Valuation process
A systematic procedure used in the valuation of real property.
Client
The party or parties who engage, by employment or contract,
... [Show More] an appraiser in a specific assignment.
Steps in Defining the problem
Identification and location of the real estate; Identification of the property rights; Definition of value; Purpose and intended use of the appraisal; Effective date of the opinion of value; Any special limiting conditions
Real property
The interests, benefits, and rights inherent in the ownership of real estate.
Market Value
A type of value, stated as an opinion, that presumes the transfer of a property (i.e., a right of ownership or a bundle of such rights), as of a certain date, under specific conditions set forth in the definition of the term identified by the appraiser as applicable in an appraisal.
Intended Use
The use or uses of an appraiser's reported appraisal or appraisal review assignment opinions and conclusions, as identified by the appraiser based on communication with the client at the time of the assignment.
Intended User
The client and any other party as identified, by name or type, as users of the appraisal or appraisal review report by the appraiser on the basis of communication with the client at the time of the assignment.
Effective Date of the Value
The ____________ can be a past (retrospective), current or future (prospective) date. This decision will be made in concert with the client's needs.
Extraordinary assumption
An assumption, directly related to a specific assignment, as of the effective date of the assignment results, which, if found to be false, could alter the appraiser's opinions or conclusions.
Hypothetical Condition
A condition, directly related to a specific assignment, which is contrary to what is known by the appraiser to exist on the effective date of the assignment results, but is used for the purpose of analysis.
Scope of work
The type and extent of research and analyses in an assignment.
Workfile
Documentation necessary to support an appraiser's analyses, opinions, and conclusions
Steps in the Valuation Process
1. Define the problem 2. Determine scope of work 3. Gather, record, and verify the data 4. Determine the highest and best use 5. Estimate the land value 6. Estimate value by each of the three approaches (if applicable) 7. Reconcile the estimated values into the final opinion of value 8. Report the final opinion of value
Highest and Best Use Criteria (in order)
1. Legally permissible 2. Physically possible. 3. Financially feasible. 4. Maximally productive
General data
Items of information on value influences that derive from social, economic, governmental, and environmental forces and originate outside the property being appraised.
Specific data
Details about the property being appraised, comparable sale and rental properties, and relevant local market characteristics.
U.S. Bureau of the Census
The largest repository of demographics
Professional or trade associations offering general data
National Association of Homebuilders; National Association of Realtors; Appraisal Institute
Sources of Specific Data
Deeds; Location maps; Tax maps; Flood maps; Assessor's records; Title companies; Zoning ordinances; Multiple listing services
Special Flood Hazard Area Designation
FEMA Zones A or V
Information in Deed
The legal description of the property; The owners of record; Easements of record; Deed restrictions; Chain of title (when the property was purchased and from whom)
Primary intended user for MLS information
Agents and Brokers
Land
The earth's surface, both land and water, and anything that is attached to it whether by the course of nature or human hands; all natural resources in their original state, e.g., mineral deposits, wildlife, timber, fish, water, coal deposits, soil.
Site
Land that is improved so that it is ready to be used for a specific purpose.
Brownfield
An industrial or commercial site that is abandoned or underused because it suffers from real or perceived continuing contamination.
Site Valuation Methods
SALES COMPARISON; EXTRACTION; ALLOCATION; SUBDIVISION DEVELOPMENT; LAND RESIDUAL; GROUND RENT CAPITALIZATION
Extraction Method
A method of estimating land value in which the depreciated cost of the improvements on the improved property is estimated and deducted from the total sale price to arrive at an estimated sale price for the land; most effective when the improvements contribute little to the total sale price of the property.
Allocation Method
A method of estimating land value in which sales of improved properties are analyzed to establish a typical ratio of land value to total property value and this ratio is applied to the property being appraised or the comparable sale being analyzed.
Principle of Balance
Real property value is created and sustained when contrasting, opposing, or interacting elements are in a state of equilibrium.
Principle of Conformity
Real property value is created and sustained when the characteristics of a property conform to the demands of its market.
