Property Valuation: Introduction

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Chapter 17: Introduction to Property Valuation Learning Objectives

• Describe the purpose a valuation may serve
• Discuss the valuation process
• Discuss redevelopment potential and identify a property’s highest and best use
• Describe the factors affecting the demand and supply of real property, and how they impact the value
• Summarize the three valuation approaches and provide examples of properties most suited to each
• Discuss options for reporting final value estimates: oral, written, and the comparative market analysis (CMA)
• Explain the legal consideration for valuators, the legal consequences resulting from a negligently prepared valuation report, and how compensation may be awarded

Introduction to Property Valuation

• Real estate valuations are necessary for investors, lenders, and registrants involved in property transactions.
• Property valuation is a systematic approach following the appraisal process.
• An appraiser is expected to competently perform valuation services independently and objectively.
• An appraisal (or property valuation) is an opinion-based estimate of real property value.

Need for Property Valuations

• Specialists are needed due to the scale and importance of real property transactions.
• Limited data and difficult collection are due to the low turnover rate, parcel uniqueness, and property durability.
• Low turnover rate in real property means data sources and information are limited.
• Each real property parcel is distinct, unique, and heterogeneous. standardized or generalized.
• Durable real property may not quickly respond to market pressures.
• Markets are local and influenced by neighboring properties, which can have positive or negative impacts called externalities.
• Real property experts help gather and interpret information due to limited data, heterogeneous and personal preferences that can affect market value
• Expertise interprets subjective preferences into an objective estimate of market value.

Valuation Process

• Valuators follow a systematic process, structuring work, considering potential questions regarding the property, and assignment
• Comprehensive research and analysis yields a credible value estimate.
• Registrants may not do as much research and analysis as appraisers, though they benefit by following a systematic approach.
• Each step is separate but often overlaps with other steps.
• The valuation process may be applied formally or automatically.
• The valuation process is commonly taken by most appraisers in valuing typical properties bought and sold in the real estate market
• One single method cannot cover every possible appraisal assignment, but the process covers the appraisal problems commonly encountered

Defining the Valuation Problem

• The first step is to clarify what is to be valued and why.
• The goal of the valuation problem definition is to eliminate valuation ambiguity
• The valuator identifies the client/report users, valuation use, valuation purpose including definition of value
• The characterizations of the property, including the date of the report, location, legal description, and property rights to be valued
• Disclaimers, extraordinary assumptions that are relevant to the report and any limiting or hypothetical conditions the estimate of value is based on.

Client and Intended Users of the Valuation

• Appraisals might be required by lenders, insurance companies, or for expropriation or property taxation.
• They are also used in real estate transactions and for investment or financial record purposes, along with legal requirements including estates, divorces, etc.
• The cost principle requires asset value to be recorded at its historic cost of acquisition
• Real estate book value is the purchase price or the cost to construct plus the land value.
• The International Financial Reporting Standards (IFRS) require public companies to record asset values at their fair market value.

Intended Use and Purpose of the Valuation

• Valuators must understand the reason for a valuation, whether for statutory or market reasons.
• This determines the form of value, market data, and potential constraints.

Value Definitions

• Estimating value is the object of a property valuation, but "value" is defined differently in various contexts.
• An appraiser's estimate of market value may differ from owner's perception or the value in exchange.
• Market value refers to an objective value, based on market evidence and accepted techniques.
• An appraised market value must withstand audit by a third party.

Terms

• Value to the owner is a personal opinion, relating to floor and ceiling prices.
• Floor price refers to the minimum price at which a seller is willing to sell their property
• Ceiling price refers to the maximum price a purchaser is willing to sell for a property
• Sellers may not sell below their floor price, buyers may not buy over their ceiling price

Valuation for Appraisers and registrants

• A sale price must be equal or more than the vendor's floor price and at most, equal to or less than the purchaser's ceiling price

Buyers & Sellers

• Jacques' floor price is $300,000, the buyer's ceiling price is $325,000, and the agreed upon price is $310,000.
• Neither buyer nor seller likely knows each other's ceiling and floor price.
• Final price is influenced by negotiation skills and motivation of parties, affected by not knowing what someone is willing to pay
• Sellers often list property over time so minimum price may change, and buyers also have time to consider the price
• If property is unsold, the floor price was higher than prospective purchasers' ceiling price.
• A buyer must withdraw/increase ceiling price if their highest offer has been rejected
• Substitute properties affect potential buyers and allow comparison and a more informed purchase

