THE FORMAL APPRAISAL PROCESS

CHAPTER TERMS AND CONCEPTS
Appraisal process
Appraisal report
Assignment conditions
Client
Contractual conditions
Cost approach
Credible appraisal
Definition of the appraisal problem
Effective date of value
Exposure time
Extraordinary assumption
Form report
Hypothetical condition
Income approach
Intended use
Intended users
Letter report
2

CHAPTER TERMS AND CONCEPTS
Limiting conditions
Market data
Market exposure
Market value
Marketing time
Narrative report
Reconciliation
Restricted Use Appraisal Report
Sales comparison approach
Scope of work
Self-Contained Appraisal Report
Subject property
Summary Appraisal Report
Type of value
Value in exchange
Value in use
3

1. Explain the four steps in the appraisal process.
2. Name the six elements that define the appraisal problem.
3. Define the term scope of work.
4. Explain the difference between value in use and value in exchange.
5. Define the term market value, and explain how it differs from market price.
6. Outline the three approaches to value, and explain how they are used in appraisals.
4

The Appraisal Process
 Is Defined by USPAP
 USPAP must be followed by o Appraisers completing Federally Insured Transactions o Licensed or Certified Appraisers in Mandatory States o Most Professional Organizations require compliance with USPAP
5

Standard 1
 How an appraisal should be developed
Standard 2
 How an appraisal should be reported
6

I.
Identify the Appraisal Problem
II.
Identify Appropriate Solutions –
The Scope of Work
III.
Execute the Appropriate Scope of Work
IV.
Report Findings and Conclusions
7

The elements to be identified
1.
The client and any other intended users
2.
The intended use of the appraiser’s opinions and conclusions
3.
The type and definition of value
4.
The effective date of the appraiser’s opinions and conclusions
5.
The Subject of the Assignment and its relevant characteristics
6.
Any assignment conditions
8

Consider:
 Intended use of the appraisal and report
 What the appraiser finds out about the property, and
 What is important to the buyers of such property, as reflected by the market data
9

 The client engages the appraiser o The client defines the other intended users
 The client’s name must be in the work file o
Client’s name does not have to be in report
 Three key points for intended users: o Decision between client and appraiser at the engagement o Parties that are directly involved in appraisal o Only includes those to whom the appraiser must clearly communicate the results.
10

Different Users Have Different Needs
Federally Insured Institutions Require USPAP Compliance
Type of Report
 Self Contained
 Summary
 Restricted Use Report
11

Opinion of Market Value
 Most common type
 Must be agreed on at the beginning of assignment
 Requires an estimate of Exposure Time.
o time to sell prior to effective date
 Client may wish to have a marketing time o time to sell after the effective date
12

Must be Agreed on by the Appraiser and
Client at the start.
Three Possible Dates
1.
2.
3.
The effective date of value
The date of inspection
The date of the report
Date of Value May Be: o o
Retrospective – In past
Prospective – In future o Current
13

5. THE SUBJECT’S RELEVANT CHARACTERISTICS
Identification of Subject
 Address
 Legal Description
 Tax I.D. Number
 Map reference
 Survey
 Property sketch
 Photographs
 Personal property identified
 Property rights appraised o Fee simple o Leased fee o Other Partial Interests
14

1. USPAP
2. Supplemental Standards
3. Jurisdictional Exceptions
4. Extraordinary Assumptions
5. Hypothetical Conditions
6. Regular Assumptions and Conditions
7. Contractual Conditions
15

1. Defining the Scope of Work
 The extent of identification of the property
 The extent of property inspection
 The type and extent of data researched, and
 The type and extent of analysis employed to reach a conclusion.
16

How much Identification of a Property is
Necessary?
Legal Descriptions
Address
Tax ID numbers
Ground and Aerial Photographs
Property Rights?
 Fee Simple
 Leased Fee
 Leasehold
 Other
17

