Module II: The Appraisal Process PDF

Module-II The Appraisal Process  Overview  Process Uniform Standards of Professional Appraisal Practice (USPAP)  Intended Use of an Appraisal  Intended Use of an Appraisal  Intended Use of an Appraisal...

Module-II The Appraisal Process  Overview  Process Uniform Standards of Professional Appraisal Practice (USPAP)  Intended Use of an Appraisal  Intended Use of an Appraisal  Intended Use of an Appraisal Process 1. Identification of the Problem Process 2. Scope of Work Determination Problem The scope of work is the amount and type of information researched and the analyses applied in an assignment. After the problem to be solved is clearly identified, the appraiser must next determine the appropriate scope of work to solve the problem. The scope of work must be clearly disclosed in the appraisal report. Process 3. Data Collection and Property Description The appraiser gathers general data on the market area and specific data on the subject and comparable properties. Data related to property values in an area to understand the economic climate in which properties compete General data and the interacting forces that cause values to increase, decrease or remain stable. Details about the property being appraised (the subject property) and comparable properties that have been Specific data sold or leased in the local market. Land and building descriptions are specific data that help an appraiser to select comparable sales and rentals. Process 4. Data Analysis National, regional and local trends are emphasized. General data Supply and demand data are studied to understand the competitive position of the property in its market. A set of properties most like the subject property is studied. Analysis of comparable properties helps an appraiser extract specific sale prices, rental terms, incomes and expenses, Specific data rates of return on investments, construction costs, economic life estimates and rates of depreciation. These figures are used in the calculations that result in indications of value for the subject property. 4. Data Analysis Provides the basis for an appraiser’s conclusions about the highest Market analysis and best use of a subject property, and the remainder of the valuation process follows from these conclusions. Highest and best use is a critical step in the development of a market value opinion. The appraiser considers the use of the land as though it were vacant Highest and best use and the use of the property as it is improved. analysis To qualify as the highest and best use, a use must satisfy four criteria: it must be legally permissible, physically possible, financially feasible and maximally productive. The highest and best use is selected from various alternative uses. Process 5. Site Value Opinion Process 6. Application of the Approaches to Value The appraiser begins to derive an opinion of property value using one or more of the three approaches to value. The approaches employed depend on the type of property, the use of the appraisal and the quality and quantity of the data available for analysis. 1 Cost 2 Sales Comparison 3 Income capitalization  6. Application of the Approaches to Value The cost approach is based on the understanding that market participants relate Cost Approach value to cost. In the cost approach, the value of a property is derived by adding the estimated value of the land to the current cost of constructing a reproduction or replacement for the improvements and then subtracting the amount of depreciation in the structures from all causes. The current cost to construct the improvements can be obtained from cost estimators, cost manuals, builders and contractors. Depreciation is of three different types (physical deterioration, functional obsolescence and external obsolescence) and is measured through market research and the application of specific procedures. Land value is estimated separately in the cost approach. This approach is particularly useful in valuing new or nearly new improvements and properties that are not frequently exchanged in the market. Cost approach techniques can also be employed to derive information needed in the sales comparison and income capitalization approaches to value, such as an adjustment for the cost to cure items of deferred maintenance.  6. Application of the Approaches to Value Sales Comparison Approach The sales comparison approach is most useful when a number of similar properties have recently been sold or are currently for sale in the subject property’s market. Using this approach, an appraiser develops a value indication by comparing the subject property with similar properties, called comparable sales. The sale prices of the properties that are judged to be most comparable tend to indicate a range in which the value indication for the subject property will fall. The appraiser estimates the degree of similarity or difference between the subject property and the comparable sales by considering various elements of comparison: Real property rights conveyed Location Financing terms Physical characteristics Conditions of sale Economic characteristics Expenditures made immediately after purchase Use/zoning Market conditions Non-realty components of value 6. Application of the Approaches to Value Income Capitalization Approach the relationship between one year’s income and value is Direct capitalization reflected in either a capitalization rate or an income multiplier. the relationship between several year’s stabilized income and Yield capitalization a reversionary value at the end of a designated period is reflected in a yield rate. Reversionary value: Property value upon expiration of a given time period Process 7. Reconciliation of Value Indications and Final Opinion of Value An appraiser draws upon his or her experience, expertise and professional judgement to resolve differences among the value indicates derived from the application of the approaches. The appraiser weighs the relative significance, applicability and defensibility of each approach and relies most heavily on those most appropriate to the intended use of the appraisal. The conclusion drawn is based on the appropriateness, accuracy and quantity of all the evidence in the appraisal. When a final opinion of value has been derived, the immediate objective of the valuation process has been accomplished. However, an appraisal assignment is not completed until the conclusions and findings have been stated in a report and communicated to the client Process  8. Report of Defined Value The type, format, length and contents of a written appraisal report may vary depending on the requirements of the client and the scope of work criteria. The Uniform Standards of Professional Appraisal Practice set forth the requirements for appraisal reports, which may be presented in one of three written formats: self-contained reports, summary reports, and restricted-use reports. In general, a self-contained report fully describes the data and analyses used in the assignment. 8. Report of Defined Value Provides comprehensive coverage of appropriate information Self-contained appraisal contained within the report itself with minimal reference to files report outside the report. Summary appraisal Summarizes the data and analyses used in the assignment. report Restricted-use appraisal Simply states the conclusions of the appraisal; this type of report may report be provided only when the client is the sole user of the report.  8. Report of Defined Value The appraisal file for a summary or restricted-use appraisal report contains backup data and/or analyses that would be presented in a self-contained appraisal report. A form report may be a summary or a restricted-use report. An appraisal may also be communicated by means of an oral report when circumstances do not permit or warrant the preparation of a written report.  Module-II USPAP Conformity Uniform Standards of Professional Appraisal Practice (USPAP) USPAP Compliance Requirements Uniform Standards of Professional Appraisal Practice USPAP Compliance Requirements USPAP Compliance Requirements