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10/04/11 Chapter 1 - Approaches to Value 1 Important Words
Appraisal Appraisal Report Replacement Cost Assumptions Restricted Use Appraisal Lot and Block System Metes and Bounds Cost Approach Comparable Approach Contract Rents Effective Date of the
10/04/11 Intended User
Market Rents Chapter 1 Approaches to Value 2 Important Words ~ 2
Final Estimate of Value
Planned Unit Development
Highest and Best Use 10/04/11 Narrative Appraisal Report
Summary Appraisal Report
Real Estate (The Dirt)
Gross Monthly Rent
((GRM)) Chapter 1 Approaches to Value 3 Important Words ~ 3
Important Highest and Best Use
Improvements 10/04/11 URAR Report
Reconciliation Chapter 1 Approaches to Value 4 Introduction to Appraisal & Value
Importance of the Appraiser
Provide an opinion of value to aid the client to make
How much of a loan should the lender make?
How much to list the property for.
How much insurance will be needed.
Government acquisition in eminent domain.
10/04/11 Chapter 1 Approaches to Value 5 Introduction to Appraisal & Value ~ 2
Originally real estate brokers established values
for banks and other lenders. There is a basic
conflict of interest when a broker is representing
the buyer or the seller or both of them.
Brokers who are Real Estate Appraisers should
not act as both in a transaction.
Because of these initial conflicts brokerage and
appraisal gradually separated into distinctly
10/04/11 Chapter 1 Approaches to Value 6 What Appraisers Have to Sell Appraisers have the following to sell to a client:
Uncompromised willingness to do the work on a
timely basis for a mutually agreed upon fee.
Chapter 1 Approaches to Value 7 Adequate Knowledge The appraiser should have had a good general
education. Currently each state outlines the requirements
for acceptance for licensing and certification.
This amounts to the appraiser having taken
certain educational courses, certain experience,
a standard of ethics, and an ability to report
10/04/11 Chapter 1 Approaches to Value 8 Experience
It is felt that experience will qualify most
individuals to do quality work in a given field.
Another idiom today is that more education,
more degrees is a suitable substitute for
Finally, the prevailing mentality today is that a
certain education is necessary but with adequate
10/04/11 Chapter 1 Approaches to Value 9 Integrity References and recommendations are the most
References common method of determining whether or
not any individual has integrity.
not The states, and the federal government attempt
to establish the integrity of an individual.
to Finally, it is strongly felt today that education
will help improve ethics, and integrity.
10/04/11 Chapter 1 Approaches to Value 10 Objectivity Appraisers sign the “Statement of Limiting
Conditions” which includes a statement that states
that the appraiser has no present or future interest in
the subject property.
Objectivity is very difficult for some people. With
others it is less of a problem. Some individuals feel
that whatever it is that they have done would best
qualify an individual for any endeavor, other people
are truly, almost naturally more objective.
Perhaps objectivity is really a matter of self
confidence and honesty.
10/04/11 Chapter 1 Approaches to Value 11 Willingness to do Work on a Timely
Basis for a Mutually Agreed Upon Fee
Basis It is critical that the appraiser is capable of
It allocating their time, and their completion of
accepted assignments in a timely fashion.
accepted It should remain obvious that acceptance of an
assignment should preclude the person who
accepted the assignment has the time, and is
capable of performing the work in an agreed
10/04/11 Chapter 1 Approaches to Value 12 The Appraisal Process
1. Define the Problem
2. Plan the Appraisal
3. Collect and Analyze the Data
Property Data Subject
Property Data Highest & Best Use Analysis Land Value Analysis 4. Apply the Value Approaches
Approach 5. Arrive at a Value Conclusion
6. Report the Value Conclusion
10/04/11 Chapter 1 Approaches to Value 13 1. Define the Problem The first step in any appraisal is to Define The Problem.
There are 7 steps in this definition of the problem. Identification of:
The client and other intended users.
2. The intended use of the appraiser’s opinions and
3. The type and definition of value.
4. The Effective date of the appraiser’s opinions and
5. The Characteristics of the property.
6. Any extraordinary assumptions necessary in the assignment.
10/04/11 Any hypothetical conditions necessary in the assignment.
