logan piercy also help you know the current market rates and see how the area has developed and the scope for future development.

1. Appraisal value of Real
Estate Principles
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2. Outline
 The appraisal process
 Sales comparison approach
 Cost approach
 Income approach

3. The appraisal report
 Try to arrive at an appraisal that is an
unbiased written estimate of the fair market
value of a property, usually referred to as
the subject property, at a particular time.
 This process leads to an appraisal report
that is the document the appraiser submits
to the client and contains (1) the appraiser’s
final estimate of value, (2) the data upon
which the estimate is based, and (3) the
calculations used to arrive at the estimate.

4. Uses of an appraisal report
 Applying for a mortgage.
 Establishing a benchmark for setting
the ask price and the bid price.

5. The appraisal process
 1. Identify the appraisal problem.
 The appraiser identifies (1) the property to
be valued, (2) the property rights to be
valued; e.g., fee simple absolute or
leasehold, (3) the type of value to be
estimated; value estimates for insurance,
taxation, or other purposes, (4) the date of
the estimate, and (5) limitations of the
analysis.

6. The appraisal process, II
 2. Determine the required scope of
work.
 The worked performed should be
consistent with the expectations of
typical uses of similar appraisals.

7. The appraisal process, III
 3. Collect data and describe property.
 Data are collected concerning the market
and property-specific context of the subject
property.
 The information often includes such items
as recent transaction information, rental
rates, vacancy rates, physical
characteristics of the subject property and
comparable properties, flood zone data,
population and employment trends, and
land use data.

8. The appraisal process, IV
 4. Perform data analysis.
 This include market analysis: supply, demand,
marketability.
 The highest and best use of a property is defined as
the use found to be (1) legally permissible, (2)
physically possible, (3) financial feasible, and (4)
maximally productive, i.e., yielding the greatest net
benefit to an owner.
 In most appraisal assignments, property is valued
at its highest and best use.
 The appraiser usually visualizes highest and best
use in two separate circumstances: (1) highest and
best use of the land as though vacant, and (2)
highest and best use of the property as improved.

9. The appraisal process, V
 5. Determine value of land.

10. The appraisal process, VI
 6. Apply 3 conventional approaches to valuation.
 There are 3 conventional approaches: (1) the sales
comparison approach, (2) the income approach, and (3) the
cost approach.
 Generally, all three approaches should be used in a formal
appraisal.
 The sales comparison approach is usually the preferred
approach. It is applicable to almost all one- to four-family
residential properties and even to some types of income-
producing properties where enough comparable sales are
available.
 The income approach is the dominant approach for income-
producing properties, e.g., offices.
 The cost approach is usually the last resort when there are no
comparable sales and there is no income to measure, e.g.,
public auditoriums.

11. The appraisal process, VII
 7. Reconciliation and a final estimate of
market value.
 Each of the 3 approaches is applied to
establish alternative indicators of market
value.
 Reconciliation: the process in which the
appraiser weighs the relative reliability of
value indicators for the property being
valued.
 Usually, more weight is given to the most
applicable method and most reliable data.

12. Sales comparison approach
 Basic Idea:
 Value of RE can be determined by
analyzing the sale prices of similar
properties.
 Why?
 Because in a competitive market close
substitutes will sell for similar prices.

13. The process
 Exhibit 7-3
Identify
Elements of
Comparison &
Value
Adjustment
Select
Comparable
Sales
Adjust
Comparable
Sale Prices
w.r.t. Subject
Reconcile
Adjusted Sale
Prices; Obtain
Indicated Value

14. Step 1
 1. Identify elements of comparison and
value adjustment.
 These elements are the relevant
characteristics used to compare and adjust
the property prices.
 Examples include location, site size, sale
date, construction quality, building age,
number of bath, etc.
 That is, those elements that have
implications on the value of the property.

15. Step 2
 2. Select comparable sales.
 Identify recent sales that are similar to the
subject property and located in immediate
neighborhood.
 Select commercial comparables that
compete with the subject property for buyers
and/or tenants.
 Arm’s-length transactions. Comparable
sales are fairly negotiated transactions; no
foreclosures.
 Usually need at least 3 comparable sales.

16. Data
 The sources of market data on
comparable sales include: (1) public
records, e.g., the local (county)
property tax assessor’s office, (2)
multiple listing service (MLS) that is
usually maintained by the local board
of realtors, and (3) private data
services.

17. Step 3, I
 3. Adjust comparable sale prices to approximate
subject.
 2 categories: (1) transactional adjustments, such as
condition of sale, financing terms, and market
conditions, (2) property adjustments, such as
location, physical characteristics, legal
characteristics, use, and non-realty items (personal
property).
 Condition of sale: arm’s-length transactions are
preferable.
 Financing terms: a favorable financing term (e.g.,
low-income homebuyer programs) is often
associated with a higher purchase price. Try not to
use sales with special financing terms because their
adjustments are difficult.

18. Step 3, II
 Market conditions: historical sale prices need to be
adjusted to reflect current market conditions.
 Location: real estate value is about location; this
adjustment is rather difficult.
 Physical characteristics: differences in lot size,
quality of structure, floor plan have implications on
RE value.
 Legal characteristics: select sales with the same
bundle of rights; the adjustments are difficult.
 Use: if you are asked to appraise a single-family
residence and a similar house next door is currently
used as a law office. Its current sale is not a
comparable sale.

19. Step 4
 4. Reconcile adjusted sale prices; obtain
indicated value.
 The final adjusted sale prices of
comparables are reconciled to the indicated
value.
 Appraisers usually give more weights to the
final adjusted sale prices of comparables
that have more complete data, fewer and
smaller adjustments (more similar), and
more recent transactions.

20. Sequence of adjustments
Transaction price of comparable
+/- Property rights conveyed (most tricky adjustment)
+/- Financing terms (low-income loan?)
+/- Conditions of sale ( a forced sale?)
+/- Expenditures immediately after purchase
+/- Market conditions
= Market-adjusted normal sale price
+/- Location
+/- Physical characteristics (lot size, structure size, etc.)
+/- Economics characteristics (tenant mix, lease terms, etc.)
+/- Use (most tricky adjustment)
+/- Non-realty items
= Indication of subject value