RE26RC07: Appraisal Process

• Definition: An appraisal is an unbiased estimate of the nature, quality, value or utility of an interest in, or aspect of, identified real estate.

  * Appraisal is a valuation and an evaluation.

• Definition Valuation is the process of estimating market value, investment value, insurable value, or other property defined value of an identified interest in a specific parcel at a given date.
• Definition: Evaluation is a study of the nature, quality, or utility of a parcel of real estate without reference to a value estimate
• Definition: Counseling may be a mixture of the two and most importantly, submitting recommendations to solve the problem.

1. Concepts of Land
   1. Geographic
   2. Legal
   3. Social
   4. Economic
2. Appraisal
   1. Discipline of Appraisal
   2. Real Estate, Real Property and Personal Property
   3. Definition of Appraisal
3. Importance of The Appraisal to a Massachusetts Community
4. Valuation Process
   1. Definition of the Problem
   2. Preliminary Analysis and Data Selection and Collection
      • General
      • Specific
   3. Highest and Best Use Analysis
   4. Land Value Estimate
   5. Application of the 3 Approaches
      • Sales
      • Income
      • Cost
   6. Reconciliation of Value Indications and Final Value Cost
   7. Report of Defined Value

• Function of a report is to lead a reader from the definition of an appraisal problem to a specific conclusion through reasoning and relevant descriptive data.
• Appraiser's facts, reasoning, and conclusions must be presented clearly and succinctly.
• Length of report is not as relevant
• Can be oral or written but usually decided by client
• If oral, still must have detailed documentation.
• Must be meaningful to a client and not misleading in the market.

• The Appraisal Institute (nationally) sets minimum requirements for contents, facts, descriptions and statements of work and purpose in all types of appraisal reports.
• In Massachusetts and elsewhere the report should include the following:
  1. Complete description of the appraised real estate.
  2. Explanation of assumptions, limitations and disclaimers.
  3. All significant facts used.
  4. Reasonable complete summary
  5. Date of valuation and report
  6. Statement of the Interest Appraised.
  7. Clear Statement of any smaller parcels of larger parcels.
  8. That the appraiser has no interest or personal bias to the parties involved.
  9. Certified statement that the appraiser did or did not inspect the property and the facts reported are true.
  10. Statement of report distribution and intended use.

• Definition: Opinion of Value at that point in time between two able and willing parties that want to sell and buy
• Fair Market Value
• Appraisal includes 3 Approaches: Market, Income and Cost Approach
• Law of Supply & Demand is the basis for the 3 appraisal approaches

The Law of Supply and Demand

• Assumes that the market is "perfect"
• Assumes perfect knowledge of the product
• Assumes An Active market with no monopolies of buyers/sellers or large enough to affect prices
• Assumes homogeneous product: that all comparables are the same
• Assumes all cash transactions, no financing
• Assumes Easy Entry into the Market by All Interested Buyers

• Definition: Price that equates the supply of real estate to the demand for real estate

  In Massachusetts, how does an appraiser find market information?

  1. Sales Comparables: Massachusetts Town Hall recent reports
  2. Massachusetts Brokers: For lease and sales information
  3. Trade journals and market reports

• Definition: Price that equates the supply of income streams to the demand for income streams
• This approach works better for investment property rather than owner-occupied
• Calculate net income
• Impose any variations in operating expenses with vacancy rate and reserves
• Impose a Capitalization Rate; Massachusetts Examples
• Determines potential value to investor
• Massachusetts Information from sales comparables, talking to investors, researching alternative investments, talking to investment brokers, etc.

• Definition: Price that equates the supply of material and labor to the demand for material and labor
• Strictly "bricks and mortar" approach
• Cost to rebuild the same structure on the same site
• Estimates from brokers, construction firms, architects, trade journals ie. Dodge Report