A solid property valuation is essential when providing estimates for probate purposes. Any estate worth more than £325,000 in terms the current threshold, attracts 40% inheritance tax above that value. The requirement for accuracy also comes into play when dividing an estate between two or more heirs. RICS probate valuations are a proven way to avoid disputes between parties.
What’s Wrong With Using an Estate Agent?
Some estate agents are inclined to value a property down for a quick sale. Others may overvalue it initially to obtain a mandate. This is miles apart from true market value. It is for reasons like this that HM Revenue and Customs only accepts property valuations by RICS members in good standing with Royal Institute of Chartered Surveyors.
Comparable Evidence for RICS Probate Valuations
A fair market value is not the same as the construction cost, or a pipe dream in the mind of an over-optimistic heir. It is actually the hypothetical price a willing seller and a willing buyer would agree on, without any pressure whatsoever.
If we assume that this is the case in a large percentage of sales, then we could use the average price agreed on as our benchmark. However, we would need factor out significant differences first, like number of rooms, etc. This in a nut shell is the art of using comparables in the context of RICS probate valuations.
Principles of Ideal Comparable Property Valuations
A comparable is an item as RICS valuator uses as input when assessing the value of their subject item of interest. They may use this same method when valuing assets other than property, provided they do not have absolute values like listed shares on the stock exchange, financial investments etc.
Here are some of the most important variables they would need to keep in mind:
- They must include several similar properties as comparables
- And the closer these are to matching the subject property, the better
- But the transaction dates must be recent to avoid the effect of cycles
- Moreover, they must be ‘arms-length’ to avoid the possibility of bias
- The transactions must be verifiable, and comply with local practice
- They must have concluded after discussions with several bidders
However, The Real World is Somewhat Different …
RICS probate valuations quite often pan out under less ideal circumstances. Some properties are unique to a varying extent, and something closely similar may only exchange hands rarely. If recently available sales are significantly different, then the valuer will have to use their skill and judgement to a greater extent.
Here are some circumstances under which comparable evidence may be questionable:
- Comparable real estate transactions are rare in the area of interest
- There are no recent transactions, so information may be dated
- Some purchasers paid more than average recent, realistic prices
- No recent sales closely match relevant factors of the subject property
- The real estate market is not transparent, e.g. in developing countries
Therefore, it can happen that comparable evidence is lacking, or is sufficiently vague to be unreliable. A RICS valuator has two choices when faced with this dilemma. These are (a) make a conditional valuation mentioning shortcomings, and (b) adopt a different valuation technique.
Alternative Approaches for RICS Probate Valuations
The Royal Institute of Chartered Surveyors Red Book Global Standards in VPS 5 provides for two alternative methods of property valuation. These are (a) the income approach, and (b) the cost approach.
- The income approach assesses the value of a property in terms of the income it generates. This income can be determined in two ways:
- The CONVENTIONAL METHOD whereby the value derives from net rental income, plus a capitalisation factor. Alternatively, the valuer may use the discounted cash flow factor based on rent, rental growth rate, discount rate, costs and disposal price at the end of the investment period using comparable evidence.
- The PROFITS METHOD using a business enterprise approach. In this instance a RICS valuer derives the income value from the trading potential, for example if the property were used to accommodate a profitable business.
- The third method in the Red Book Global Standards uses a cost approach to value property that is unlikely to sell on the open market, for example a public building. This determines a combined value taking (a) the depreciated cost of the building, and (b) the value of the land in account
When You Need Expert Advice, Speak to Avery First
Avery Associates provides a practical solution for bereaved persons, too swept up in their loss to focus on a property valuation. We have a panel of RICS Chartered Surveyors, who complete all types of valuation of property for the purposes of probate, and in full accordance with Inland Revenue guidelines and statutory bases too.
Speak to us first if you seek peace of mind, and impeccable service backed by professional indemnity insurance. Be assured of an accurate, timely RICS Red Book valuation of a home, commercial or retail location, or industrial property, for probate, inheritance tax and capital gains purposes. Call 002 640 0044 now.
