Australia & New Zealand
Valuation and Property Standards

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15.0 Client Focus

15.3 Instructing Valuers

Instructing Valuers 15.3 (PDF 72 KB)

A Guide for the Mortgage Industry

  • This Element of Client Focus is divided into two parts:
    • • Part A --- Instructions and Supporting Documentation (what you should provide when instructing)
    • Part B --- Report Content (what valuers should provide in their reports) plus Annexures:
      • • 1 --- Model Standing Instructions (part of terms of engagement)
      • • 2 --- Model Instruction Proforma (individual valuation instruction)

Part A - Instructions and Supporting Documentation

1.0 Introduction

  • 1.1 Purpose

    • The purpose of this Client Focus element is to provide clients in the mortgage industry who are involved in instructing Valuers, with an understanding of what information should be supplied when ordering a valuation. It also provides an understanding of what information could be expected to be included in the Valuer's report.
  • 1.2 Scope

    • The information contained in this element is for the understanding and benefit of clients in the mortgage industry who instruct Valuers or rely on their reports. This document may also be used by Valuers to assist in the service they provide to clients.
  • 1.3 Expert and Impartial Report

    • For mortgage purposes, a Valuer provides an expert and impartial report on the property, highlighting the security risks associated while incorporating an estimate of the Market Value of a property. Valuers also assess, classify and reflect the separate influences that create, maintain or diminish value. Instructions to Valuers are an essential part of the process of obtaining a report that meets a lender s requirements and which addresses all the relevant issues.
  • 1.4 Seek Further Advice In Areas Outside Valuer's Expertise

    • There are many areas in which Valuers do not claim to be experts. These include, for example contamination matters, land surveys and legal interpretation of titles. Valuers will, however, if properly instructed report within the extent of their expertise, on the understanding that lenders will seek further advice where necessary on matters outside the Valuer s area of expertise.
  • 1.5 Responsibility and Disclaim or Limit Liability

    • Valuers should be encouraged to view, enquire, analyse and report. This will only occur if there is a clear understanding between lenders and Valuers of their respective areas of responsibility in relation to the lending and valuation process and of the Valuer s right to disclaim or limit liability for matters outside the Valuer s area of expertise.
  • 1.6 Market Value

    • The Australian Property Institute and Property Institute of New Zealand have adopted the International Valuation Standards Committee definition of Market Value:
      • the estimated amount for which an asset should exchange on the date of valuation between a willing buyer and a willing seller in an arms'length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently, and without compulsion .
    • 'Asset' includes property.
    • [Def. Market Value ]
      It is considered that the definition paraphrases the elements of Market Value as defined in Spencer v The Commonwealth and it is intended that it includes the essential elements of that definition.
  • 1.7 Alternative Value

    • When preparing mortgage valuations, valuers should exercise caution in understanding valuations based on the doctrine of continuation of the existing use where that used is a specialised use which is not regularly traded in the market place (i.e it can not be supported by a body of market transaction sales evidence).
    • In circumstances where a valuation is to be relied on for mortgage purposes of a property which is not regularly traded in the marketplace, a valuation on the basis of highest and best alternative use as zoned should be undertaken for mortgage fund advancement purposes. In other words, in the event that the specialised use which is not regularly traded in the market place were to cease, a mortgagee in possession would most likely sell the property based on its highest and best alternative use as zoned.
    • The definition of alternative use value is one in the same as market value, however ignoring the existing use and adopting the highest and best use of the property under the existing zoning, town planning and development constraints.
  • 1.8 General Purpose Instructions

    • These model instructions are for general purpose properties including commercial, industrial, retail, residential and other urban properties.
  • 1.9 Going Concern

    • A valuation of a property and business trading as a going concern may require the use of further headings, information and documents.

