Real Estate Appraisal Process Overview

Module II: The Appraisal Process

• Appraisal is based on factual information, which is context-specific.
• Many professional appraisers focus on the profession and are recognized for their knowledge, skill, and experience.
• They interpret facts in an unbiased manner from available information.
• A professional appraiser may be called upon to support opinions in a court of law.
• Diligent care is taken with each real estate appraisal to support decisions regarding usage, disposition, and ownership rights.
• An appraisal answers specific questions about a real estate parcel's value, marketability, usefulness, or suitability.

Overview of the Appraisal Process

• An appraisal is an estimate of a property's worth.
• An appraiser must measure the value of each parcel of real estate and provide a supportable opinion.
• The process involves steps including:
  • Identification of the Problem
  • Scope of Work Determination
  • Data Collection and Property Description
  • Data Analysis
  • Site Value Opinion
  • Application of the Approaches to Value
  • Reconciliation of Value Indications and Final Opinion of Value
  • Report of Defined Value

Uniform Standards of Professional Appraisal Practice (USPAP)

• USPAP standards for the appraisal profession are set by the Appraisal Standards Board of The Appraisal Foundation.
• USPAP specifies procedures for developing and communicating appraisals, including ethical rules.
• An appraisal is the act or process of developing an opinion of value.
• The valuation process is a systematic procedure following to answer a client's questions about real property value..

Intended Uses of an Appraisal

• Facilitating the transfer of ownership of real property.
• Helping sellers determine acceptable selling prices or buyers decide on offering prices.
• Establishing a basis for the exchange or reorganization of real property or for merging ownership.
• Assisting underwriters in establishing security values for mortgage loans.
• Providing investors with a basis for purchasing real estate mortgages, bonds, or other securities.
• Estimating market value in eminent domain proceedings.
• Estimating the market value of a property, in contract disputes or as part of a portfolio.
• Estimating the market value of partnership interests.
• Estimating damages created by environmental contamination.
• Estimating assessed value.
• Determining gift or inheritance taxes.
• Estimating the value of the real property component of an estate.
• Setting rent schedules and lease provisions or renovation programs.
• Assisting in corporate mergers, issuance of stock, or revising of book value.
• Estimating liquidation value for forced-sale or auction proceedings.
• Counseling clients on investment matters, including goals, alternatives, resources, constraints, and timing.
• Advising zoning boards, courts, and planners, among others, regarding the probable effects of proposed actions.
• Arbitrating between adversaries.

1. Identification of the Problem

• This step sets the parameters of the assignment and eliminates ambiguity about the nature of the assignment.
• It involves identifying the client and intended users, purpose of the assignment, effective date of the opinion, relevant property characteristics, and assignment conditions (including extraordinary or hypothetical conditions).

2. Scope of Work Determination

• The scope of work is the amount and type of information researched and analyses applied in an assignment.
• The appraiser determines the appropriate scope of work to clearly solve the problem identified.
• The scope of the work is clearly disclosed in the appraisal report.

3. Data Collection and Property Description

• General data about the market area includes general characteristics of the region, city, and neighborhood.
• Specific data about the subject property includes specific characteristics of the land and improvements, personal property, and business assets.
• Comparable property data includes sales, listings, offerings, vacancies, costs, depreciation, income, expenses, and capitalization rates.

4. Data Analysis

• National, regional, and local trends in supply and demand data are studied to understand the competitive position in the market.
• Analysis of comparable, similar properties is performed to extract specific sale prices, rental terms, incomes, expenses, rates of return on investments, construction costs, economic life estimates, and depreciation rates.
• These figures are then used in calculations that result in indications of value for the subject property.

5. Site Value Opinion

• A land value opinion is formed through methods derived from the three approaches to value, most reliably through sales comparison.
• Sales of similar vacant properties are analyzed, compared to the subject land, to arrive at a value estimate.
• If insufficient comparable sales exist, alternative procedures like extraction, allocation, land residual technique, ground rent capitalization, or subdivision development analysis may be used.

6. Application of the Approaches to Value

• Cost approach: estimates the current cost to reproduce or replace the property minus depreciation plus land value (including entrepreneurial incentive).
• Sales comparison approach: determines value by comparing the subject property to similar properties recently sold or currently available in the market.
• Income capitalization approach: determines value based on the property’s net earning power.

7. Reconciliation of Value Indications and Final Opinion of Value

• The appraiser weighs each approach's relative significance, applicability, and defensibility to derive a final value opinion.
• The conclusion drawn is based on accuracy and quantity of evidence from all approaches.
• The final value opinion is clearly stated, marking the completion of the valuation process .

8. Report of Defined Value

• The types of written appraisal reports (self-contained, summary, or restricted-use reports) vary based on client requirements.
• A self-contained report fully details all data and analyses used in the assignment.
• Summary reports summarize the data and analyses or may only state the conclusions when appropriate.
• Restricted-use reports only contain the conclusions.
• Backup data and analyses may also be contained in the file with summary or restricted-use reports.

USPAP Conformity

• USPAP defines the set of standards for professional appraisal practice.
• USPAP establishes procedures and rules for developing and reporting appraisals.

USPAP Compliance Requirements

• There are twelve minimum requirements that must be followed for compliance with USPAP.
• Some requirements include identifying the client and intended users; defining the intended use of the appraisal; describing the real estate and the real property interest being appraised, purpose; effective date; scope; assumptions and hypothetical or limiting conditions affecting the analysis, conclusions, and supporting data.