Appraisal
unbiased estimate of the nature, quality, value or utility of an interest in or aspect of identified real estate and related personalty as of a certain date.
Steps in the appraisal process
1. define the problem and the scope of work
2. Collect, record, and verify the required data
3. Determine the property's highest and best use
4. Estimate the land value
5. Use ALL THREE approaches to estimate value (cost, income, and sales comparison)
6.
Appraisers divide the collected data into two primary classes:
Specific data
General data
Specific data
This is information and details about the subject property, as well as data (used for comparison) about comparable properties' costs, income and expenses, sales and other relevant information.
General data
This is information about the property's location - its country, region, city, and, most importantly, its neighborhood. The neighborhood helps the appraiser determine those social, economic, physical and political influences that directly impact the prope
What is the first step in the appraisal process?
Define the problem and scope of work
What does the appraiser do after he or she decides which value approaches to use?
Determine the type of data needed and the sources to be consulted, and then collect the data
Describe the difference between specific and general data.
Specific data is information and details about the subject property and the comparable.
General data is information about the property's location - its country, region, city, and neighborhood.
What is the definition of highest and best use?
The definition of highest and best use is that use that is
Legally permissible
Physically possible
Financially feasible
Maximally productive
It is also important to note that land values and improvement values may change independently of each other, as improvements are subject to depreciation, while land is not.
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Some of the techniques used in valuing the land component are:
direct sales comparison
allocation
extraction
subdivision development analysis
land residual
ground rent capitalization
Direct sales comparison
Sales of comparable vacant parcels are analyzed and adjusted to indicate a value for the subject land.
Allocation
a typical ratio of land value to total value is derived from comparable properties and applied to the subject
Extraction
land value is estimated by deducting the depreciated cost of improvements on a property from the total sale price of the property.
Subdivision development analysis
costs and profit are deducted from estimated gross sale prices of subdivided and finished lots, and net sales proceeds are discounted to present value.
Land residual
net operating income attributable to the land is capitalized at market rates to obtain land value.
Ground Rent Capitalization
ground rent of subject is capitalized at market rates
What is usually the most reliable method for estimating land value when comparable sales are available?
Sales comparison
Cost approach to value
the appraiser estimates a property's value by adding the land value to the depreciated value of any improvements to the property.
Depreciated value of improvements is NOT the same as either the replacement cost, which refers to
the cost associated w/ buying a replacement copy of the item, or the reproduction cost.
Reproduction cost
the expense of reproducing an exact copy of the item, including its improvements and its flaws.
The cost approach is often the only reliable approach when
dealing w/ special-use properties such as public or governmental structures, marinas and unique properties, or on newer structures which have not yet suffered any significant depreciation, but is not considered as reliable as other approaches for valuing
Income approach
to estimate the value of properties that produce income, usually from rent paid on leases. These approach assumes that an investor will purchase a property based on the future income stream the property will produce. Also assumes that an investor will not
Sales Comparison Approach
appraiser examines the price (or price per unit area) of similar properties recently sold or currently being sold in the marketplace to come up w/ comparable value assessments.
In the reconciliation step, the appraiser looks at each approach to value and all the data used to determine:
the APPLICABILITY of each approach to the property type and the appraisal problem
the RELIABILITY of the data and data sources
the ACCURACY of all calculations and logic used in deriving value conclusions
the QUANTITY of relevant evidence provided by each
The appraiser's last duty in conducting an appraisal is to create the appraisal report, which can be produced in any of the following forms:
short-or long-form narrative reports
form reports
letter or oral reports
In general, the appraisal report must:
State the purpose and intended use of the appraisal.
Identify specifically the real estate and real property interest being appraised.
State the value to be estimated.
Explain the extent to which data was collected, confirmed, and reported.
Specify both t
List and describe three techniques used to value a land component.
Direct sales comparison�sales of comparable vacant parcels are analyzed and adjusted to indicate a value for the subject land.
Allocation�a typical ratio of land value to total value is derived from comparable properties and applied to the subject.
Extrac
What does replacement cost include?
All the costs of building a house or other real estate improvement from the ground up and having the same utility as the one being valued, but with a modern design, new materials and current standards of workmanship.
How does the income approach work?
The income approach capitalizes a single year's income or discounts a projected income stream to derive an indication of the property's value.
What forms can appraisal reports take?
Short- or Long-Form Narrative Reports
Form Reports
Letter or Oral Reports
Valuation
the process of estimating the value of an identified interest in specific property as of a given date. The purpose is largely to determine a property's market value.