2.0 Instructions to the Valuer

  • 2.1 Letter of Instruction to the Valuer

    • A letter of instruction to the Valuer should state the Mortgagee s requirements and provide information to the Valuer in order to assist in the valuation. The information provided can reduce the time taken to complete the valuation, and, more importantly, provide the Valuer with information necessary to provide sound advice to the potential mortgagee. Set out hereunder, are the key elements of the letter of instruction, and the supporting documentation which, if available, should be provided. With specialised properties, such as hotels, motels and similar trading concerns, trading figures constitute essential information.
  • 2.2 Form and Content

    • Instructions to a Valuer should issue from the Mortgagee or its representative, not the borrower. In New Zealand it remains common practice for instructions to be issued by either the borrower or mortgage broker. They should be in writing (or confirmed in writing if verbal initially) and should clearly specify:
      • • The instructing party and/or,
      • • The party or parties to whom the valuation is to be addressed.
      • • The use to which the valuation will be put, ie. mortgage lending, provisioning decisions on existing loans, mortgage sale advice or other purpose.
      • • The basis of the valuation will be Market Value (unless requested otherwise).
      • • The interest to be valued, ie. freehold -- fee fee simple; leasehold -- lessor or lessee s interest; fractional freehold -- partial interest.
      • • The nature of the property - owner occupied or subject to tenancy.
      • • The date of valuation will be the date of inspection (unless requested otherwise).
      • • That the valuation should be in accordance with appropriate API & PINZ Practice Standards and Guidance Notes.
      • • Any additional matters which the valuation should address.
      • • The basis of and responsibility for the Valuer s fee if not already agreed.
      • • Details for access and contacts for information and supporting documentation.
      • • Requirements in relation to supporting documentation.
  • 2.3 Fee Paid by Instructor not Borrower

    • If there are difficulties in determining the basis of the valuation, advice should be sought from the Valuer. The Valuer s fee should be negotiated and paid by the instructing party, not the borrower. In New Zealand it remains common practice for the borrower to issue instructions and pay the fee.
  • 2.4 Frequent Instructions warrant Standing Instructions

    • Where instructions are issued frequently to the same valuer or firm, it may be appropriate to incorporate terms of engagement into a set of Standing Instructions. As firms often have many clients, there is therefore the likelihood of multiple sets of instructions.. The Institute therefore supports the adoption of the Model 'Standing Instructions' which are provided for you as Annexure 1 to this element.
  • 2.5 Instruction Pro-forma

    • Where instructions issue frequently and are of a consistent nature, it may be expedient to use a pro-forma. A Model Instruction Pro-forma is provided as Annexure 2 to this element and may be used or adapted for your use. The API will forward the layout by E-Mail or on disc should you wish, email national@api.org.au

3.0 Supporting Documentat ion

  • 3.1 Supporting Documentation

    • The Valuer will review a number of documents in his investigations and is required to consider all matters affecting the value of the proposed security. Delays in completing a valuation are sometimes caused by the failure to provide all relevant details. The following discussion on individual documents should assist in determining those which should be available and provided with the letter of instruction. Information and documentation provided by the borrower to the
      Instructor should be identified as such by the Instructor when forwarding this to the Valuer, with where appropriate, an indication as to whether the Valuer should rely on the information or documentation or make further inquiries.
  • 3.2 Certificate of Title Folio Identifier Survey

    • It is highly preferable that a current title search is considered by the Valuer and commented upon. Should a current search be available, it should be provided by the Instructor. If this is not available, the correct title description including Lot and Plan number, together with the Folio Identifier or Certificate of title reference, should be provided.
    • If a site survey is available this should also be included.
  • 3.3 Encumbrances

    • The Instructor should provide all details within its knowledge on matters affecting the title, for example, details of encumbrances, restrictions or encroachments. It is the Instructor s and/or solicitor s responsibility to confirm title
      information, encumbrances and restrictions set out in the Valuer s report and any divergence should be referred to the Valuer for comment and amendment of the valuation if necessary.
  • 3.4 Town Planning

    • Obtaining a zoning certificate is time consuming and costly and often an excessive requirement for valuation purposes.
    • The Valuer may make independent investigations but should qualify the valuation appropriately. If a current zoning certificate is available it should be provided to the Valuer. The Valuer should be requested to indicate the source of town planning inquiries and to comment on the current use of the property in relation to the zoning.
  • 3.5 Certificate of Compliance

    • Unless construction is obviously not in accordance with building regulations and other ordinances, the Valuer is likely to qualify the valuation to the effect that it is assumed that a Certificate of Compliance is available. Lending institutions may delay advancing funds until the certificate is obtained. It is important, therefore, for intending mortgagees to determine and advise the extent of documentation required. The borrower may be requested to provide information on compliance in some cases.
  • 3.6 Building Plans & Specifications