Basic income capitalization formula
Value = Income/Rate
Summation Approach
Another name for cost approach
Manufactured Home
A factory-built house manufactured under the Federal Manufactured Home Construction and Safety Standards Act of 1976, commonly known as the HUD Code.
Modular Home
A factory-built house built in compliance with a building code other than the HUD Code. This usually means that the home is constructed to the standards of the state or local building code used by the governmental unit where the house is to be located. Note that the California Factory-Built Housing Program uses the term factory-built housing (FBH) in place of the term modular home.
Gross Living Area
Total area of finished, above-grade residential space; calculated by measuring the outside perimeter of the structure and includes only finished, habitable, above-grade living space. (Finished basements and attic areas are not generally included in total gross living area. Local practices, however, may differ).
Gross Building Area
Total floor area of a building, excluding unenclosed areas, measured from the exterior of the walls of the above-grade area. This includes mezzanines and basements if and when typically included in the region.
Monolithic slab-on-grade foundation
One giant footing (slab)
Wood Foundations
Foundations that are more common in Canada
Plywood or OSB Board (oriented strand board)
Most common subflooring material
Romex
Type of wiring is most commonly found in new residential construction
U-shaped traps
Prevent sewer gases from venting back into the house
Heat pump
Essentially reversible air conditioner
Voltage
Electricity measured by pressure
Amperage
Electricity measured by volume
Substitution
The appraisal principle that states that when several similar or commensurate commodities, goods, or services are available, the one with the lowest price will attract the greatest demand and widest distribution. This is the primary principle upon which the cost and sales comparison approaches are based.
Cost Approach Formula
Reproduction or Replacement Cost New
- Accrued Depreciation
+ Site Value
= Property Value
Cost Approach
A set of procedures through which a value indication is derived for the fee simple interest in a property by estimating the current cost to construct a reproduction of (or replacement for) the existing structure, including an entrepreneurial incentive, deducting depreciation from the total cost, and adding the estimated land value. Adjustments may then be made to the indicated fee simple value of the subject property to reflect the value of the property interest being appraised.
Fee Simple Estate (or Interest)
Absolute ownership unencumbered by any other interest or estate, subject only to the limitations imposed by the governmental powers of taxation, eminent domain, police power, and escheat.
Reproduction Cost
The estimated cost to construct, at current prices as of the effective date of the appraisal, an exact duplicate or replica of the building being appraised, using the same materials, construction standards, design, layout, and quality of workmanship and embodying all the deficiencies, superadequacies, and obsolescence of the subject building.
Replacement Cost
The estimated cost to construct, at current prices as of the effective appraisal date, a building with utility equivalent to the building being appraised, using modern materials and current standards, design and layout.
Entrepreneurial Incentive
The amount an entrepreneur expects to receive for his or her contribution to a project. Entrepreneurial incentive may be distinguished from entrepreneurial profit (often called developer's profit) in that it is the expectation of future profit as opposed to the profit actually earned on a development or improvement.
Depreciation
In appraising, a loss in property value from any cause; the difference between the cost of an improvement on the effective date of the appraisal and the market value of the improvement on the same date.
Direct Costs
Expenditures for the labor and materials used in the construction of improvements; also called hard costs.
Indirect Costs
Expenditures or allowances for items other than labor and materials that are necessary for construction, but are not typically part of the construction contract. Indirect costs may include administrative costs; professional fees; financing costs and the interest paid on construction loans; taxes and the builder's or developer's all-risk insurance during construction; and marketing, sales, and lease-up costs incurred to achieve occupancy or sale. Also called soft costs.
Entrepreneurial Profit
A market-derived figure that represents the amount an entrepreneur receives for his or her contribution to a project and risk; the difference between the total cost of a property (cost of development) and its market value (property value after completion), which represents the entrepreneur's compensation for the risk and expertise associated with development. An entrepreneur is motivated by the prospect of future value enhancement (i.e., the entrepreneurial incentive).
Comparative-Unit Method
It is the simplest, quickest, least complicated, and least accurate method of estimating costs.
Segregated Cost Method
A different term for Unit-in-Place method
The wear and tear that begins when a building is completed and placed into service.
