Valuation is an assessment of your property’s value. There are different types of valuations used for a wide variety of purposes. A Red Book valuation is just one of them. Solicitors, accountants, bankers and agents are acquainted with this type of valuation. Let’s dig deeper to find out what Red Book valuations mean and why you may need them.
What is a Red Book Valuation?
The Red Book is an RICS publication where the rules as well as guidelines for valuations are described.
Red Book valuations are the type of reports that comply with the valuation professional standards set by the Royal Institution of Chartered Surveyors (RICS). The report is prepared by RICS registered valuers who have to follow the rules and guidelines included into the Red Book.
The RICS Red Book does not teach a professional valuer how to do property valuations and asset valuations. A Red Book sets consistent standards for RICS registered valuers. It contains the following:
- Strict mandatory rules and guidelines for RICS registered valuers
- Duty of care
- Ethical valuation standards and global standards for RICS registered valuers to follow
- Qualifications of the valuer and the minimum content of a valuation
There are different situations when Red Book valuations need to be done. If, for example, you are going to inherit someone’s assets, inheritance valuation is performed. Valuations are done for probate in order to determine if estate is a subject of inheritance tax. According to the probate guide, people have to deal with the probate process after the death of their loved ones. Red Book valuations are also used in a divorce case and some other cases.
What is a Red Book Valuation on Property?
When people order Red Book valuations of properties, they can be sure that they get a fully researched and accurate report that reflects the market value of your properties. Valuation reports have to be transparent and easy to understand.
The main difference between red book valuation and market value is that red book complies with RICS standards while market value is based on factors like supply and demand.
Sometimes, it’s necessary to do property valuation for probate purposes. In order to estimate the market value, a chartered surveyor has to compare three properties that have been sold in the last 6 months and in the same area. Once submitted probates takes 9 – 12 months.
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How Long Does a Red Book Valuation Last?
A Red Book valuation report is usually valid for three months. But this term can be extended for another three months under certain circumstances. In order to let that happen the valuer has to conduct secondary research within 2 weeks after the report expires.
How Much Should a RICS Valuation Cost?
Red book valuation prices range between £150 and £800. The final cost largely depends on several factors such as property’s location, size and value. The whole procedure usually takes from 1.5 to 6 hours or even more. You will get a property valuation report within 5 working days after the inspection.
What are The Five Methods of Valuation?
There are five main methods which are used for estimating the market value of properties in the United Kingdom.
Surveyors use these methods when providing their services and undertaking valuations. These valuation methods include:
- Comparison method
- Investment method
- Profits method
- Contractor’s method
- Residual method
Every situation is different and requires one of these methods. Chartered surveyors have to meet certain valuation standards in each case. Now, we’ll give you insights into these valuation methods.
Comparison Method
The comparison method is traditionally used to estimate the value of properties based on the value of similar properties located in the same neighborhood. This method is extremely popular and is often applied for calculating the value of the residential properties. In order to get an accurate valuations, the real estate market has to be properly researched. A property has to be compared to the properties with the same characteristics. The property location, condition, size and availability of utilities have to be carefully analysed and taken into account.
Investment Method
The investment method is commonly used to determine the value of a commercial properties. It helps to calculate the potential income the property can generate if it is rented or leased out. In some cases, this method can be used to assess the value of a residential property as well. The investment and comparison methods use the variables got from the outside market.
Profits Method
The profits method is very often used to value different types of business premises such as malls, restaurants, pubs, hotels and others. This method is based on analyzing the operating income that business generates. Unlike the two previous methods, the profits method uses the variables received from the property and not from the market.
Contractor’s Method
The Contractor’s method of property valuation is used by investors, real estate developers and contractors when the other methods seem to be ineffective. This method is applied to estimate the value of some rare properties such as public libraries and oil refineries or the properties that appear on the market from time to time. According to this method, a surveyor applies the following formula of valuation: Cost Of Site + Cost Of Construction – Depreciation. But the vast majority of RICS registered valuers do not find this method reliable and apply it only when the other methods cannot be used.
Residual method
The residual method of a valuation is used when it is necessary to find out whether the properties or vacant land is suitable for development or redevelopment. The formula for the residual method of valuation is as follows: Land/Property = GDV – (Construction + Fees + Profit). This method is also considered inaccurate just because determining the costs and calculating valuation figure can be hard.
When to Choose a Red Book Valuation?
A Red Book valuation is essential in a number of different situations including:
- Divorce cases and other legal disputes
- Loan security assessment
- Tax liability partnership dissolution
- Red book valuation for probate
- Inheritance tax planning
- Capital gains tax situations
- Compulsory purchase
- Company financial reporting
Red Book valuations can be applied in many cases. If you need an accurate and clear valuation report, you should definitely rely on a Red Book valuation method.