Chapter 1 Approaches to Value
1. 1.The Client & Other Users
1. The client and other intended users.
The identification of the client and other intended users helps limit
who you might be liable to.
For example you might be doing a letter report for a builder
concerning a “Future Market Value” helping him determine the
profitability of a project. Another reader could conclude that
this is a general value for the entire area and subsequently
purchase a property, ultimately suffering a loss. Would that
person then, try and hold you accountable for their loss?
The identification of the client (the person who ordered the
appraisal normally) and other intended users should restrict the
use of the appraisal to people who understand what you are
trying to submit in any conclusions.
10/04/11 Chapter 1 Approaches to Value 15 2. The intended use of Opinions and Conclusions
1.The intended use of the appraiser’s opinions and conclusions.
What are you doing the appraisal for? What kind of value are you
trying to conclude.
Usually the value we seek is “Market Value” for the purpose of a
lender who is going to make a loan.
We could be looking for “Condemnation Value” in an eminent
domain proceeding by the city, county, or state.
Sometimes we do an appraisal for a property settlement in a
divorce. Here the attorney normally wants equity value.
An appraisal for “Equity Value” when a couple is trying to position
a “Living Trust” and their allocation of property.
10/04/11 Chapter 1 Approaches to Value 16 3.The type and Definition of Value
1. The type and definition of value.
We are required to state the Type of Value we are seeking
and give a definition of that value.
In most appraisals the definition of “Market Value” is
included in the report.
The value sought could be for Tax Purposes in depreciation
schedules for investors. We would need to state that that was
the reason for the appraisal and why it was important to
separate the improvements and the land.
10/04/11 Chapter 1 Approaches to Value 17 4. Effective date of Opinions and Conclusions
1. The Effective date of the appraiser’s opinions and
The Effective Date is normally the date of inspection. The date
that you saw and inspected the property.
The value of the property on, then give a date, then state the
value. That way someone would not be able to rely on the
value next year, or last year.
Sometimes we do an appraisal in the past. In that case the date of
inspection would not be the Effective Date of the appraisal.
This could be the case in a probate. The original owner died
14 years ago and the family didn’t know they had to do a
probate to establish value.
10/04/11 Chapter 1 Approaches to Value 18 5. The Characteristics of The Property.
1.The Characteristics of the property.
Every appraisal must have a legal description of the property.
Additionally every appraisal must have an accurate description
of the real estate (site) and any improvements (buildings). If
there is any personal property included in the sale it must be
included in the report. Carpets, drapes, washer and dryer.
Real estate is owned by what we call the “Bundle of Rights” or
your right to use certain benefits of the property, not simply
site and improvements but your right to use the benefits
associated with this bundle of rights.
10/04/11 Chapter 1 Approaches to Value 19 Real Property “Bundle of Rights Theory”
Real property ownership involves the following
rights. The government keeps some rights.
rights. Possess Will Use Sell Enjoy Do nothing at all Encumber
10/04/11 Chapter 1 Approaches to Value 20 6. Any Necessary Extraordinary Assumptions
6. Any extraordinary assumptions necessary in the assignment. 10/04/11
10/04/11 Chapter 1 Approaches to Value 21 Extraordinary Assumptions
Any extraordinary assumptions necessary in the
Extraordinary assumptions presume as fact otherwise uncertain
information about physical, legal, or economic characteristics of
the subject property; or about conditions external to the property,
such as market conditions or trends; or about the integrity of
data used in the analysis.
10/04/11 Chapter 1 Approaches to Value 22 6. Any Necessary Extraordinary Assumptions
Sample language that could be used to describe
Extraordinary Assumption in a report.
Sample Language #1 “The property owner indicates that the home has
a total of 2,400 square feet. Based on the
location of the home on the site, the landscaping
and the configuration of the second floor, the
appraiser was unable to measure the exterior of 10/04/11
10/04/11 Chapter 1 Approaches to Value 23 7. Necessary Hypothetical Conditions
1. Any hypothetical conditions necessary in the
Sample Language – The subject property is outside but adjacent
to a municipality that identifies the subject property as suitable for
low density residential development upon annexation.