    • Where a proposed or recently completed building or development is involved, detailed building plans and specifications if available, or schematic plans to scale, are of great assistance to the Valuer, and should preferably be a council-approved copy.
  • 3.7 Tenancy Details

    • In most circumstances, depending on the nature of a valuation, the Valuer should not be requested or encouraged to rely solely on a tenancy schedule. The Valuer will usually need access to all lease documents and any supporting documents or collateral agreements of which the lender is aware. If only one or two leases exist, copies should be provided otherwise arrangements should be made for all leases and associated documentation to be available in one location for detailed analysis by the Valuer. A vacancy history should be provided.
    • The Valuer may require the owner s consent to verify some lease details with tenants. Any tenancy which is not at arms length from the owner of the property should be identified to the Valuer.
  • 3.8 Outgoings

    • For income producing properties, year-to-date budgeted outgoings with actual year-to-date comparisons, are required. If available, actual outgoings for the previous year and estimated outgoings for the ensuing year should also be provided.
    • Any extraordinary items, such as capital works, should be brought to the attention of the Valuer.
  • 3.9 Miscellaneous Documents

    • Documentation on pest control, structural stability reports, environmental audits, Department of Main Roads searches, soil surveys, permissive occupancies, licences, environmental impact statements, engineering reports on plant and machinery, should all, if possible, be made available to the Valuer. It is rare for all these to be made available, however, if they are, the end report will give the user more confidence in the property as a security. If any of these searches is not provided, the Valuer may qualify the report appropriately.
  • 3.10 Trading Figures

    • Where the property and business operates as a going concern , trading figures must be supplied or made available. Ideally an audited three year history of trading figures should be provided.
    • Insufficient or poorly documented trading figures are likely to affect the marketability and the value of the going concern and its suitability as a security.
  • 3.11 Turnover

    • Shopping centre leases often contain clauses where rent is based on turnover. To assist the Valuer to assess the potential rental growth, a full history of turnover should be available. Three years or more is preferable. However, due to changes of ownership and the constant re-mixing of centres, the Valuer may only have one or two year s trading
      results to consider.
  • 3.12 Environmental Issues

      • Where an Instructor has an environmental assessment report or other environmental documentation which may affect the value of the property, this should be provided. Should the Instructor be aware of any matters which could affect value, or should they have specific environmental policy directives for the type of property, or for the type of industry located on the property, the Valuer should be advised before the time of inspection. The Valuer is not usually able to provide expert advice on site contamination and this should be acknowledged by lenders so as to encourage Valuers to attempt to identify and report on any possible problems.
    • The Lender or its solicitor should carry out a search of the STATE or LOCAL AUTHORITY CONTAMINATED SITES REGISTER where it deems it necessary and advise the Valuer of the results.
  • 3.13 Properties Under Construction "As If Complete'

    • Where the Valuer is required to value a property in a completed state as at the date of valuation and reflects current market conditions), the Instructor should provide or arrange supporting documentation for the development. The Valuer should always be requested to provide an 'as-is' valuation (valuing the property with the project to its current stage) as well as the 'as if complete' value.
  • 3.14 Report Qualifications

    • Where a Valuer has been instructed to value a property subject to certain assumptions (completion of construction, signing of leases, etc) the Valuer should qualify the report accordingly. It is important that the lending officer confirms such events (in the case of lease signing) or withholds funds (in the case of construction).
  • 3.15 Verbal Enquiries

    • Due to time delays in obtaining certain information (eg. town planning information) the Valuer may rely on verbal inquiries in these circumstances and the report should be qualified accordingly.