Functional Obsolescence
The impairment of functional capacity of a property according to market tastes and standards.
Outmoded Items
Dated items/features
Inadequacies
Examples: the heating system is not large enough or the insulation is inadequate.
Superadequacies
Things that are more than adequate for their intended purpose.
External Obsolescence
An element of depreciation; a diminution in value caused by negative externalities and generally incurable on the part of the owner, landlord, or tenant.
Economic Life
The period over which improvements to real property contribute to property value.
Useful Life
The period of time over which a structure may reasonably be expected to perform the function for which it was designed.
Physical Life
The total period a building lasts or is expected to last as opposed to its economic life.
Actual Age
The number of years that have elapsed since construction of an improvement was completed; also called historical or chronological age.
Effective Age
The age of property that is based on the amount of observed deterioration and obsolescence it has sustained, which may be different from its chronological age.
Remaining Economic Life
The estimated period during which improvements will continue to represent the highest and best use of the property; an estimate of the number of years remaining in the economic life of the structure or structural components as of the date of the appraisal; used in the economic age-life method of estimating depreciation.
Age-Life Method
Effective age
————————— X total cost =
Total Economic Life
Depreciation
Curable Depreciation
Items of physical deterioration or functional obsolescence that are economically feasible to cure. Economic feasibility is indicated if the cost to cure is equal to or less than the anticipated increase in the value of the property.
Breakdown Method
It breaks down depreciation into its component parts of physical deterioration, functional obsolescence and external obsolescence and measures each individually
Deferred Maintenance
Needed repairs or replacement of items that should have taken place during the course of normal maintenance.
Short-Lived Items
A building component with an expected remaining economic life that is shorter than the remaining economic life of the entire structure.
Long-Lived Items
A building component with an expected remaining economic life that is the same as the remaining economic life of the entire structure.
Functional Utility
The ability of a property or building to be useful and to perform the function for which it is intended according to current market tastes and standards; the efficiency of a building's use in terms of architectural style, design and layout, traffic patterns, and the size and type of rooms.
Sales Comparison Approach
The process of deriving a value indication for the subject property by comparing market information for similar properties with the property being appraised, identifying appropriate units of comparison, and making qualitative comparisons with or quantitative adjustments to the sale prices (or unit prices, as appropriate) of the comparable properties based on relevant, market-derived elements of comparison.
Principle of Substitution
The appraisal principle that states that when several similar or commensurate commodities, goods, or services are available, the one with the lowest price will attract the greatest demand and widest distribution. This is the primary principle upon which the cost and sales comparison approaches are based.
Principle of Contribution
The concept that the value of a particular component is measured in terms of its contribution to the value of the whole property, or as the amount that its absence would detract from the value of the whole.
Neighborhood
A group of complementary land uses; a congruous grouping of inhabitants, buildings, or business enterprises.
District
A neighborhood characterized by homogeneous land use, e.g., apartment, commercial, industrial, agricultural.
Market Area
The area associated with a subject property that contains its direct competition.
General Data
Items of information on value influences that derive from social, economic, governmental, and environmental forces and originate outside the property being appraised.
Specific Data
Details about the property being appraised, comparable sale and rental properties, and relevant local market characteristics.
Comparative Analysis
The process by which a value indication is derived in the sales comparison approach. Comparative analysis may employ quantitative or qualitative techniques, either separately or in combination.
Quantitative Analysis
based on numbers, and results in either dollar or percentage amounts.
Quantitative Adjustment
In the sales comparison approach, the process of making numerical adjustments to the sale prices of comparable properties, including data analysis techniques (paired data analysis, grouped data analysis, and secondary data analysis), statistical analysis, graphic analysis, trend analysis, cost analysis (cost-to-cure, depreciated cost), and capitalization of rent differences; usually precedes qualitative analysis.
Paired Data Analysis
A quantitative technique used to identify and measure adjustments to the sale prices or rents of comparable properties; to apply this technique, sales or rental data on nearly identical properties are analyzed to isolate a single characteristic's effect on value or rent. Often referred to as paired sales analysis.
