Understanding Property Appraisal and Valuation

• Appraisal is an expert's estimate of a property's value, providing an unbiased assessment of its nature, quality, value, or utility.

Types of Value

• Market value: the most probable selling price
• Insurable value: the value covered by insurance
• Assessed value: valuation for taxation purposes
• Liquidation value: the likely price in a forced sale scenario
• Value in use: the value derived from a specific owner's use
• Investment value: the value to a particular investor

Appraisal Process

• Investigates the property, comparable properties, and the market itself.

• Considers factors like physical condition, zoning, taxes, building codes, construction type, design, and environmental issues.

• Provides a property valuation as of a specific date

• Valuation is the process of estimating various types of value for a property as of a specific date.

Assessed Value

• A valuation set by a public officer or board for taxation.
• May or may not equal market value, potentially a percentage of it.
• Relates to other market values but does not reflect current market value.
• NYC examples: Class 1 (residential) assessed at 6% of market value; Classes 2 & 4 (multi-family, commercial) at 45%.

Insured Value

• The value of an asset covered by an insurance policy.
• Can be estimated by subtracting the cost of non-insurable items (like land) from market value.
• Replacement cost new refers to creating something of similar quality.
• Replacement cost refers to creating an actual replica.

Liquidation Value

• The likely price of an asset sold quickly in a situation without sufficient time on the open market.
• Typically used in bankruptcy or property discharge.

Value-in-Use

• The net present value of cash flow or benefits an asset generates for a specific owner's use.
• Common for businesses operating from the property, where income generation isn't the sole purpose.
• Examples include churches, schools, and community centers.

Investment Value

• The value of an investment to a specific investor based on their requirements.
• Differs from market value, which is impersonal.

Evaluation

• A study of property interests, like highest and best use or market supply and demand.
• Does not necessarily require a value estimate.
• Often used to gather data for a specific market segment, such as home prices within a size range.

Market Value

• The most probable price a property should bring on the open market

• Assumes a reasonable exposure time, informed and willing participants, and no duress.

• Considered to be the typical purchasers of that type of property

• A specific date applies

• Price is expressed in terms of cash

• Considers specific rights (bundle of rights connected to real estate)

• Cash equivalency

• Price is the agreed amount between a buyer and seller in an arm’s length transaction.

• Cost is the total expenditure for labor, materials, and other related services which may or may not equal value.

Direct Costs

• Hard costs
• Consists of expenditure for labor and material

Indirect Costs

• Soft costs

• Consists of expenditure for Architectural fees, engineering fees, appraisal fees

• Price can change drastically, cost is more static

Establishing Market Value

• Researching the sales in the last 3, 6, 12 months
• Checking current offerings
• Checking current listings
• Checking current contracts

Comparative Market Analysis (CMA)

• A property evaluation comparing similar properties sold within the last year
• Conducted by brokers, salespersons, appraisers, investors, and developers.
• NOT an appraisal

Appraisal vs CMA

• Appraisal is a defensible estimated value
• Data is compared to the property being appraised and adjusted for those differences
• CMA involves gathering sales data and looking at differences between sold properties without making adjustments

Residential Market Analysis

• Collecting data of recently sold properties
• Reviewing expired offerings and current listings
• Analyzing contracts of sale and subject property in terms of buyer appeal

Determining Market Value Accuracy

• Data collection will lead to conclusions about market trends

Indicators of Market Appreciation

• Offering and contractual prices increase
• Time on market decreases and properties move faster
• Previously unsold properties are absorbed

Indicators of Market Depreciation

• Exposure time increases
• Offering prices are reduced
• Supply increases

Adjusting to Changing Market Conditions

• Current offerings and contracts of sale are the best indicators

Salesperson's Role

• Requires competence in marketing, client communication, and data verification.
• A salesperson must provide well-researched listings matching buyer needs.
• Diligence, adaptability to market conditions, record-keeping, and effective communication are crucial.

Highest and Best Use

• Refers to a vacant or improved site.
• Considerations are based on whether it's legally permissible, physically possible, economically feasible, and the most appropriate use

Site Valuation

• Valued as if unimproved and ready for construction, considering price per square foot, buildable square foot, or acre.

Land Value

• Land cannot be created nor destroyed, but it can have a negative value when encumbered with an environmental hazard.

Sales Comparison Approach

• Compares a subject property's characteristics to similar properties recently sold.

Cost Approach

• Estimates value by calculating current construction cost, subtracting depreciation, and adding land value.
• Best used for newer improvements where depreciation estimates are more accurate.

Depreciation

• Loss of value due to physical deterioration, functional obsolescence, or economic obsolescence.

Three Approaches to Value

Sales Comparison Approach (Market Approach)

• Based on the principle of substitution with comparable sales.
• Requires a minimum of 3 comparable sales.
• Order of adjustments: rights conveyed, financing, conditions of sale, location, size, age, condition, utility, amenities.

Cost Approach

• Replacement cost minus depreciation equals depreciated value of improvement.
• Types of depreciation: physical (curable/incurable), functional (curable/incurable), external (always incurable).
• Property value = depreciated site improvements + depreciated overall improvements + site value under highest and best use.

Income Approach

• Gross income minus vacancy/holding costs equals net operating income.

• Sales approach is most commonly used by salespersons and brokers for residential and amenity-type properties.