Part B - Report Content

4.0 Report Content

  • 4.1 Comply with Institute Standards and Guidance

    • The Australian Property Institute and the Property Institute of New Zealand have developed and continues to develop Practice Standards and Guidance Notes as well as Client and Business Focus sections. These elements, along with the Code of Ethics and Rules of Conduct are incorporated in the Valuation and Property Standards Manual. A lender may elect to simply instruct that the valuer should comply with, and give due recognition to, these elements as far as they apply to the type of property, purpose, issues and professional conduct in the provision of the service including the content of the report.
  • 4.2 Report Headings

    • Alternatively, the Instructor may choose to indicate to the Valuer what should be included or emphasised in the valuation report. This may be done conveniently by the provision of a list of headings indicating matters to be reported upon.
  • 4.3 Common Report Headings

    • The matters considered by a Valuer will vary according to the type of property (industrial, retail, commercial, special purpose, etc) being valued and the purpose of the valuation. They could include the following:
      • • Valuation Summary
      • • Introduction
      • • Land & Title
      • • Location
      • • Site Description & Services
      • • Town Planning/Resource Management
      • • Statutory Valuation & Charges
      • • Improvements
      • • Environmental Matters
      • • Comments on the Property
      • • Basis of Valuation
      • • Tenancy Details
      • • Valuation Rationale or Approach
      • • Market Review or Summary
      • • Risk Analysis
      • • Valuation
      • • Qualifications and Disclaimers
    • The degree of detail provided may also be varied to suit the clients' requirements. The Valuer should consider the property in relation to relevant Institute Practice Standards and Guidance Notes.
    • Pro-forma reports may be provided on some properties. The Australian Property Institute has a pro-forma report format known as PropertyPro Residential Valuation and Security Assessment (with attendant Supporting Memorandum) specifically for mortgage purposes. Its use is encouraged where a brief report is required on individual residential properties.
    • PropertyPro is not applicable in New Zealand at this stage.
  • 4.4 Annexures or Report Inclusions Where Appropriate

    • The report may be supplemented by annexures:
      • • Location Map
      • • Certificate of Title or Folio Identifier
      • • Other Searches
      • • Deposited Plan
      • • Strata/Unit Plan
      • • Zoning Certificates (if available)
      • • Tenancy Schedule
      • • Sales Evidence* * If not in the body of report.
      • • Rental Evidence*
      • • Valuation Calculations*
      • • Any Other Relevant Documentation
      • • Photographs
      • • Authorities/Persons Consulted
  • 4.5 Report Content

    • The Valuer should incorporate the headings required by the Instructor and address points contained within each heading where such points are appropriate for consideration. Information supplied by the Instructor and assumptions required to be made should be treated as follows:
  • 4.6 Information Provided Critically Appraised

    • Information provided by a borrower or by any other party (including the lender) should be verified by the Valuer as far as possible and critically appraised.
  • 4.7 Defined Assumptions

    • If instructions include the requirement to base the valuation on defined assumptions, the assumptions should be acknowledged and included in the Valuer s report.
  • 4.8 Unrealistic or Unusual

    • Any assumptions or instructions which are either unrealistic, unusual or abnormal should be drawn to the attention of the lender and highlighted in the report. In some circumstances the requirements of the instructing party may be such that the instructions should be declined.
  • 4.9 Contents