Qualitative Analysis
The process of accounting for differences (such as between comparable properties and the subject property) that are not quantified; may be combined with quantitative analysis.
Relative Comparison Analysis
A qualitative technique for analyzing comparable sales; used to determine whether the characteristics of a comparable property are inferior, superior, or similar to those of the subject property.
Ranking Analysis
An ordinal technique for analyzing data, commonly used in the analysis of comparable sales; a variant of relative comparison analysis in which comparable sales are arrayed in descending or ascending order of desirability and each is analyzed to determine its comparability to the subject property.
Sequence of Adjustments
The order in which quantitative adjustments are applied to the sale prices of comparable properties.
Fee Simple
Absolute ownership unencumbered by any other interest or estate, subject only to the limitations imposed by the governmental powers of taxation, eminent domain, police power, and escheat.
Partial Interest
Divided or undivided rights in real estate that represent less than the whole (a fractional interest).
Life Estate
Rights of use, occupancy, and control, limited to the lifetime of a designated party, sometimes referred to as the life tenant.
Leased Fee Interest
A freehold (ownership interest) where the possessory interest has been granted to another party by creation of a contractual landlord-tenant relationship (i.e., a lease).
Leasehold Interest
The tenant's possessory interest created by a lease.
Tenancy in Severalty
An estate in real estate held by one owner.
Tenancy
The holding of property by any form of title.
Mortgage
A pledge of a described property interest as collateral or security for the repayment of a loan under certain terms and conditions.
Conventional Loan
A mortgage that is neither insured nor guaranteed by an agency of the government, although it may be privately insured.
Guaranteed Mortgage
A mortgage in which a party other than the borrower assures payment in the event of default, e.g., a VA-guaranteed mortgage.
Insured Mortgage
A mortgage in which a party other than the borrower assures payment on default by the mortgagor in return for the payment of a premium, e.g., FHA-insured mortgages, private mortgage insurance (PMI).
Discount Points
A percentage of the loan amount that a lender charges a borrower for making a loan; may represent a payment for services rendered in issuing a loan or additional interest to the lender payable in advance.
Buydown
A lump-sum payment to the lender that reduces the interest payments of the borrower. The cost of the buydown is usually reflected in the price paid and can be expressed as a percentage of principal.
Conditions of Sale
An element of comparison in the sales comparison approach; comparable properties can be adjusted for differences in the motivations of either the buyer or a seller in a transaction, e.g., when the comparable transaction is not an arm's-length sale.
Arm's-Length Transaction
A transaction between unrelated parties under no duress.
Expenditures Made Immediately after Purchase
An element of comparison in the sales comparison approach; comparable properties can be adjusted for any additional, atypical investment (e.g., curing deferred maintenance) required to make a property salable.
Life Cycle of a Market Area
Growth, Stability, Decline, Revitalization
Room Count
A unit of comparison used primarily in residential appraisal. No national standard exists on what constitutes a room. The generally accepted method is to consider as separate rooms only those rooms that are effectively divided and to exclude bathrooms.
Net Adjustment
The difference between the total positive and negative adjustments made to a comparable sale price.
Gross Adjustment
The total adjustment to each comparable sale price calculated in absolute terms. All the adjustments, both positive and negative, are added together to determine the gross adjustment to a comparable sale price.
Income Capitalization Approach
A set of procedures through which an appraiser derives a value indication for an income-producing property by converting its anticipated benefits (cash flows and reversion) into property value.
Income Capitalization Formula
Value = Income / Rate OR Value = Income X Multiplier
Gross Rent
Usually expressed in a monthly figure
Gross Income
Usually expressed in an annualized figure
Capitalization Rate
Any rate used to convert income into value.
Net Operating Income
The actual or anticipated net income that remains after all operating expenses are deducted from effective gross income but before mortgage debt service and book depreciation are deducted.
Direct Capitalization
A method used to convert an estimate of a single year's income expectancy into an indication of value in one direct step, either by dividing the net income estimate by an appropriate capitalization rate or by multiplying the income estimate by an appropriate factor.