How Extensive the Viewing of the Subject
Property?
 Interior and exterior viewing?
 Drive-by appraisal?
 Desktop appraisal?
Appraisal must be Credible
 Appraiser must have adequate information from other sources for a drive by or desktop appraisal
 Appraisers view a property
 Home Inspectors Inspect
18

19

1. The Sales Comparison Approach to Value
2. The Cost Approach to Value
3. The Income Approach to Value
20

1. Three Types of Written Reports a.
Self-Contained Appraisal Report
• The report describes the material and analyzes to solve the problem b.
The Summary Appraisal Report
• The report summarizes the material and analyzes to solve the problem c.
The Restricted Use Report
• States the answer to the problem d.
With the Minimum required content
21

1. Letter Report
• Word Processed
2. The Form Report
• Generated by appraisal software
3. The Narrative Report
• Generated on narrative report generating software and/or word processed
22

•
•
•
•
•
•
•
•
•
•
•
•
Assessed value
Book Value
Capitalized value
Cash value
Depreciated value
Economic value
Exchange value
Face value
Fair value
Going concern value
Leased value
Liquidation value
Listing value
Loan value
Market value
Nuisance value
Potential value
Rental value
Salvage value
Use Value
Inheritance tax value
Insurance value
Value in foreclosure
Value in place
Each type of value needs its own definition
23

VALUE IN USE VS. VALUE IN EXCHANGE
Value in Use
• Value of an item or object to a particular user
• Value in Exchange
• Value of a thing to people in general
24

Market Value
 What a property should normally sell for, assuming a willing buyer and a willing seller.
Market Value for Federally-Related R.E.
Transactions
 ….the most probable price which a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller each acting prudently, knowledgeably, and assuming the price is not affected by undue stimulus.
25

Conditions
1. Typical Motivation
2. Informed Parties
3. Market Exposure
4. Terms of Sale
5. No Sales Concessions
26

1. Factors Influencing Price as Distinguished from Value: a.
Unusual financing b.
Distress sale c.
Forced purchase d.
Uninformed parties e.
Misrepresentation of facts
27

1. The Sales Comparison Approach to Value
2. The Cost Approach to Value
3. The Income Approach to Value
28

1. Investigate Comparable Sales
2. Compare Sales to Subject Property
3. Adjust for Differences
4. Arrive at Value for Subject
29

1. Estimate Land Value as if Vacant
2. Estimate the Cost to Build the Existing
Structure
3. Estimate the Amount of Accrued
Depreciation, or Loss in Value
4. Subtract Accrued Depreciation
5. Add Land Value to the Depreciated Cost of
Improvements
30

31

1. Estimate Market Rent and Potential Gross
Income
2. Estimate Annual Vacancy and Collection
Loss
3. Subtract to Arrive at Effective Gross income
4. Subtract Annual Operating Expenses from
Effective Gross to Arrive at the Net
Operating Income
5. Decide on Capitalization Method and Rate
6. Capitalize Net Income into an Estimate
(Opinion) of Value
32

EXAMPLE OF INCOME APPROACH
The appraiser selected the direct capitalization method and a 10% capitalization rate, based on the market rate analyzed.
33

SUMMARY
The steps in the appraisal process are to:
1. Identify the appraisal problem to be solved
2. Identify appropriate solutions
3. Execute the appropriate scope of work
4. Report the findings and conclusions reached
34

SUMMARY
The six elements of defining the appraisal problem are:
1. The client and any other intended users
2. The intended use of the appraisal and report
3. The type and definition of value
4. The effective date of the appraiser’s opinions and conclusions
5. The subject of the assignment and its characteristics
6. Any assignment conditions
35

SUMMARY
The scope of work includes four issues:
1. The extent of property identification
2. The extent of property inspection
3. The type of data researched and the extent of research
4. The types and extent of data analyses used
36

SUMMARY
Three approaches are used for valuing real estate:
Sales Comparison / Cost / Income
1. The sales comparison approach is often the most reliable.
2. The cost approach estimates the value of a property by adding its land value to the estimated cost to replace the existing structures less depreciation.
3. The income approach compares the income-producing capability of the property with that of properties that have been sold.
37