    • Valuation Summary
      • A comprehensive style report will usually feature an executive style summary prior to the body of the report. As well as capturing the essence of the report and highlighting any significant risks, it will usually include a certified valuation.
    • Introduction
      • • The person/party for whom the valuation is being prepared.
      • • Details of the instructions including any special conditions and/or assumptions.
      • • The date and basis of the valuation.
      • • The purpose for which the valuation is to be used, e.g. mortgage purposes.
    • Land and Title
      • • The title reference of the property and the title description.
      • • The name of the registered proprietor(s).
      • • The identification and reporting of title encumbrances such as easements, covenants, rights of carriageway. Comments should be made on the effect of any such matters under the valuation section of the report.
      • • Note which leases are registered on title and also note their expiry dates.
    • Location
      • • A general description of the location of the property and its access, the availability and accessibility of public transport.
      • • Comments on the nature of the surrounding development and land use.
      • • Proximity to major centres, educational facilities and retail facilities.
      • • Special features relating to the property such as views, adjoining developments, recreational facilities, etc.
      • • Any signs of apparent potential contamination from surrounding properties.
    • Site Description and Services
      • • Comment on the nature of the site, the dimensions and area, any positive or negative features and the siting of any buildings.
      • • Identify the services connected and available to the property.
      • • Comment on any potential flooding or landslip problems.
      • • Comment on site accessibility, roads and the nature of the traffic in the area.
      • • Visually identify any site problems such as any readily apparent contamination, drainage problems, obvious encroachments, filled ground.
      • Comment on any other relevant factors such as alternative access, impact on property of adjoining or neighbouring development.
    • Town Planning/Resource Management
      • • The report should provide details on the current zoning/planning area.
      • • Comment if the use of the property constitutes a non-conforming use under the town planning guidelines and whether the property has the apparent benefit of existing use rights.
      • • Comment on development codes, site ratios, development guidelines and densities where appropriate.
      • • The Valuer should inquire, if possible, as to any intention of Council to amend the planning scheme and if the property is affected by any detrimental or beneficial planning proposals.
      • The Valuer should provide brief details of any current development consent affecting the property and any conditions to that consent affecting the valuation or the proposal.
    • Statutory Valuation and Charges
      • • Provide relevant information regarding statutory valuations and assessments for rating and taxing purposes.
      • Improvements
      • • Provide a description of the improvements including the materials used in construction and the accommodation provided with, where appropriate, gross building areas and/or net lettable areas. It may be necessary to define these terms.
      • • Comment on any detrimental features or unusual matters and the requirement for refurbishment or upgrading.
      • • Comment on the age and condition of the improvements including observable building deterioration and any recent upgrading/refurbishment works. Emphasise any adverse structural features.
      • • Where appropriate the Valuer should comment on the suitability of the improvements to the current use of the
        property and on any economic or functional obsolescence factors.
      • • Comment on the specialised nature of any of the improvements or features of the property.
      • • Comment on possible alternative uses particularly for specialised properties.
      • • Comment on any obvious non-compliances with statutory codes or fire provisions and recommend any expert advice where necessary.
      • • Comment on the effect of any outstanding orders where these are discoverable by reasonable verbal enquiry.
      • • For development proposals a description should be provided under the heading 'Proposed Improvements' and comment should also be made on any condition of the development consent affecting the proposal.
    • Environmental Matters
      • • The existence of any past, current or potential environmental hazard or contamination should be reported to the lender if identified by the Valuer. If necessary the Valuer should advise the requirement for an environmental audit before proceeding with the valuation.
      • Where an adequately detailed environmental assessment report is available the Valuer should comment, if possible, on the effect of the contamination on the value and marketability of the property.
    • Comments on the Property
      • • A summary comment on the property may be appropriate especially relating to how they affect the marketability of the property:
      • • Locational factors both positive and negative.
      • • The overall state of the improvements and their functionality.
      • • Foreseeable or likely changes to or affecting the property.
      • • Actual or potential obsolescence factors affecting the buildings and the property.
      • • Observations in relation to statutory compliances.
      • • Any other features, disadvantages or unusual features.
    • Basis of Valuation
      • • The Valuer will provide an assessment of the Market Value of the property as at the date of inspection.
      • • Owner occupied properties shall be valued on a vacant possession basis for valuations for lending purposes.
      • • Tenancies or leases which are not at arms length should be ignored.
      • • The valuation should (where applicable) indicate inclusions and exclusions within the valuation assessment.
      • • The Valuer should consider the highest and best use before arriving at the valuation.
      • • Any assumptions made by the Valuer should be clearly highlighted under this heading.
      • • Information provided by the intending borrower must be critically assessed by the Valuer and acknowledged in the report.
    • Tenancy Details
      • • The valuation shall have regard to the existing tenancy position, subject to the points under 'Basis of Valuation'.
      • • Where the property has lease structures in place, the Valuer will provide details of tenancy information either within the body of the report, or as an annexure.
      • • The Valuer will have regard to and confirm the actual rentals received, and should comment on current market rental levels, potential future vacancies, re-lettability, letting-up allowances and costs and teh tenants' liability for the payment of outgoings.
      • • The Valuer will have regard to the impact of impending and other rental reviews, the basis of such reviews, the remaining term of each lease (and option periods) and other relevant matters. If leases have not been sighted the
        Valuer should clearly state this in the report.
      • • A schedule of arrears of rental and outgoings should be obtained if applicable and details of any tenancy disputes.
      • • The Valuer is to comment on achievability of rental levels for proposed developments, letting up periods, incentives required and competition in the market from other similar developments.
    • Valuation Rationale Or Approach
      • • The Valuer will indicate to the mortgagee the basis upon which the valuation has been assessed, i.e. capitalisation of net income, direct comparison, summation or discounted cash flows.
      • • Details of comparable sales and other market evidence should be discussed in relation to the subject property. Where the Valuer has selected one or more methods of valuation, all matters considered in these methods should be outlined or detailed for the mortgagee, eg. rental shortfalls or overages, identification of outgoings, allowances for continuing vacancies, items identified as being of a capital nature for which an allowance must be made, monies required to complete the construction of the property, profit and risk factors, letting up periods, note of salient assumptions made within the discounted cash flows as to rental growth, outgoings growth, terminal yields and discount rates.
      • • A reconciliation of the various valuation approaches used may be required and the Valuer should justify the conclusions
        accordingly.
      • • Advise on what level of current and potential competition exists in the market for the letting and sale of the property.
    • Market Review or Summary
      • • Valuers should provide an overview of market conditions in relation to the property being considered and comment in relation to supply and demand. There should be some identification of the kind of demand, ie. owner occupier, investor or other and the general trends in the market which are apparent at the time.
    • Risk Analysis
      • • Valuers should provide a Risk Analysis appropriate for the type of property and its Market Value.
    • Valuation
      • • This will certify the Market Value of the property at the relevant date for mortgage lending purposes subject to any qualifications in the report.
      • • The Valuer should certify if requested that neither the valuer nor the firm has any interest, financial or otherwise in the property or the outcome of the loan application.
      • • For properties under construction or development the valuation figure should be CLEARLY IDENTIFIED AS A VALUATION 'AS IF COMPLETE'. This should be subject to the issue of the appropriate building or other certificates and a final confirmation by the Valuer at completion.
    • Qualifications and Disclaimers
      • • The Valuer may include a qualification as to the intended use of the valuation identifying the party or parties relying on the report.
      • • Any qualifications on other matters contained in the report, should be included within the body of the report at the appropriate place, and/or next to the valuation, and/or as an annexure.
      • • Any disclaimer required by the Valuer s professional indemnity insurer should be included.
      • • Any other disclaimer.