In addition to market value, other types of value are:
investment value
insured value
use value (value-in-use)
mortgage value
Investment value
the amount of the return on an investment that an income-producing property will produce.
Insured value
the face amount a casualty or hazard insurance policy will pay in case a property is rendered unusable
Use value (also known as value-in-use)
the value the property holds for the owner.
Several factors contribute to use value:
income- important because investors will pay for the income flow that ownership brings them.
appreciation- property generally increases in value over time
use- the specific use determines its value and its benefits
tax benefits- property ownership could y
Mortgage value
the value the lender places on a property as collateral for the loan, especially in the event of a foreclosure when the lender must recover the debt through the sale of the property.
Exchange value
the value that results from comparing the property to other similar properties on the open market. real estate agents are concerned with this value.
Reproduction value
The value based on the cost of constructing a precise duplicate of the subject property's improvements, assuming current construction costs.
Replacement value
The value based on the cost of constructing a functional equivalent of the subject property's improvements, assuming current construction costs.
Salvage value
nominal value of a property that has reached the end of its economic life; also an estimate of the price at which a structure will sell if it is dismantled and moved
Assessed value
value of property as estimated by a taxing authority as the basis for ad valorem taxation
condemned value
The value set by a county or municipal authority for a property which may be taken by eminent domain.
Depreciated value
a value established by subtracting accumulated depreciation from the purchase price of a property
Rental value
an estimate of the rental rate a property can command for a specific period of time.
Evaluation
a study of nature, quality, or utility of certain property interests in which a value estimate is not necessarily required.
Evaluation looks at a number of economic principles that ____________ the value of a property.
influence
Anticipation
the benefits a buyer expects to receive over the period of time he or she has the property influences the decision to purchase it.
Assemblage
When two adjacent pieces of property are joined together, the value of the one larger parcel may be greater than the value of the two separately.
The extra value created by merging two parcels is called
plottage value
Change
Both market conditions and a property's physical condition change constantly over time. These changes affect the benefits of the property.
Principles of value
conformity
competition
contribution
diminishing return
substitution
supply and demand
highest and best use
progression and regression
Market value is the highest price a buyer is willing to pay and the lowest price the seller will accept, under these conditions:
the market is open and competitive.
the property is exposed in the market for a reasonable period of time
both buyer and seller are fully aware of market conditions
Both buyer and seller are acting with no undue pressure.
Buyer and seller are not related.
Market value vs. Market price
value- opinion of the value of a property
price- the actual sales price
Two types of cost
direct
indirect
Direct costs
hard costs, includes the cost of labor and materials
Indirect costs
support a given project, includes
Administration costs
Appraisal fees
Architectural and engineering fees
Attorneys' fees
Filing fees
Financing costs
Interest
Leasing costs
Recording fees
Surveyor fees
Taxes during construction
Explain the difference between market value and market price.
Market value is an opinion of the property
market price is the actual sales price and can in some circumstances be greater or lesser than market value.
What does the term anticipation mean as it relates to property value?
The benefits a buyer expects to receive over the period of time he or she holds the property
Grace and Paul spent $75,000 on a complete remodel of their kitchen. What does this mean to the value of their home?
It depends on what the market recognizes as the change in value the improved kitchen makes. A remodeled kitchen might add $50,000, $75,000 or even $100,000 to the value of a home.
Explain the principle of substitution.
Substitution says a buyer will not pay more for a home than what he or she would pay for another home that is equally desirable and available.
Sales comparison approach
based on principle of substitution. the value is determined by comparing the property being appraised w/ recently sold comparable (equivalent) properties.
Appraisers make adjustments based on these criteria in a sales comparison approach:
date of sale
location
physical characteristics
transaction characteristics
sale conditions
Cost approach most reliable for
properties that were built recently, since the appraiser can get access to the actual costs of the development and construction. Also good approach for special purpose buildings when data on income is not available or there are no comparable sales.
The cost approach attempts to
estimate either the property's replacement cost or reproduction cost.
Replacement cost
the construction cost at todays prices of producing a similar or equivalent structure. most popular when appraising older buildings w/ outdated features. Newer materials and techniques can replace the outmoded ones.
The cost approach has five steps.
1. Estimate the value of the land as if it were vacant and available for its highest and best use. (Note: Land does not depreciate in value.)
2. Estimate the cost of improvements - either replacement or reproduction cost.
3. Estimate the accrued depreciat
When computing the reproduction or replacement cost of a building, an appraiser would use one of these four methods.