Discussions with the municipal planning department indicate that
annexation is available upon request by the property owner. The
analysis associated with this assignment is based on the
assumption that the property is annexed into the municipality and
zoned for low density residential development.
10/04/11 Chapter 1 Approaches to Value 24 7. Necessary Hypothetical Conditions
1. Any hypothetical conditions necessary in the
10/04/11 A Hypothetical Condition is something that
could be but isn’t as the appraiser writes their
The appraiser is asked to develop an
appraisal on the subject property as it is now,
a vacant lot.
The appraiser is asked to estimate a value if
the lot had a finished four-plex built on it.
Chapter 1 Approaches to Value 25 2. Plan the Appraisal
This 2nd Step, Plan the Appraisal includes determining
the “Scope of the Work”, usually with the client. Then
you plan the appraisal. Your text includes six helpful
steps in this planning.
1.Decide which data is needed
2.Identify the sources of the needed data.
3.Determine what personnel are needed.
4.Make a time schedule.
5.Make a flow chart.
6.Present a fee proposal, agree upon a fee, sign a contract.
10/04/11 Chapter 1 Approaches to Value 26 Types of Data
There are two basic types of Data:
1. General Data
General data has to do with the current economic
market, real estate market and location of the subject
General Data could be used for other
properties in the area.
2. Specific Data Specific data is about the site and the improvement that you
are working on. It will pertain only to that property.
10/04/11 Chapter 1 Approaches to Value 27 2. Plan the Appraisal
Income of Owners
Building Codes 10/04/11
Property Data Comparable
Property Data Description of Improvements Location in
Comparison to subject
Number of Bedrooms
Number of Bedrooms
Number of Baths
Number of Baths
Size in Comparison
Square feet in subject
Garage – attached – detached Comparison
Chapter 1 Approaches to Value 28 Data Sources The appraiser will have a sizable amount of
The data for any area that they have done repetitive
appraisals Other data sources include the Multiple Listing
Services. The County Recorders Office. Title
Companies. Some appraisers subscribe to data services.
They simply type in some basic information
and suitable comparables are downloaded.
10/04/11 Chapter 1 Approaches to Value 29 Personnel Needed Will you need other secretaries or appraisers to
Will assist you with the appraisal?
assist Will you need another body when you are at
the Can someone in the office gather the data
necessary for the report?
necessary Can someone else in the office arrange the
time for you arrival?
10/04/11 Chapter 1 Approaches to Value 30 Personnel Needed
Depending on the size of the office and the
volume of work the personnel that is or might be
available is limited.
Some offices have one person who will make a
time schedule for you, with comparables, and
you simply arrive in a timely fashion.
Usually when we are in the field appraising
single family homes we will do four homes in a
10/04/11 Chapter 1 Approaches to Value 31 Time Schedule
You will want a time schedule on a daily basis.
This is particularly true when you are doing field
What time will you leave?
What time will you get to the first appraisal. If
you are ahead of schedule, behind schedule, do
you have the telephone number of the next client
whose property you are appraising.
How are you going to get into the property?
10/04/11 Chapter 1 Approaches to Value 32 Time Schedule
IF you get into the field and some or all of the
comparables are unsuitable for the appraisal.
How will you get other comparables while you
are there? Will you have to go back? What if
you had to trade cars and you don’t have your
tools with you.
Better than half of appraisals are delivered late.
Once you get the field information and all the
data, how long until you finish the report?
10/04/11 Chapter 1 Approaches to Value 33 Flow Chart
If you have a heavy workload you will want a
Flow charts are many and varied. Depending on
your workload you will need to use a flow chart
of some kind so you will know where you are
and when appraisals in progress will be finished.
I prefer a visual flow chart, as in a white board
on a wall where I can see from my desk or
worktable what I have on my agenda.
10/04/11 Chapter 1 Approaches to Value 34 Fee Proposal & Contract
You will finally have to tell the potential client
what your fee for the assignment is going to be.
Once they accept that, rather than a contract, the
fax or email you an intent for work.
You can then begin your work. In California it
is rate that we ever sign a contract. The fax or
email is a letter directing us to do the work.
10/04/11 Chapter 1 Approaches to Value 35 Data Analysis
Data analysis is simply the analyzing of the data
that you have gathered or anticipate gathering.