Annexure 1 -- Model 'Standing Instructions'

<Lender s Name>

PREAMBLE

This document serves to set down the professional and service standards required by <Client Name> as lenders, engaging <Firm Name> as valuers to report on property for mortgage purposes.

It is set down in two parts:

  • Part A -- Professional Standards
  • Part B -- Service Standards

PART A - PROFESSIONAL STANDARDS

  • 1. <Client Name> recognises that the Australian Property Institute (API) / Property Institute of New Zealand (PINZ) is the representative professional body for property professionals including valuers.
  • 2. The API/PINZ has developed and continues to develop Practice Standards and Guidance Notes as well as Client Focus and Business Focus sections. These elements, along with the Code of Ethics and Rules of Conduct are incorporated in the Valuation and Property Standards Manual.
  • 3. <Client Name> requires <Firm Name> to comply with, and give due recognition to, these elements as far as they apply to the type of property, purpose, issues and professional conduct in the provision of services to <Client Name>.

PART B - SERVICE STANDARDS

The Lender

For its part <Client Name> as lender, agrees to supply:

  • • Instructions in writing which will normally be forwarded by <means>.
  • • Information as recommended in the API / PINZ document Client Focus 2 sufficient for <Firm Name> to undertake its instructions. Should <Firm Name> consider that insufficient information has been provided for the purpose of the assessment and the type of report required, <Client Name> should be contacted immediately.

<Client Name> will pay accounts by <method> and on a <time> basis.

The Valuer For its part, unless specifically instructed to the contrary, <Firm Name> as valuers, will delegate specific instructions to a qualified and appropriately experienced member of the firm (unless a particular valuer is nominated) and agrees to provide:

Report Format <specify>

Turn Around Time <specify if appropriate>

Report Delivery <specify method(s) if appropriate>

<Firm Name> encloses evidence of its current Professional Indemnity Insurance Policy in the sum of $<amount>.

Signed: <Client>
Signed: <Firm>

 

Annexure 2 - Instructions for Valuation & Security Assessment