Elect 7 - Midterm Lesson 2

Fundamentals of Real Estate Appraisal

• Appraisal is the professional service performed by a licensed Real Estate Appraiser, estimating and rendering an expert opinion on real estate values.
• Appraisal is the act of determining the value of a property as of a specific date for a specific purpose.
• Appraisal is usually required when a real property is sold, financed, condemned, taxed, insured, or partitioned.

Principles of Appraisal

• Appraisal is the process of making an estimate of the value of any assets/property in accordance with generally accepted standards on a given date.
• Appraisal is an estimate or process through which conclusions of property value are obtained.
• Appraisal is the result of valuing a property, making a cost estimate, forecasting earnings, or any combination of two or more stated results.

Types of Appraisal

• Re-Appraisal: validates and updates the appraisal values of lot and housing unit.
• Independent Appraisal: an estimate of property value performed by an independent person or disinterested party.
• Mass Appraisal: the practice of appraising multiple properties by a systematic and uniform application of appraisal methods and techniques.
• Mass Appraisal Model: a mathematical expression of how supply and demand factors interact in a market.

Real Estate Valuation

• Asset Valuation: the valuation of land, buildings, and business or an entity or an interest therein.
• Business Valuation: the act of arriving at an opinion or estimation of the value of a business or entity or an interest therein.

Appraisal Concepts

• Arms Length Transaction: a transaction between parties who are knowledgeable, capable, and not under pressure.
• Betterment: an improvement that adds to the value of real estate, such as sidewalks, sewerage, etc.
• Heterogeneity Principles: states that no two lots have the same value although they may be adjacent to each other.
• Physical Depreciation: the loss in value due to impairment of physical condition.
• Capricious Value: value estimate derived by observing completed transactions involving a large degree of amenities or other personal and unpredictable factors.
• Component Value: value of those components created by the separation of the property interest.

Appraisal Methods

• Reconciliation: the adjustment process between comparable property utilities equivalent to that of being appraised.
• Replacement Cost: the cost of replacing an asset/property with an equally satisfactory substitute asset/property.
• Reproduction Cost: the cost to create a virtual replica of the existing structure/property, employing the same design and similar materials.

Principles of Value

• Principles of Surplus Productivity: net income remaining after the cost of labor, capital, and coordination have been paid.
• Principle of Utility: the meeting of desires and needs.
• Evolution of Value Theories: includes the Austrian School, Cost Theory, Scarcity Theory, Labor Theory, Theories of the Mercantilist, and Social Theory.

Purpose of Appraisal

• For Financing: to secure a loan using the property as collateral.
• For Partition and Distribution of Estate: to affect an equitable distribution of properties among heirs or co-owners.
• For Taxation: used as a basis for fair assessment or for contesting government assessment of estate and donors.
• For Indemnification: to determine just compensation for property being expropriated by the government or public utilities.
• To Maximize Utilization of Property: by considering maximum returns.
• As a Guide in Pricing: for purposes of sales, purchases, exchanges, and leases of real property.

Characteristics of Value

• Effective Demand or Purchasing Value: refers to desires, coupled with the financial capacity of the buyer to acquire a piece of real property.
• Utility: the ability of the property to satisfy human needs.

Factors Affecting Appraisal

• Political Forces: government-based, including the degree of efficiency in the maintenance of peace and order and the effort of providing essential services.
• Economic Forces: includes the nature of basic industry and business activity in the neighborhood, trend of employment, and expansion of housing programs.

Fundamentals of Real Estate Appraisal

Definition of Appraisal

• Appraisal is the professional service performed by a licensed Real Estate Appraiser based on a defined standard.
• It refers to the acts of estimating and rendering an expert opinion pertaining to real estate values.
• Appraisal is the act of determining the value of a property as of a specific date for a specific purpose.

Role of Appraiser

• A Business Valuer/Appraisal is a person who, by education, training, and experience, is qualified to perform a valuation of a business, business ownership interest, security, and/or intangible assets.

Real Estate and Real Property

• Real Estate or Real Property refers to land and/or building improvements, including rights and interest therein.
• Estate refers to the totality of assets owned by a person, which include real and personal properties and the interest thereof.

Fair Market Value

• Fair Market Value is the highest monetary price a property has at a reasonable period of time, which the seller is willing to sell and the buyer is willing to buy.
• It is used as a basis of determining property taxes.

Types of Value

• Capricious Value: value estimate derived by observing completed transactions involving a large degree or amenities or other personal and unpredictable factors.
• Component Value: value of those components, created by the separation of the property interest.

Appraisal Process

• Reconciliation is the adjustment process between comparable property utilities equivalent to that of being appraised but constructed with modern materials and according to the current standards, design, and layout.
• Remaining Economic Life refers to the remaining period during which a property can be profitably used or the period during which a building is expected to generate more income than operating expenses.

Cost and Value

• Replacement Cost: the cost of replacing an asset/property with an equally satisfactory substitute asset/property; normally derived from the current acquisition cost of similar assets, new or used, or of an equivalent productive capacity or service potential.
• Reproduction Cost: the cost to create a virtual replica of the existing structure/property, employing the same design and similar materials.

Principles of Appraisal

• Principle of Surplus Productivity: net income remaining after the cost of labor, capital, and coordination have been paid.
• Principle of Utility: the meeting of desires and needs.

