Chapter 1
What is appraisal?

"...a supportable, defensible, estimate of [the most probable selling price]"

What should you sell for?

What should you buy for?

What is the cost vs. the value of an appraisal

The role of real estate brokers in appraisal

When may a formal appraisal not be needed in a buy/sell transaction?

In a very active market with many sales of very similar properties, the value of the possible increased accuracy may not exceed the cost of the appraisal.  (eg. lot sales in a large popular subdivision)

 

Whenever the value in use of a specific site so exceeds the asking price of the property that any delay in its purchase could be much more costly than the value of any information disclosed by the appraisal.  (eg. A developer has assembled all but a small residential parcel in the middle of the planned office park development.)

The economic role of value and value estimation

Improves information flow to the market

Improves market efficiency

Types of decisions requiring appraisal

Buy/sell

Lease/buy

Market rent

Highest and best use

Timing of construction

Types of Value

Market value

Loan value

Taxable (assessed) value

Insurable value

Investment value

Going-concern value

Value in use

Value in exchange

Definition of Market Value

“The most probable price that a property should bring in a competitive and open market under all conditions requisite to a fair sale, assuming that the buyer and seller are both acting prudently and knowledgeably and that the price is not affected by undue stimulus.”

Implicit in the definition:

The sale is of a specified date  and the passing of title from the seller to the buyer is under the following conditions:

    Buyer and seller are typically motivated

    Both parties are well informed and acting in what they consider their best interests

    A reasonable time is allowed for exposure to the open market

    Payment is made in cash or comparable to cash

    The price represents a nomal consideration for the property sold, unaffected by special or creative financing or sales concessions

Estimation vs. Prediction

Probabilistic

Assumptions

    Value not absolute

    Value expects future transactions

Requisites of Market Value

Scarcity

Utility

Transferability

Value vs. cost and price

The Appraisal Process

Definition of the problem

Preliminary analysis

Data selection and collection

Highest and Best Use Analysis

Land value estimate

Application of the appropriate approaches to value

Reconciliation of value indications and final estimate

Reporting of defined value

Approaches to Value Estimation

Cost-depreciation approach

Sales-comparison approach

Income capitalization approach

Cost-Depreciation Approach

Based upon the theory that a knowledgeable purchaser would pay no more for a property than the cost of building an acceptable substitute.

Site value

Plus Improvement value

Less Depreciation

Sales-Comparable Approach

Based upon the theory that a knowledgeable purchaser would pay no more for a property than the cost of acquiring an acceptable substitute.

Identifying comparables

Adjustments

    Time of sale

    Conditions of sale

    Location

    Physical attributes

    Reconciliation

Income-Capitalization

Based upon the theory that a knowledgeable purchaser would pay no more for a property than the present value of the anticipated future benefits.

Estimation of income

Estimation of multipliers

    Value = Income / Rate
    $10,500/.09 = $116,667

Appraisal Organizations and Regulation (See Appendix A)

MAI, SRA (Appraisal Institute)

ASA (American Society of Appraisers)