THE FORMAL APPRAISAL PROCESS - PowerPoint Presentation

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THE FORMAL APPRAISAL PROCESS

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CHAPTER TERMS AND CONCEPTSAppraisal processAppraisal reportAssignment conditionsClientContractual conditionsCost approachCredible appraisalDefinition of the appraisal

problemEffective date of valueExposure timeExtraordinary assumptionForm report

Hypothetical conditionIncome approachIntended useIntended usersLetter report2Slide3

CHAPTER TERMS AND CONCEPTSLimiting conditionsMarket dataMarket exposureMarket valueMarketing timeNarrative reportReconciliationRestricted Use Appraisal Report

Sales comparison approachScope of workSelf-Contained Appraisal ReportSubject propertySummary Appraisal Report

Type of valueValue in exchangeValue in use3Slide4

LEARNING OUTCOMESExplain the four steps in the appraisal process.

Name the six elements that define the appraisal problem.Define the term scope of work.

Explain the difference between value in use and value in exchange.Define the term market value, and explain how it differs from market price.Outline the three approaches to value, and explain how they are used in appraisals.4Slide5

THE APPRAISAL PROCESS AND USPAPThe Appraisal ProcessIs Defined by USPAPUSPAP must be followed byAppraisers completing Federally Insured Transactions

Licensed or Certified Appraisers in Mandatory StatesMost Professional Organizations require compliance with USPAP

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CONFORMITY WITH USPAP REQUIRMENTSStandard 1How an appraisal should be developedStandard 2

How an appraisal should be reported6Slide7

FOUR STEPS IN APPRAISAL PROCESSIdentify the Appraisal ProblemIdentify Appropriate Solutions –

The Scope of WorkExecute the Appropriate Scope of Work

Report Findings and Conclusions7Slide8

Step 1: Identify the Appraisal ProblemThe elements to be identified

The client and any other intended usersThe intended use of the appraiser’s opinions and conclusions

The type and definition of valueThe effective date of the appraiser’s opinions and conclusionsThe Subject of the Assignment and its relevant characteristicsAny assignment conditions8Slide9

RELEVANT CHARACTERISTICSIntended use of the appraisal and reportWhat the appraiser finds out about the property, andWhat is important to the buyers of such property, as reflected by the market data

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Consider:Slide10

1. IDENTIFICATION of the CLIENTThe client engages the appraiser

The client defines the other intended usersThe client’s name must be in the work fileClient’s name does not have to be in report

Three key points for intended users:Decision between client and appraiser at the engagementParties that are directly involved in appraisalOnly includes those to whom the appraiser must clearly communicate the results.10Slide11

2. INTENDED USE Different Users Have Different NeedsFederally Insured Institutions Require USPAP ComplianceType of ReportSelf ContainedSummary

Restricted Use Report11Slide12

3. TYPE & DEFINITION OF VALUEOpinion of Market ValueMost common type

Must be agreed on at the beginning of assignmentRequires an estimate of Exposure Time.time to sell prior to effective dateClient may wish to have a marketing timetime to sell after the effective date

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4. EFFECTIVE DATE OF APPRAISALMust be Agreed on by the Appraiser and Client at the start.Three Possible Dates

The effective date of valueThe date of inspectionThe date of the reportDate of Value May Be:

Retrospective – In pastProspective – In futureCurrent13Slide14

5. THE SUBJECT’S RELEVANT CHARACTERISTICSIdentification of SubjectAddressLegal DescriptionTax I.D. Number

Map referenceSurveyProperty sketchPhotographsPersonal property identifiedProperty rights appraised

Fee simpleLeased feeOther Partial Interests14Slide15

6. ASSIGNMENT CONDITIONSUSPAPSupplemental StandardsJurisdictional Exceptions

Extraordinary AssumptionsHypothetical ConditionsRegular Assumptions and ConditionsContractual Conditions

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STEP 2: IDENTIFY APPROPRIATE SOLUTIONSDefining the Scope of WorkThe extent of identification of the propertyThe extent of property inspection

The type and extent of data researched, and The type and extent of analysis employed to reach a conclusion.