Evolution of Value Theories

• Theory of Austrian School: relationship of market price and value; normal value under conditions of balanced supply and demand.
• Cost Theory of Adam Smith: objective; value in use.
• Scarcity Theory of Malthus: emphasized the supply and demand factor.
• Labor Theory of Marx: value is a mere congelation of homogeneous human labor.

Purpose of Appraisal

• For Financing: to secure a loan using the property as the collateral, which is based on the appraised value of the property.
• For Partition and Distribution of Estate: to an effect an equitable distribution of properties among heirs or co-owners.
• For Taxation: used as a basis of fair assessment or for contesting government assessment of estate and donors.

Characteristics of Value

• Effective Demand or Purchasing Value: refers to desires, coupled with the financial capacity of the buyer to acquire a piece of real property.
• Utility: the ability of the property to satisfy human needs.

Factors/Forces that Affect Appraisal

• Political Forces: government-based, including the degree of efficiency in the maintenance of peace and order, and the effort of providing essential services.
• Economic Forces: includes the nature of basic industry and business activity in the neighborhood, trend of employment, and expansion of housing programs.

Principles of Property Valuation

• The principle of contribution measures the value of a component by its contribution to the property's volume.
• The principle of consistent use states that a property cannot be valued based on one use for land and another use for improvements.

Supply and Demand

• The principle of supply and demand states that the value of a property increases if supply is reduced by effective demand, resulting in scarcity.

Highest and Best Use

• The principle of highest and best use is the most profitable and likely use of the property at the time of appraisal, producing the land's highest present value.
• It is the first necessary consideration in studying a tract of land to estimate its value.

Regression

• The principle of regression states that the value of a property tends to be adversely affected or enhanced by association with inferior or superior properties.

Substitution

• The principle of substitution states that a property's value is indicated by the value of an equally desirable substitute.

Appraisal Definitions

• Appraisal is an estimate or opinion of value arrived at by a licensed real estate appraiser who has the necessary competence, skills, integrity, sound judgment, experience, and in-depth study, analysis, and interpretation of pertinent data bearing on values.
• Independent appraisal is an estimate of property value performed by an independent person or disinterested party, usually made by a licensed appraiser.
• Mass appraisal is the practice of appraising multiple properties by a systematic and uniform application of appraisal methods and techniques.
• Business valuation refers to the act of arriving at an opinion or estimation of the value of a business or entity or an interest therein.

Real Estate Definitions

• Real estate refers to the totality of assets owned by a person, which include real and personal properties and the interest thereof.
• Estate refers to all the property, either real or personal, owned by a natural or juridical person.
• Fair market value is the highest monetary price a property would get if exposed for sale in the open market, allowing a reasonable time to find a purchaser who buys with knowledge of all the uses which the property is capable of.

Income Approach

• The income approach to value is based primarily on the economic principle of anticipation.
• Net operating income (NOI) is the net income derived from gross income after deducting property operating expenses and reserves.

Other Concepts

• Over improvement refers to an improvement that is not suitable to the site where it is placed due to excessive size or cost.
• Matched pair refers to two recently sold properties selected for their similarities, which may be compared to determine the value of dissimilarities.
• Recapture rate is the return of the capital over the economic life of the property.

Principles of Property Valuation

• The principle of contribution measures the value of a component by its contribution to the property's volume.
• The principle of consistent use states that a property cannot be valued based on one use for land and another use for improvements.

Supply and Demand

• The principle of supply and demand states that the value of a property increases if supply is reduced by effective demand, resulting in scarcity.

Highest and Best Use

• The principle of highest and best use is the most profitable and likely use of the property at the time of appraisal, producing the land's highest present value.
• It is the first necessary consideration in studying a tract of land to estimate its value.

Regression

• The principle of regression states that the value of a property tends to be adversely affected or enhanced by association with inferior or superior properties.

Substitution

• The principle of substitution states that a property's value is indicated by the value of an equally desirable substitute.

Appraisal Definitions

• Appraisal is an estimate or opinion of value arrived at by a licensed real estate appraiser who has the necessary competence, skills, integrity, sound judgment, experience, and in-depth study, analysis, and interpretation of pertinent data bearing on values.
• Independent appraisal is an estimate of property value performed by an independent person or disinterested party, usually made by a licensed appraiser.
• Mass appraisal is the practice of appraising multiple properties by a systematic and uniform application of appraisal methods and techniques.
• Business valuation refers to the act of arriving at an opinion or estimation of the value of a business or entity or an interest therein.

Real Estate Definitions

• Real estate refers to the totality of assets owned by a person, which include real and personal properties and the interest thereof.
• Estate refers to all the property, either real or personal, owned by a natural or juridical person.
• Fair market value is the highest monetary price a property would get if exposed for sale in the open market, allowing a reasonable time to find a purchaser who buys with knowledge of all the uses which the property is capable of.

Income Approach

• The income approach to value is based primarily on the economic principle of anticipation.
• Net operating income (NOI) is the net income derived from gross income after deducting property operating expenses and reserves.

Other Concepts

• Over improvement refers to an improvement that is not suitable to the site where it is placed due to excessive size or cost.
• Matched pair refers to two recently sold properties selected for their similarities, which may be compared to determine the value of dissimilarities.
• Recapture rate is the return of the capital over the economic life of the property.