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THE FORMAL APPRAISAL PROCESS
Presentation on theme: "THE FORMAL APPRAISAL PROCESS"— Presentation transcript:
THE FORMAL APPRAISAL PROCESS
CHAPTER TERMS AND CONCEPTSAppraisal processAppraisal reportAssignment conditionsClientContractual conditionsCost approachCredible appraisalDefinition of the appraisal
problemEffective date of valueExposure timeExtraordinary assumptionForm report
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
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
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
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
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
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.
CRITERIA FOR MARKET VALUEConditionsTypical Motivation
Informed PartiesMarket ExposureTerms of SaleNo Sales Concessions
PRICE VS. VALUEFactors Influencing Price as Distinguished from Value:Unusual financingDistress sale
Forced purchaseUninformed partiesMisrepresentation of facts
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
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
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
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
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
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.