1. Unit Comparison Method (Square-Foot Method)
An appraiser examines at least one newly-constructed building that is similar to the subject property and computes the cost by multiplying the cost per unit by the number of units. The unit of measurement is
Methods to determine depreciation
breakdown method
straight-line method
The income approach has five steps.
1. Estimate the potential gross income.
2. Estimate the effective gross income.
3. Estimate the net operating income.
4. Select a capitalization rate.
5. Apply the capitalization rate.
As the capitalization rate goes ___________, the value goes ____________.
down, up
The sales comparison approach is thought to be the most reliable appraisal approach for what kind of property?
single family homes
What's the difference between reproduction cost and replacement cost?
reproduction cost is cost at today's prices of producing an exact duplicate of the current building, including its improvements and its flaws.
replacement cost is the construction cost at today's prices of producing a similar or equivalent structure.
Jim is using the cost approach to appraise Greg's property. John has the following figures: land value $25,000, building value $137,000, total depreciation, $33,000. Using these figures, what will John estimate as the total value of the property?
129,000
The income approach is based on which two principles of value?
anticipation and substitution
Gross rent multiplier (GRM) and Gross income multiplier (GIM)
appraisers use these approaches to estimate the value of properties such as single family homes and duplexes that could produce income, but are not primarily income-producing properties like apt buildings and office space.
GRM formula
sales price / gross rent = gross rent multiplier
GIM formula
sales price / gross annual income = gross income multiplier
Estimated value using GRM formula
Monthly rent x GRM= Estimated Value
Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA)
1989. response to the savings and loan crisis. This act included provisions to regulate appraisal.
Title XI of FIRREA
requires that competent individuals whose professional conduct is properly supervised perform all appraisals used in federally related transactions.
As of January 1, 1993, such federally-related appraisals must be performed only by
state-certified appraisers.
USPAP (Uniform Standards of Professional Appraisal Practice)
set of standards, guidelines and provisions for the appraisal industry. It resulted from the cooperation of nine national appraisal organizations in 1985.
Provisions of USPAP
Competence
departure
The "standards" of USPAP
Recognized appraisal methods
Definition of due diligence
How appraisal results are reported
Disclosures and assumptions
Appraisal review
Real estate analysis
Mass appraisals
Personal property appraisals
Business appraisals
Compliance with USPAP
Compliance
Texas Appraiser Licensing and Certification Board (TALCB)
Texas established in 1991 to license, certify, and regulate real estate appraisals in this state.
TALCB has identified 5 levels of real property appraisal classification:
Appraiser Trainee
Provisional Licensed Real Estate Appraiser
Licensed Real Estate Appraiser
Certified Residential Real Estate Appraiser
Certified General Real Estate Appraiser
Appraiser Trainee reqs
Must be sponsored by a current certified general or certified residential real estate appraiser
Be at least 18 years old
Be a citizen of the united states of a lawfully admitted alien
Be a legal resident of TX for at least 60 days immediately before filin
Certified Residential Real Estate Appraiser License Req
A Bachelor's Degree or higher from an accredited college or university AND 200 TOTAL hours of specific AQB required Core Curriculum courses:
Basic Appraisal Principles (30 Hours)
Basic Appraisal Procedures (30 Hours)
15-Hour National USPAP or Equivalent (
Certified General Real Estate Appraiser License Req
Successfully complete 300 classroom hours of acceptable real estate appraisal related courses (with exams) which must include ALL Appraiser Qualifications Board (AQB) required topics.
Legally acquire 3,000 hours of acceptable real estate appraisal experie
New Appraiser Qualifications Board Reqs
The Appraiser Qualifications Board (AQB) has adopted the following:
Education and experience will have to be completed prior to taking the National Uniform Licensing and Certification Examinations.
Applicants for the Certified Residential and Certified Ge
For what types of property would an appraiser use a gross rent multiplier?
Properties such as single-family homes and duplexes that could produce income, but are not primarily income-producing properties.
What is the Uniform Standards of Professional Appraisal Practice (USPAP)?
The Uniform Standards of Professional Appraisal Practice (USPAP) is a set of standards, guidelines and provisions for the appraisal industry.
Who may perform appraisals in Texas?
Only persons who are licensed or certified appraisers or who are approved as appraiser trainees
What are the five levels of real property appraisal classification?
Appraiser Trainee
Provisional Licensed Real Estate Appraiser
Licensed Real Estate Appraiser
Certified Residential Real Estate Appraiser
Certified General Real Estate Appraiser