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EXTENT OF IDENTIFICATIONHow much Identification of a Property is Necessary?Legal DescriptionsAddress

Tax ID numbersGround and Aerial PhotographsProperty Rights?Fee SimpleLeased Fee

LeaseholdOther17Slide18

EXTENT OF PROPERTY INSPECTIONHow Extensive the Viewing of the Subject Property?Interior and exterior viewing?Drive-by appraisal?Desktop appraisal?Appraisal must be Credible

Appraiser must have adequate information from other sources for a drive by or desktop appraisalAppraisers view a propertyHome Inspectors Inspect

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TYPE & EXTENT OF DATA RESEARCHED19Slide20

STEP 3. EXECUTE SCOPE OF WORKThe Sales Comparison Approach to Value

The Cost Approach to ValueThe Income Approach to Value

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STEP 4. REPORT FINDINGS & CONCLUSIONS

Three Types of Written ReportsSelf-Contained Appraisal ReportThe report describes the material and analyzes to solve the problem

The Summary Appraisal ReportThe report summarizes the material and analyzes to solve the problemThe Restricted Use ReportStates the answer to the problemWith the Minimum required content21Slide22

FORMATS OF APPRAISAL REPORTSLetter ReportWord Processed

The Form ReportGenerated by appraisal softwareThe Narrative Report

Generated on narrative report generating software and/or word processed22Slide23

TYPES OF VALUEAssessed valueBook Value

Capitalized valueCash valueDepreciated valueEconomic value

Exchange valueFace valueFair valueGoing concern valueInheritance tax valueInsurance valueLeased valueLiquidation valueListing valueLoan valueMarket valueNuisance valuePotential valueRental valueSalvage valueUse ValueValue in foreclosureValue in place23

Each type of value needs its own definitionSlide24

VALUE IN USE VS. VALUE IN EXCHANGEValue in Use

Value of an item or object to a particular userValue in ExchangeValue of a thing to people in general

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DEFINING MARKET VALUEMarket ValueWhat a property should normally sell for, assuming a willing buyer and a willing seller.Market Value for Federally-Related R.E. Transactions

….the most probable price which a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller each acting prudently, knowledgeably, and assuming the price is not affected by undue stimulus.

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CRITERIA FOR MARKET VALUEConditionsTypical Motivation

Informed PartiesMarket ExposureTerms of SaleNo Sales Concessions

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PRICE VS. VALUEFactors Influencing Price as Distinguished from Value:Unusual financingDistress sale

Forced purchaseUninformed partiesMisrepresentation of facts

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CLASSICAL APPROACHES TO VALUEThe Sales Comparison Approach to ValueThe Cost Approach to Value

The Income Approach to Value28Slide29

STEPS for SALES COMPARISON APPROACHInvestigate Comparable SalesCompare Sales to Subject Property

Adjust for DifferencesArrive at Value for Subject29Slide30

STEPS IN THE COST APPROACHEstimate Land Value as if VacantEstimate the Cost to Build the Existing Structure

Estimate the Amount of Accrued Depreciation, or Loss in ValueSubtract Accrued DepreciationAdd Land Value to the Depreciated Cost of Improvements

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Example of Cost Approach31Slide32

Steps in the Income ApproachEstimate Market Rent and Potential Gross IncomeEstimate Annual Vacancy and Collection Loss

Subtract to Arrive at Effective Gross incomeSubtract Annual Operating Expenses from Effective Gross to Arrive at the Net Operating IncomeDecide on Capitalization Method and Rate

Capitalize Net Income into an Estimate (Opinion) of Value32Slide33

EXAMPLE OF INCOME APPROACH33

The appraiser selected the direct capitalization method and a 10% capitalization rate, based on the market rate analyzed.Slide34

SUMMARY34

The steps in the appraisal process are to

:1. Identify the appraisal problem to be solved2. Identify appropriate solutions3. Execute the appropriate scope of work4. Report the findings and conclusions reachedSlide35

SUMMARY35

The six elements of defining the appraisal problem are

:The client and any other intended usersThe intended use of the appraisal and reportThe type and definition of valueThe effective date of the appraiser’s opinions and conclusionsThe subject of the assignment and its characteristicsAny assignment conditionsSlide36

SUMMARY36

The scope of

work includes four issues:1. The extent of property identification2. The extent of property inspection3. The type of data researched and the extent of research4. The types and extent of data analyses usedSlide37

SUMMARY37

Three approaches are used for valuing real estate:

Sales Comparison / Cost / Income The sales comparison approach is often the most reliable.The cost approach estimates the value of a property by adding its land value to the estimated cost to replace the existing structures less depreciation.The income approach compares the income-producing capability of the property with that of properties that have been sold.