an individual investor feels they are prepared to buy or sell something
for. This could differ from a valuation figure.
*Cost* - how much was actually spent on something. - answerOn receiving a valuation
report, an investor may feel a property is not *worth* the suggested *value* because the
investor is influenced by their personal opinions and experiences. The *cost* of a
property may not be the same as its *value* because an investor may have over or
underpaid. *Cost* may also be higher than *price* as other fees will likely apply when
buying a property.
, *Interest rates and yields (i):* - answerThese are usually given as a percentage but
must always be entered as decimal numbers when using valuation formulas.
Change the following percentages into decimals:
1) 12%
2) 6%
3) 2.4% - answerThe word percentage means *per one hundred* which is why you
divide the percentage by 100 to get the decimal equivalent.
12% = 12/100 = 0.12
6% = 6/100 = 0.06
2.4% = 2.4/100 = 0.024
*Time Value of Money*
• Opportunity Cost
• Inflation
• Risk - answerThe idea that having an amount of money now is worth more than having
the same amount of money in the future because money you have today can be
invested to increase the amount you will have in the future. This concept is key to
property valuation.
*Opportunity Cost:* Receiving money in the future means you miss out on the
opportunity to invest it now and start earning interest.
*Inflation:* The Bank of England is in charge of trying to manage inflation in the UK.
There is a short explanation here:
https://www.bankofengland.co.uk/monetary-policy/inflation
*Risk:* Inflation is a risk that money will become worth less over time unless you invest
it. There are many reasons why investing money could also be risky i.e., a tenant could
stop paying rent. - answer*Time Value of Money*
A valuer usually considers all of these aspects when they are deciding on an *"all-risks
yield"* (percentage) to apply in their valuation formulas.
*Inflation in action (Freddos)*
*Compounding*
It is important to understand compound interest in valuation mathematics. It is the effect
of earning interest on top of interest already received. - answer*Compounding* is like
rolling a snowball; the bigger your snowball gets, the more snow it picks up as it rolls. It
begins to increase in size at a faster rate.
*Compound Interest - Question:*
You put £1000 in a savings account that pays 5% interest per annum. At the end of the
year, you therefore have £1050 (£1000 x 1.05).
At the end of year 2, you earn 5% interest on the initial £1000 as well as the £50
interest. How much will be in the account at the end of the year 2? - answer*Compound
Interest - Solution:*
£1000 x 1.05 x 1.05
= £1000 x (1.05)²
Questions and Answers
*Introduction to Property Valuation*
This set is best studied using the *"Flashcards"* option.
Press and hold an image to enlarge it on your phone.
Please note that powers in some formulas are represented in plain text using the caret
symbol. - answer*The caret symbol ^*
This means "to the power of". For example, all the below expressions mean the same
thing; 1.05 to the power of 2.
(1.05)² = (1.05)^2 = 1.05 x 1.05
*Reasons that money might be spent on property:*
• Investment
• Occupation
• Speculation - answer*Investment:* a lump sum (known as capital) is paid for
something with the aim of growing the invested sum over time.
*Occupation:* a person or business wants to occupy (live in or trade from) a property.
*Speculation:* spending money on a property in the hope that it will sell for a
considerably larger sum. Much riskier than investment.
*Price* - the actual amount something is selling for.
*Value* - An estimate of the price that would be paid for something if it were to be sold
(this is what valuation is all about!). - answerIn order to come up with a *value* (a fair
estimate) of the *price* that should be asked or paid for a particular property, a valuer
will research the *prices* that are being asked and paid for similar properties.
*Worth* - what an individual investor feels they are prepared to buy or sell something
for. This could differ from a valuation figure.
*Cost* - how much was actually spent on something. - answerOn receiving a valuation
report, an investor may feel a property is not *worth* the suggested *value* because the
investor is influenced by their personal opinions and experiences. The *cost* of a
property may not be the same as its *value* because an investor may have over or
underpaid. *Cost* may also be higher than *price* as other fees will likely apply when
buying a property.
, *Interest rates and yields (i):* - answerThese are usually given as a percentage but
must always be entered as decimal numbers when using valuation formulas.
Change the following percentages into decimals:
1) 12%
2) 6%
3) 2.4% - answerThe word percentage means *per one hundred* which is why you
divide the percentage by 100 to get the decimal equivalent.
12% = 12/100 = 0.12
6% = 6/100 = 0.06
2.4% = 2.4/100 = 0.024
*Time Value of Money*
• Opportunity Cost
• Inflation
• Risk - answerThe idea that having an amount of money now is worth more than having
the same amount of money in the future because money you have today can be
invested to increase the amount you will have in the future. This concept is key to
property valuation.
*Opportunity Cost:* Receiving money in the future means you miss out on the
opportunity to invest it now and start earning interest.
*Inflation:* The Bank of England is in charge of trying to manage inflation in the UK.
There is a short explanation here:
https://www.bankofengland.co.uk/monetary-policy/inflation
*Risk:* Inflation is a risk that money will become worth less over time unless you invest
it. There are many reasons why investing money could also be risky i.e., a tenant could
stop paying rent. - answer*Time Value of Money*
A valuer usually considers all of these aspects when they are deciding on an *"all-risks
yield"* (percentage) to apply in their valuation formulas.
*Inflation in action (Freddos)*
*Compounding*
It is important to understand compound interest in valuation mathematics. It is the effect
of earning interest on top of interest already received. - answer*Compounding* is like
rolling a snowball; the bigger your snowball gets, the more snow it picks up as it rolls. It
begins to increase in size at a faster rate.
*Compound Interest - Question:*
You put £1000 in a savings account that pays 5% interest per annum. At the end of the
year, you therefore have £1050 (£1000 x 1.05).
At the end of year 2, you earn 5% interest on the initial £1000 as well as the £50
interest. How much will be in the account at the end of the year 2? - answer*Compound
Interest - Solution:*
£1000 x 1.05 x 1.05
= £1000 x (1.05)²