Overall Capitalization Rate
An income rate for a total real property interest that reflects the relationship between a single year's net operating income expectancy and the total property price or value
Rent
An amount paid for the use of land, improvements or a capital good.
Contract Rent
The actual rental income specified in a lease.
Scheduled Rent
Income due under existing leases.
Market Rent
The most probable rent that a property should bring in a competitive and open market reflecting all conditions and restrictions of the lease agreement, including permitted uses, use restrictions, expense obligations, term, concessions, renewal and purchase options, and tenant improvements
Effective Rent
The rental rate net of financial concessions such as periods of no rent during the lease term and above- or below-market tenant improvements
Excess Rent
The amount by which contract rent exceeds market rent at the time of the appraisal; created by a lease favorable to the landlord (lessor) and may reflect unusual management, unknowledgeable parties, a lease execution in an earlier, stronger rental market, or an agreement of the parties.
Deficit Rent
The amount by which market rent exceeds contract rent at the time of the appraisal; created by a lease favorable to the tenant, resulting in a positive leasehold, and may reflect uninformed parties, special relationships, inferior management, a lease executed in a weaker rental market, or concessions agreed to by the parties.
Percentage Rent
Rental income received in accordance with the terms of a percentage lease; typically derived from retail store and restaurant tenants and based on a certain percentage of their gross sales.
Operating Expenses
The periodic expenditures necessary to maintain the real property and continue production of the effective gross income, assuming prudent and competent management.
Fixed Expenses
Operating expenses that generally do not vary with occupancy and which prudent management will pay whether the property is occupied or vacant.
Total Operating Expenses
The sum of all fixed and variable operating expenses and the replacement allowance cited in the appraiser's operating expense estimate.
Net Operating Income Formula
Gross Annual Rental (Potential Gross Income, or PGI)
+ Other Income
- Vacancy/Credit Loss (V&C)
= Effective Gross Income (EGI)
- Operating Expenses (TOE)
= Net Operating Income (NOI)
Potential Gross Income
The total income attributable to real property at full occupancy before vacancy and operating expenses are deducted.
Other Income
All income generated in the operation of the property that is not derived directly from space rental.
Vacancy and Collection Loss
A deduction from potential gross income (PGI) made to reflect income reductions due to vacancies, tenant turnover, and nonpayment of rent; also called vacancy and credit loss or vacancy and contingency loss.
Effective Gross Income
The anticipated income from all operations of the real property after an allowance is made for vacancy and collection losses and an addition is made for any other income.
Yield Capitalization
A method used to convert future benefits into present value by 1) discounting each future benefit at an appropriate yield rate, or 2) developing an overall rate that explicitly reflects the investment's income pattern, holding period, value change, and yield rate.
Discounted Cash Flow Analysis
The procedure in which a discount rate is applied to a set of projected income streams and a reversion. The analyst specifies the quantity, variability, timing, and duration of the income streams as well as the quantity and timing of the reversion and discounts each to its present value at a specified yield rate.
Gross Rent Multiplier
The relationship or ratio between the sale price or value of a property and its periodic gross rental income.
Range
In statistics, the difference between the highest and lowest values in a set of numbers.
Arithmetic Mean
A measure of central tendency. The sum of values for a variable in a sample or population divided by the number of items in the sample or population.
Median
A measure of central tendency identified as the middle value in an ordered array of numerical values.
Mode
A measure of central tendency consisting of the numerical value or categorical characteristic that occurs most frequently in a sample or population.
Gross Income Multiplier
The relationship or ratio between the sale price or value of a property and its gross annual rental income.
Expense Ratio
Expenses to Income
Reconciliation
The process of reducing a range of value indications into an appropriate conclusion for that analysis, e.g., the derivation of a value indication from the adjusted prices of two or more comparable sales in the sales comparison.
Reconciliation Criteria
The criteria that enable an appraiser to form a meaningful, defensible conclusion about the final value opinion. Value indications are tested for the appropriateness of the approaches and adjustments applied, the accuracy of the data, and the quantity of evidence analyzed. [Show Less]