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What is the article about?
In this week’s blog, we share our practical guidance for comparable evidence research. This builds on our past blog on the RICS Professional Standard (formerly a Guidance Note) Comparable Evidence in Real Estate Valuation.
This is essential reading for any RICS APC or AssocRICS candidates who are researching comparable evidence in relation to the Valuation, Leasing & Letting, Purchase & Sale and Landlord & Tenant competencies, amongst others.
A quick refresher…
There are five main valuation methods, of which the comparable method is one. This involves comparing similar transactions to give an indication of value.
RICS define comparable evidence as an ‘item of information used during the valuation process as evidence to support the valuation of another, similar item’.
What makes a good comparable?
Comprehensive, i.e. ideally a valuer needs more than one transaction. At least three, if not five plus, would be even better
Very similar or identical
Recent
Result of an arm’s length transaction
Verifiable
Consistent with local market practice
Result of underlying demand, i.e. sufficient bidders to createan active market
Where can I find comparable evidence from?
In Jen’s professional work for her RICS-regulated surveying firm, Projekt, she often has to find comparable evidence for lease renewals and rent reviews. We will focus on finding evidence to support an opinion of rental value in the rest of this blog.
This is the process that Jen follows when researching comparable evidence:
Use published online databases, such as CoStar or EIG, to identify potential comparables
Look for done deals, such as lettings, lease renewals, rent reviews and regears. Consider the weight allocated to each under the hierarchy of evidence (i.e. to what extent is the transaction at arm’s length?)
Look for investment or auction sales (completed deals or properties being marketed), where you may be able to extract details of key leasing events. Some may be historic so ensure you keep a close eye on any transaction dates
Look for properties that are available to let. Although not done deals, these may give an indication of ceiling (quoting) rents and the market dynamics in a specific location. Speaking to the agents involved may give you further leads on completed deals nearby
Speak to active local and national agents in the area. Some online databases have a search function to identify which agents have done deals in an area recently. You are likely to identify evidence not published on the online databases this way, including rent reviews, regears and off-market transactions
Use a database such as The Requirement List to identify active requirements in the area and the level of rents that the market might pay
Look at nearby properties in the area that could be potential comparables and use the Land Registry to identify landlord or tenant contacts, or to download any leases that may be available
Do I need to verify the information?
For each comparable identified, you MUST speak to the agent involved to verify details of the transaction. Ideally, speak to both parties to the transaction as they will often have differing analyses or views!
What details should I record?
We recommend that as part of your discussions and due diligence, you should record the following details:
Address
Type of property
Tenure, i.e. freehold or leasehold
Location
Lease terms, if applicable
Brief description
Floor areas
Transaction type and date
Value and any incentives
Analysis
Parties involved
Source of information
Any issues relating to reliability
Date the evidence was verified
Having a simple template proforma to record key details is best practice. This can then be saved on your file for future reference.
What do I do with the evidence?
You will then need to analyse your comparable evidence:
Analyse the net effective rate, i.e. taking any incentives into account
Collate evidence in a schedule or matrix
Adopt a common measurement or comparison standard
Adjust quantitatively and qualitatively using the hierarchy of evidence and other key considerations (including your own knowledge and experience)
Analyse the evidence to form your opinion of value
Stand back and look to sense check the final valuation figure
Report your opinion to the client, including any negotiation strategy or quoting terms, depending on the instruction in hand
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Stay tuned for our next blog post to help build a better you.
N.b. Nothing in this article constitutes legal, professional or financial advice.