The Decision to Order an Appraisal Q) In addition to estimating "Market Values" of real estate for Lenders in the underwriting of a mortgage loan or line of credit, what other typical "Intended Uses" or "Purposes" are there for written Appraisal Reports? A) "Retrospective Date" or "Current Market Value" Appraisals are used for a variety of other "Intended Uses" and "Purposes" including:
1) An estate appraisal (as of the date of death) can assist (as clear evidence) in the total valuation of a decedent's estate to determine whether any estate taxes might be due.
2) An estate appraisal (as of the date of death) could establish for the heirs, a "Stepped-up Basis" and often limit "Capital Gains" tax should they decide to sell the inherited property. 3) An appraisal could be used in pre-estate planning when setting up a trust and/or will. 4) An appraisal is quite often used to present evidence in a successful assessment appeal should your client believe that the local county assessor has over-valued their property. 5) An appraisal is often used in determining a fair and equitable distribution of the equity in a property in a proposed marriage dissolution negotiation. 6) A "Current Market Value" appraisal and suggested "Asking Price" could assist a property owner or an "Out-of-State" heir to settle an estate who might wish to first secure an unbiased "Market Value" opinion from an uninterested 3rd party professional appraiser. 7) An appraisal can be sometimes used in the dissolution of a partnership or in the transfer of a partial ownership interest to satisfy the terms of a buy-sell agreement between parties.
Once the "Intended Use" and "Purpose" for the appraisal has been established, the Client and the Appraiser will then need to discuss who the "Intended User(s)" will be. The initial "Scope of Work" will then be determined at this point with specific details verbally agreed upon including but not limited to how to access the property, type of report, anticipated delivery date, cost and if there are any specific assignment conditions.
Requested information for income producing properties include: current and historic income and expense statements, copies of leases, rent rolls. For all properties, other important material (if available) include a plat of survey, legal description, deed, title policy, sales history, recent capital improvements, etc. From our initial conversation, the appraiser will determine a "Scope of Work" and often prepare a "Letter of Engagement" detailing other specific details of the proposed assignment.
One of the next tasks for the appraiser to perform will be to set an appointment date and personally inspect the subject property. In an appraisal, the location of the real estate is of primary importance. Does this property conform well to others in the immediate market area? Beyond that, during the inspection, the subject improvement will be carefully observed, described and photographed. Such details include physical features and condition of the improvements, effective age, architectural style and other special features will be noted as well as measurements taken.
The gross living area (GLA) and size and shape of the underlying subject land site are of critical importance.
It will always be helpful if you have a legible copy of a plat of survey and/or scale architectural drawings that you can provide to the appraiser at the time of inspection. In this way, a more accurate calculation of the subject's SF building (GLA) and SF site size can be compared to that which in appears in the public record. This can be of particular importance to determine if county assessor's stated sizes are accurate.
A supportable error in the reported County Assessor's public records in terms of building or site sizes in an appraisal report could provide critical evidence in a successful assessment appeal.
I. Sales Comparison (Market Data) Approach
Competent licensed real estate appraisers should be familiar with the local markets that they service. In the "Sales Comparison Approach" it becomes the primary job of the appraiser to search for relevant "Comparable Sales" (Comps) that have recently sold that are located within the same market area as the subject property. Once defined, the appraiser will then drive past these properties for the purpose of making an exterior inspection of these potential "Comps" and photograph them while reviewing listing sheets and other data previously collected. From this group, three (3) to nine (9) comparable closed sales most similar to the subject are selected and analyzed to later appear in the written appraisal.
In this instance, the Sales Comparison (Market Data) Approach is given primary weight since it in a sense, "measures" the value of the subject based upon analysis of recently sold comparable sold properties. In some cases, current active (For Sale) listings might be cited especially in rapidly changing markets. The effectiveness of the Sales Comparison Approach is diminished when there are few sold properties to be found in the local market for direct sales comparison. This can occur when weak market conditions prevail due to a national or local recession or when affordable mortgage money is not available. In addition, when the subject real estate is dis-similar to other properties in the local market, direct sales comparison is rather subjective.
In the Sales Comparison Approach, relevant "Units of Comparison" such as "Gross Income Multipliers" (GIM's), Price per Unit, Price per Room and Price per Square Foot of gross building area (GBA) (extracted from relevant market data) can also be used to establish a range of values which are then reconciled to arrive at an indicted estimate of "Market Value" in the Sales Comparison (Market Data) Approach.
A supported opinion of the "Market Value" of the subject property will be determined once all differences between the comparable sales and the subject property have been evaluated and adjusted for differences. When it comes to valuing real estates, the Sales Comparison Approach (Market Data Approach) generally proves to be the most reliable indicator of value in most assignments.
II. Valuation Using the Income (Capitalization) Approach
In the case of income producing properties, another way of valuing a property is through the development of an "Income Approach". In this case, the actual or "Potential Gross Annual Income"" (PGAI) that the subject property could generate is taken into consideration and compared to that income generated by other existing similar properties. After reviewing historic expense data and reconstructing it in comparison to that found in the market, a "Net Operating Income" (NOI) for the subject property is estimated. The indicated (NOI) is then capitalized using a market-derived overall rate (OAR) to estimate the subject's indicated "Market Value" by the "Income Approach".
It is important to observe, that in the case of single-family homes and to a lesser extent, condominiums, limited rental data can be found as these properties are usually purchased by owner-occupants. In most instances, no income approach will be developed as it is would not be relevant to value.
III. Valuation Using the Cost ApproachThe underlying subject land value is often estimated in the Cost Approach, under the assumption that the site was vacant and available for development as of the effective date. The Cost Approach has limited application for the valuation of existing residential properties due to the difficulty in accurately estimating construction costs new, effective age of the improvements, physical depreciation and functional and external obsolescence. Existing properties are often located in fully developed areas with little or no land sales to rely upon for market analysis. In some instances when buyer demand is strong and financing is readily available, certain properties can have strong market appeal as "tear down" properties. The purchasers of such properties (obviously after the closing) then demolishes the site's existing improvements which can be reasonably considered part of their total land site acquisition price.
In most "Market Value" appraisal assignments, the Cost Approach is generally omitted as it is considered the least objective of the three (3) typical approaches to value.
Arriving at a Final Value Conclusion (Reconciliation) Combining information from all relevant approaches, the appraiser is then ready to document an estimated "Market Value" for the subject property. The estimate of value on the appraisal report is not necessarily the final sales price even though it is likely the best indication of a property's value. Depending on the specific personal circumstances of the buyer and seller, their level of urgency or a buyer's desire for that exact property, and the underlying motivation of the seller, the negotiated contract price is where the "meeting of the minds" takes place.
As stated earlier, the Income Approach has no relevance in establishing a Market Value estimate for the subject property unless it happens to be an income producing property. Depending on the local market, most detached single-family homes and to a lesser degree, most residential condominiums are typically purchased by owner-users and not acquired solely for future rental income. In conclusion, it should be observed that the exclusion of the Income Approach and the Cost Approach does not diminish the reliability of most appraisal reports.
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