RE26RC07: Appraisal Process

Approved Jan. 13, 2017

1. Learning Terminology: Court Definitions and Appraisal Institute Definitions

1. 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.
2. 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.
3. Definition: Evaluation is a study of the nature, quality, or utility of a parcel of real estate without reference to a value estimate
4. Definition differences between states or countries.
5. Global appraisal standard differences and standardization through RICS, UPAV, TINSA.

2. The Different Levels and Requirements of a Licensed Appraiser and Recommending the Appropriate Level to Your Client:

• Licensed Trainee
• Licensed Appraiser
• Certified Residential
• Certified General
• Trade designations: MAI, RSA, SRA
• Now need a 4-year college degree to earn a license

3. What are the Federal Regulations That an Appraiser Follows Unlike a Broker Developing a CMA? 

• CMA are now being regulated in some states: it is not a valuation but a “suggested listing price” consumer understanding the differences.
• Uniform Standards of Professional Appraisal Practices (USPAP). What is it and how does it regulate appraisal reports?
• Background on the Appraisal Foundation and the Appraisal Standards Board and why they were formed. Review of 1989 Savings and Loan Crisis and FIRREA
• Summary discussion about the Federal Yellow book.
• How do appraisers differ for residential, multi-family and commercial properties?

4. Appraisal Institute's Definition of Appraisal Process and How its Used in Massachusetts

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. Valuation Process
   1. Definition of the Problem
   2. There are over 32 types of value and a number of methodologies. Each value dictates a different appraisal methodology and approach.
   3. Preliminary Analysis and Data Selection and Collection
      1. General 
      2. Specific
   4. Highest and Best Use Analysis: How is this analysis to the foundation of valuation? What is legally permitted?
   5. Land Value Estimate
   6. Application of the 3 Approaches:
      1. Sales
      2. Income
      3. Cost
   7. Reconciliation of Value Indications and Final Value Cost
   8. Report of Defined Value
   9. Any updates necessary due to new Federal, USPAP or Congressional changes

5. Report Writing in General

• 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.
• What are the ingredients to an appraisal report?

6. Industry Standards for Reporting

• The Appraisal Institute sets minimum requirements for its own members on 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. Who is the Intended User, Purpose and Distribution? Scope of Work
3. Explanation of assumptions, limitations and disclaimers.
4. Competency of Appraiser for the assignment. How can an out-of-state appraiser be engaged? What is the definition of competent and how does the appraiser disclose competency.
5. All significant facts used.
6. Reasonable complete summary.
7. Date of valuation and report.
8. Statement of the Interest Appraised.
9. Disclaimer Statements and why they are important to the reader and appraiser.
10. Clear Statement of any smaller parcels of larger parcels.
11. That the appraiser has no interest or personal bias to the parties involved.
12. Certified statement that the appraiser did or did not inspect the property and the facts reported are true.
13. Statement of report distribution and intended use.

7. The Appraisal Process Experienced in Massachusetts

• Definition: Opinion of Value at that point in time between two able and willing parties that want to sell and buy.
• Fair Market Value: What is “fair”? How does fair differ from “current market value?”
• Appraisal includes 3 Approaches: Market, Income and Cost Approach. When are they used or not used?
• Law of Supply & Demand is the basis for the 3 appraisal approaches. What is its definition?

8. 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.

9. Market Approach

• Definition: Price that equates the supply of real estate to the demand for real estate.
• In Massachusetts, how does an appraiser find market information?
• Sales Comparable: Massachusetts Town Hall recent reports.
• MLS should have zoning district and not state as “residential” or “commercial” Needs to be specific.
• Is the property commercial or “mixed use”? Clarity is relevant.
• Massachusetts Brokers: For lease and sales information. Discuss how a broker can help an appraiser with data and market information.
• Trade journals and market reports.
• Appraiser should be discussing the market with market area brokers.

10. Income Approach

• 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. 

11. Cost Approach

• 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 i.e. Dodge Report.

12. Sample of Completed or Portion of a Massachusetts Appraisal