Appraisers and Registrants

• Buyers and sellers are willing to give cash over the property
• Registrants communicate the concept of value differently so that the clients are aware (example - home Reno, renovations don't add the exact costs)
• Registrants frame appropriate rational offers and less emotional mindset

Defintions of Market Value

• Valuations can mean something different depending on legal standpoints
• There are many definitions of market value
• It is still up to the appraiser to determine a fair degree of knowledge
• The Valuer's purpose has been made clear that this can be difficult

Suggeted definition of Market Value

• Market value is the price that might be reasonably realized
• Involves a certain point in time which will affect the accuracy of the original number
• Includes the the reasonable the expectation such as someone who has knowledge of the market "should it be sold" This must include buyers an sellers who can prepare bargins at the right arm and influence or any relationship doesn't affect the price
• Must reflect market conditions during the appropriate times and date of the appraisal
• This covers exclusion with buyers, prices of unusual problems, and frequency

Objective Value

• The valuator can say how long the property will sell for
• Economic Value: interest rates, wage levels, and level of credit
• Politics: zoning, building codes, and monetary
• Social: Growth, family changes, and amenities
• Nature factors: climate topography, flood control

Estimation

• Justification is difficult in definition but valuators are to set the current market value, by the owner
• The developer/counselor knows this and determines if a client buy a $2.5 apartment for sale

Appartment Price

• Valuators must consider economics and taxes
• Valuations are made for many sources (death/taxes)
• Identify legal issues, properties, and their location

Title & Property

• Properties include ownership + physical property with locations
• Important legal rights over the physical property
• Must determine the property title, fees in simple form + leases/ rights over lands/ areas in common

Disclaimers

• Can limit but can't waive as a liability
• Appraisers must act in a proper job for serious foundation problems

Limitation

• registrants must be weary about misrepresentation from a client
• Determination is needed
• Market data analysis guides the value
• Must provide sufficient information

Steps for Valuation

• Identification inspection is needed with comparables
• Valuators support and value the client and value
• Scope is reflected in the work as well
• This is all relevant to the legal responsibilities set in place

More Valuation

• There are key steps in the assessment
• Municipal and local and national data needed with developments
• Background must include geographical levels, government and economy

Objectives

• Used to understand economic climate with supply and demand factors
• Relative status with the market
• Set up comparable market from the value

General economy includes and produces factors and expectations

• There are many global problems, the valuator should see relevant economical standing from the valuation

Analysis

• There are other economical factors that must play a hand
• These are international relations, supplies and resources, economic factors
• Past markets do point at certain directions with influences in property
• Lenders/Sellers are still concerned with immediate trends

Valuator Analysis

• The neighborhood analysis contains the most impactful properties
• Boundaries should include a map that is social and has value
• Homogeneity is what the size and location will do

Boundary analysis

• These may include mountains
• Highway lines with boundaries and city bounds analysis
• Important additional considerations for homogeneity with the current standards
• They also tend to include current market standards + analysis into potential sales data

Wealth factors

• They include what the trends are and the resident's economical status with questions

Valuators look for

• What may be the impact to buyers and sellers of property type
• How the best market for these properties + conditions play an important part
• There are different factors with locations as well that must be looked at (recreation, vacancy, business, community)

Inspections + Values

• Requires both interior and exterior to be inspected (unless it has been set to destroy)
• Logical points need to be addressed with buyer questions
• One has to understand what is going into the area

Site analysis looks at

• Legal: restrictive uses of site
• Economical: Prices for comparable sites
• Environmental: Problems + costs of clean up
• Valuators should look for potential buyer impacts and unique conditions
• You may find a need for more ground and wooded topography + the site and neighborhood conditions

Market Elements

• Valuators will want to find times to sell elements
• All the following may be included: sale, advertising relationship financers, and purchasers

Market Elements: time

• Sale time and all related will effect
• Properties below usually sell faster with buyers and so on

Elements: advertisers + realitives

• These items do affect the markets as well as financing + any terms
• Important to inspect ownership titles/mortgages/liens

Disclainers

In this section an appraisers will

• It is up to registrants to not affect real market

Purchasers and Fraud

• You need an assessment of mortgage too high
• There are many more values and factors

Data points

• Find the local element of supply, demand and marketing conditions
• Keep to date will local and internal economics

As a registrant

• Report can't have this level but market knowledge should be communicated

Demand for property

• Supply measures the amount of real property at any given price.
• In contrast to demand, the supply of real property increases as price increases
• Supply includes ownership, technology, goals

Influences

• Urban and time of market property is effected
• Supply will change over long periods
• There are variations for cities with other areas as well
• Buyers effect demand etc