You are going to gather, or maybe already have
gathered data that is pertinent to your appraisal.
You need to ascertain how that data that you
plan on using relates to the subject property.
The appraisal must include a highest and best
use anlysis of the property as well.
10/04/11 Chapter 1 Approaches to Value 36 Market Analysis
The market analysis amounts to the type of property
you are trying to appraise.
With single family homes, which will be 99.99% of
your work you will still apply all of the steps.
The following slide has a 6 step process that was
outlined by the institute in a book “The Appraisal of
Real Estate” 12th edition.
In your real appraisal work you won’t be aware that you
are using these steps, but you are, and they are worth
10/04/11 Chapter 1 Approaches to Value 37 Six Step Outline for Market Analysis
6. Property productivity analysis
Competitive supply and demand analysis
Supply and demand study
Capture estimation 10/04/11
10/04/11 Chapter 1 Approaches to Value 38 Property Productivity Analysis
Which features of the subject property define the
productive capabilities and potential uses of the
These attributes can be physical, legal, or
All are the basis for selecting comparable
10/04/11 Chapter 1 Approaches to Value 39 Market Delineation
Once you have determined the uses of the
subject property you can identify a market, or
markets for that property.
What you are doing is separating the subject
property from a larger market according to its
A single family home in a single family
neighborhood all zoned Residential 1 (R-1).
This won’t be a shopping center.
10/04/11 Chapter 1 Approaches to Value 40 Demand Analysis and Forecast
You must consider existing and anticipated
demand. You study population and employment
data to analyze and forecast the demand.
The scope of work required by the assignment
will dictate to what extent demand variables
must be investigated.
A regional mall would involve one demand
study, a single family home would be another
10/04/11 Chapter 1 Approaches to Value 41 Competitive Supply Analysis and Forecast
Here you will determine what is currently on the
market as competition for your subject property.
This is normally done from the information that
you have gotten from the local Multiple Listing
Knowing then what is in competition with your
property, and trying to determine the probable
time before that supply is exhausted.
10/04/11 Chapter 1 Approaches to Value 42 Supply and Demand Study
You will examine the interaction of supply and
demand to determine if demand exists. You can
estimate the length of time, the exposure to the
market, before the property would sell.
How much of what you are appraising is being
built right now, are there proposals and permits
that have been applied for to construct similar
property in the neighborhood or affective area of
10/04/11 Chapter 1 Approaches to Value 43 Capture Estimation
How much of the market will your subject command,
capture? You will compare the amenities of your
subject property and other properties being offered and
determine what price you can achieve to attract enough
demand to justify the price you have indicated.
If four homes in the indicated price area are available
but all four look like they will sell before the subject
because they are more desirable, then the subject will
command a lower price
When will the subject sell and for how much.
10/04/11 Chapter 1 Approaches to Value 44 Capture Estimation 2
This information generated through this Market
Analysis is important for all three of the approaches to
Cost Approach – it provides the basis for depreciation,
physical deterioration and functional and external
Income Capitalization Approach – this study provides
the basis for rents, vacancies, expenses of operation.
Sales Comparison Approach – this study provide the
comparables that help determine the value.
10/04/11 Chapter 1 Approaches to Value 45 Highest & Best Use Analysis
Two highest and best use analyses are made;
Highest and best use as vacant.
Highest and best use as improved.
Four tests have to be met before any highest and
best use can be considered.
If a proposed use fails to meet any of the four
tests it is discarded.
Finally, there will be a highest and best use.
10/04/11 Chapter 1 Approaches to Value 46 Four Tests for Highest and Best Use
The 4 Tests for Highest and Best Use are:
10/04/11 Physically possible.
Maximally productive. Chapter 1 Approaches to Value 47 Physically Possible
The proposed use has to be possible. If you
propose a 12 story hotel for a site that is zoned
for that your good. You wouldn’t propose a 12
story hotel for construction of a single family
home located among other single family homes.
If it is not physically possible, it can’t be done,
so it is not even considered.
10/04/11 Chapter 1 Approaches to Value 48 Legally Permissible
The proposal must be legal. Is it legally
Is the Zoning right for you proposal? What
about environmental studies?
