Real Estate Appraisal

Real Estate Appraisal

Introduction

Property appraisal refers to the process through which one can develop an opinion of the value of a particular property. Various properties are appraised separately in real estate due to its unique conditions. For example, a single-family property cannot be appraised similarly to commercial retail. Nonetheless, the real estate properties’ valuation is quite distinct since their assessment does not occur daily as compared to corporate stocks. The development of appraisal reports for properties is crucial in businesses. A property appraisal is based on location due to its immobility factor (Betts & Glickman, 2015). As such, it is vital in that; the evaluation reports form the basis in taxation, price establishment of the property, and mortgage loans. Appraisers perform property appraisal to determine their market value, value-in-use, investment, and liquidation value. Therefore, for a better understanding of real estate appraisal, one will discuss an appraisal process for single-family, condominium, commercial retail, and land. Nonetheless, one will focus on similarities and differences of various appraisal processes of the properties to values as well as to data. Finally, one will discuss the Uniform Standards of Professional Appraisal Practice (USPAP) that applies the in property valuation.

The appraisal process for each property type

Identification of the problem

The appraisal process for land, single-family dwellers, condominium, and commercial retail is based on various processes. The first process involves the identification of the problem. The appraiser identifies the problem in which ought to be solved. For land, one identifies on the characteristics such as whether it is cleared or not, area’s location such as is it in a zoned area or not, and its best use. One should put into consideration whether the land can be one that can be developed. For single-family units and condominiums, one should factor in issues such as its best use, location, and future use. One should consider if the location can be inhabited or is a house that can be rented or not. On commercial retail, one should factor in the location and if the property free from defects.

Development of scope of work

Secondly, one should develop the scope of work to be used during the valuation process. The scope of work developed is based on the information in which one obtained during the problem identification stage. For land, one should figure out if one can appraise based on the information collected or perform the appraisal according to the standards provided by USPAP. For a single-family dwelling, the appraiser should focus on whether to measure the house or use the information provided by tax records. In a condominium, one can decide on whether to use the information based on the number of unassigned and assigned parking. One can also determine its value by determining the ratio of the rented apartment, which is already occupied. A valuation can be achieved better through involves an expert in the field.

Collection and analysis of data applicable

The third process of appraising a property can be achieved through the analysis of the data in the market concerning the property one intends to purchase or rent. The scope of work changes since as one evaluates the property, new information is likely to come up. As such, one should collect and analyze market data concerning the property one desires. Information regarding supply and demand, growth trends, and should be valued. For a condominium or single-family residence, data concerning the zoning should be considered. One should also outline issues such as if the house had reached its final useful life and the need for improvement through demolition and construction has to be considered. The single-family house can also be determined by obtaining the data regarding the number of people occupying the house and the trend of the occupants. For example, single house data with trends based on the aged population specifically may not be the same with one with data on young or mid-age people. In the appraisal of data for commercial property, the studies of the market should unravel its maximum productivity (Kelley et al., 2012). Market data and analysis for a single-family dwelling, land, commercial retail, and condominium is done using four market analysis levels. They include level A which relies on generic data updated every year. It is majorly focused on the demand and supply of the property. Level B is subject-specific. It utilizes data from a market survey from public or private agencies. Level C is based on the usage of data obtained from the subject sub-market, and it forecasts on future demand and absorption of the property. It scrutinizes the income level, employment, and population of the area. Level D Analyses is more based on land since it focuses on its usage, public and private fiscal policies, and economic base.

 Relevant approaches to value                                                                                            

The fourth process involves the application and the development of approaches to value. One of the value approaches is the cost approach. The method does not work for land, condos, and commercial retail. It is based suited for properties recently constructed or used for special use. The site value is essential in the appraisal process of single-family, land, condos, and commercial retail. Similar vacant sites cost of improvement in comparison to sales and land value is basic in value determination. The cost of development can be determined by using quantity survey, index method, comparative unit, and unit in place. A relative unit can be used in the valuation of a newly constructed home. Prior value determination, an appraiser calculates the depreciation by determining the physical and economic value of the property based on the reproduction cost of a new property.

The most relevant method of indicating the value for a land, single-family dwelling, and condominium is the sales comparison approach. The method is also used in the valuation of commercial retail; however, it is not reliable. The reason is that finding an enterprise with similar revenue and expenses in the same location is difficult. The sales comparison approach is based on the development of the value of a property by choosing sales in a subject market that shares the best use. In terms of sales, the magnitude of property similarity, whether land, condominium, single-family dwellers, or commercial retail to the selected subject property, provides an indicator of its value (Ling & Archer, 2018). This thus forms the basis towards the identification of value influencing elements in the region. Through the elements identified, the appraiser uses the difference obtained from the properties and comparable sales for analysis purposes. This helps in the development of adjustment, which can be used in compensation for the differences existing between the market value of the property and comparable sale. The appraiser in this process uses quantitative adjustments since it is based on market data, and it is supported numerically.

An appraiser can also use the income approach mechanism. It usually uses the capitalization rate in the appraisal of the property. The value of the property can be obtained through the application of capitalization to net operating income. The method applies to a single-family dwelling, condominium, and commercial retail. However, the appraisal of land does not apply the income approach. The method is quite hectic since the gathering of data from the owners is difficult. Most people fail to keep records, and for those who keep, they present data of business only for productive light. As such, the appraiser is entitled to work towards the reconstruction of the owner’s operating statement. One should ensure that accountability is met and all aspects of property or business are listed. For instance, issues such as rent, mortgages, and repair reserves have to be accounted for. Nonetheless, the appraisal process also is the market versus the actual value of the property. In a single-family dweller and retail business with rentals that are long-term dwellers and detailed expenses, records can be a reliable method through which value can be determined since the actual numbers exist. Regardless of that, it is always prudent for the appraiser to use the market-based numbers during the preparation of operating statement reconstruction. This is due to leases, which are generally based every year, and as such, numbers provided may not be accurate or correct. However, in commercial retail, using actual numbers can be reliable in determining the value as compared to the market.

Comparison and contrast of approach to value

Various methods in the appraisal of the property work best on some properties, while its application to the appraisal of other properties does not work. The sales approach is quite relevant to single-family, condominium, and land. This has been influenced by its market participants’ competition for similar properties. For instance, the choice of selecting a house or land is influenced by the desire of various people to settle in a particular place.

On the other hand, the income approach can be utilized by commercial retail. This is because businesses are specifically purchased for their capabilities in income generation. Income approach in single-family is not suitable as compared to its application to commercial retail. A single-family is specifically purchased to settle one’s family or a right to own home, not for income purposes (Ling & Archer, 2018). The emotional needs of an individual more influence it. Income and sales approaches can also be suitable for condominiums and land since some people might engage in the desire to possess for either settling purposes or commercial issues. For instance, one may purchase land to construct a rental house or other income-generating purposes. Similarly, a condominium might be purchased for the reason for renting out for income purposes.

Comparison and contrast of data used in different approaches

The sales comparison approach, also called the market data approach, is a sophisticated competitive market analysis used in the analysis of single-family homes. The data of single-home is obtained through analysis of its data based on its physical features such as decks, pools, property conditions, counting the number of bathrooms, bedrooms, and rooms. One should also consider the data of the construction quality, floor plan, and features of the neighboring properties. The data of the properties without neighboring can be done by using a downward adjustment. The appraiser can also count more expensive features that are not similar to the neighboring house. For condominiums, the sales approach can utilize the data of other apartments in the location. Obtaining the data for condominiums using the sales approach is simple since the structures and features of condominiums are similar.  As such, its data is obtained through the valuation of the selling prices of the condominiums in the area.