Are there prohibitive Private Restrictions?
Easements can restrict the use of a site.
Will the city, county or state allow what you are
10/04/11 Chapter 1 Approaches to Value 49 Financially Feasible
The proposed use must be financially feasible if
it is to compete with other uses. If you plan on
building a 200 unit apartment building in
Death Valley, California it isn’t likely you’ll
ever fill it with tenants. If you don’t have
rents coming in it won’t be profitable.
If it isn’t profitable then it isn’t financially
10/04/11 Chapter 1 Approaches to Value 50 Maximally Productive
The proposed project should give the maximum
financial return that would be possible.
Even though the property is being used as a home, if
it is an R-3 or R-4 lot on which you could build a 6
unit apartment building,.
The value as a home is $500,000 but the value of
the 6 unit would be $1,200,000 and cost $500,000 to
build, then the highest and best use would be the 6
units even though it will remain a single family
10/04/11 Chapter 1 Approaches to Value 51 Highest and Best Use As Vacant 10/04/11
10/04/11 Chapter 1 Approaches to Value 52 Highest and Best Use As Improved 10/04/11
10/04/11 Chapter 1 Approaches to Value 53 4. Apply the Value Approaches
Approach Chapter 1 Approaches to Value Income
Approach 54 10/04/11
10/04/11 Chapter 1 Approaches to Value 55 6. Report the Value Conclusion 10/04/11
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10/04/11 Chapter 1 Approaches to Value 77 1. Step #1 of the appraisal process
To collect the data.
b. Apply the sales comparison approach.
c. Define the problem to be solved.
d. None of the above.
Page 1 - 4
10/04/11 Chapter 1 Approaches to Value 78 2. The most common type of
value estimated by the appraiser
b. Insurable value.
c. Purchase value.
d. Market value.
a. Page 1 - 4 10/04/11
10/04/11 Chapter 1 Approaches to Value 79 3. Which of the following
methods of identifying a
property would be most accurate?
10/04/11 Mailing address
Page 1 - 5
Chapter 1 Approaches to Value 80 4. The client has input but the
appraiser must determine:
The scope of the work to be done
b. The value estimate reported.
c. Which comparable sales to use.
d. All of the above
a. Page 1 - 6
10/04/11 Chapter 1 Approaches to Value 81 5. Market analysis includes:
d. demand analysis and forecast.
property productivity analysis
all of the above.
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10/04/11 Chapter 1 Approaches to Value 82 6. The highest and best use is:
Suitable for a very steep lot.
b. Maximally productive.
c. Market delineation.
d. All of the above.
a. Page 1 - 12
10/04/11 Chapter 1 Approaches to Value 83 7. Reasons to do a highest and
best use is:
To identify comparable sites.
b. To identify the owner’s tastes.
c. Botha. And b.
d. Neither a. nor b.
a. Page 1 - 13
10/04/11 Chapter 1 Approaches to Value 84 8. The cost approach is most
d. The value of the property is low.
the improvements are quite old.
the improvements are new.
None of the above.
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10/04/11 Chapter 1 Approaches to Value 85 9. When estimating the value of a rental
property by the income capitalization
approach, the appraiser must:
d. Multiply the cost by a cost factor.
Divide by the vacancy rate.
Estimate and apply a market rent in their
Use the contract rent in their calculations.
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10/04/11 Chapter 1 Approaches to Value 86 10. The final value estimate should
Rounded to reflect accuracy.
b. Negotiated with the client.
c. Based on the appraiser’s instincts.
d. Rounded to the nearest dollar.
a. Page 1 - 19
10/04/11 Chapter 1 Approaches to Value 87 11. Which of the following are
NOT acceptable types of
b. Short form narrative.
c. Form appraisal.
d. Scope of work contract.
a. Page 1 - 19
10/04/11 Chapter 1 Approaches to Value 88 12. Most single-family appraisal
b. Short form narrative.
c. Form appraisals
d. Scope of work contracts.
a. Page 1 - 20
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This note was uploaded on 10/04/2011 for the course REAL ESTAT 40 taught by Professor Robertrooks during the Winter '08 term at El Camino.
- Winter '08