The cost approach is mainly used in the valuation of land. The data of the value of land-based on cost approach uses reproduction and replacement cost. The replacement, though, is the most effective since it uses modern material and features. Estimation of replacement or reproduction cost uses a square-foot, unit-in-place, and quantity-survey method in obtaining the value of the property (Kelley et al. 2012). The data of a property using the square-foot method uses the cost of a recently constructed comparable property per square foot and multiplies by square footage. The appraiser uses external dimensions regarding the comparable structure. The unit-in-place method obtains the data of a property being appraised by summing up individual components cost. The structures of the component, such as overhead, labor, and profits, are calculated. The quantity-survey method estimates the value of the property by adding up the separate cost of the material. This is applicable for condominium and single-family. It is accurate but costly. Cost approach methods also obtain the data of a property through the calculation of its depreciation. Depreciation is mainly used in the calculation of value for condominium and single-family.  The most effective way of obtaining depreciation data of a property is through the use of an economic age-life method. The data of a property is obtained using a constant rate in a linear mechanism over a period. For example, for a single-family unit;

House value=property price-price of the land

Using the income approach, the appraiser obtains the data of the property by estimating the expected annual gross income through market analysis of how much the property can earn. One can also use effective gross income. The method is suitable for condominium since one obtains data through calculated by subtracting rent loss and vacancy rate from its market price. The estimation of the capitalization rate can also be used to obtain the required data. This is a calculation of data of the property by using the return rate in which other investors are obtaining from the same property in the local market. This method is suitable for commercial retail. The formulas below are used in the calculation of effective gross income and capitalization rate;

Effective gross income=gross income-(vacancy rate rent loss)

Capitalization rate= effective gross income/property value

Uniform Standards of Professional Appraisal Practice (USPAP)

Valuation of the property defined by USPAP. The profession defines on the appraisal process. According to USPAP, an appraiser is a person who performs the valuation services in a competent, independent, and objective way (Tosh & Rayburn, 2016). In land, single-family, condominium, or commercial retail, one has to follow the required ethical standards in the appraisal process. For the cost approach, the report of the appraisal should include depreciation extracted from the cost of the property from the market data. This should be based on an individual basis. The report on the analysis of depreciation of condominium and single-family must be presented. The subject improvement should be outline based on external and functional obsolescence. For the income approach, according to USPAP, the rent for the property, such as condominium, must be included. As well, the sources of expenses based on market value data such as the information from the interviews from market participants are used in the appraisal. For example, if the income approach is obtained from the owner-operator, the appraiser should include the discussion in the valuation report. For the sales comparison approach, USPAP outlines that the Minimum of two adjustments derived from the market value analysis of the property is used. One can either use a graphic, paired sales, or statistical analysis in obtaining the two market adjustments required in property valuation. For a land valuation, the land mix ratio should be used. For building such as condominium and single property, building mix adjustments should be used in the appraisal process.

Conclusion

There are various processes and approaches used in property appraisal. The process in place is crucial in ensuring that the required opinion value is obtained. The problem in place is essential since it determines the property characteristics in terms of its viability. For example, for a land, a problem identified can be based on its market value within the region located. The scope involved is based on the defined problem in place. It outlines the steps one should follow during the appraisal process. Analyzing data concerning various properties is also important. The relevant approach used is general market analysis.  The application of multiple methods of value is the most crucial part. The appraiser can either use the cost approach, sales comparison approach, or the income approach. The techniques in place are suitable for specific properties. The problem identified scope of work and data analysis on various features enables the appraiser to determine the most effective way to value for users.

References

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Betts, R. M., & Glickman, J. A. (2015). Basic real estate appraisal: Principles & procedures.

Kelley, C. A., Hood, L. P., Tax Management Inc., & Bloomberg BNA. (2012). Valuation: General and real estate. Arlington, Va: Tax Management.

Ling, D. C., & Archer, W. R. (2018). Real estate principles: A value approach.

Tosh, D. S., & Rayburn, W. B. (2016). Uniform standards of professional appraisal practice: Applying the standards. Chicago: Dearborn Real Estate Education.