Real property valuation_Unit one and two.pdf

Woldia University
School of LandAdministration:
Department of LandAdministration and Surveying
Real Property Valuation
1 2012 E.C By: Minale Kassahun

UNIT I: THEORETICAL BASIS OF VALUATION
1.1 Introduction
 In our complex society, there are various occasions when
formal or informal appraisals are needed.
 Such occasions can be divided in to two major categories:
Ømarket transactions and
Ølegal transactions
 Most of the market transactions requiring valuations are connected
with
Øsale,
Øpurchase,
Øfinance/mortgage, etc
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Cont…
 In legal transactions, our society requires valuations for different
purposes, including
Øexpropriation and compensation
Øvarious taxation purposes, and
Øuse as evidence in civil lawsuits involving real property
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What is property valuation/appraisal?
 Property valuation/property appraisal is the act or the process of
developing an opinion of property value.
 It involves selective research into appropriate market areas,
assemblage of pertinent data, the use of appropriate analytical
techniques, the application of knowledge, experience and
professional judgment to develop value opinion.
 It is not simply a mathematical process. It is much more than that,
and probably the larger part of the valuation process depends
upon the appraiser forming opinion.
 The appraiser has to look at a wide range of facts and try to
predict the future.
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UNIT I:Theoretical …
 It is some times said that valuation is an art and some times that it
is a science. In fact, it is a mixture of both, an art and a science.
 The scientific part of valuation is
Ø the analysis of data and
Ø the mathematical calculation of data;
 The art is the skill of knowing which information to use to assist
valuation and the process of making judgments and forming
opinions.
the art part of valuation makes valuation subjective
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1.2 Real Estate, Real Property and Personal Property
 An important distinction is made in between real estate and real
property in real estate valuation.
 Even if these concepts are different, some countries laws and court
decisions treat them as similar for legal purposes.
Real Estate
 Real estate is the physical land and the fixtures attached to the land,
e.g, structures.
 It is immobile and tangible.
 The legal definition of real estate includes:
Ø Land
Ø All things that are a natural part of land such as trees, minerals
Ø All things that are attached to land by people, such as buildings, improvements
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 All permanent building attachments like plumbing, electrical
wiring, heating system etc, as well as built- in items such as cabinets
and elevators are usually considered as part of real estate.
 Real estate includes all attachments above and below the ground.
Real Property
 Real property includes all interests, benefits, and rights inherent to
the ownership of physical real estate.
 The total range of ownership of interests in real property is called
bundle of rights.
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 It contains all the interests in real property including the right to
Øuse real estate
Øsell real estate
Ørent and lease real estate
Øenter in it
 give it away
 Each right can be separated from the bundle and can be traded in
the market.
 Real estate appraisers not only distinguish between real estate
and real property but also differentiate between real estate,
personal property and trade fixtures.
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Personal property
 It includes movable items of property that are not permanently
affixed to, or part of, the real estate. Examples:
Øfurniture and furnishings not built into the structure such as refrigerators
and freestanding shelves,
Øitems such as bookshelves installed by a tenant that, under specific lease
terms, may be removed at the termination of the lease.
Trade fixtures
 Unlike fixtures, which are regarded in law as part of the real estate,
trade fixtures are not real estate endowed with the rights of real
property ownership.
 They are personal property regardless of how they are affixed.
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 A trade fixture is to be removed by the tenant when the lease
expires. Examples of trade fixtures:
ØRestaurant booths
ØGasoline station pumps
ØStorage tanks
ØFitness equipment in a health club
ØPlumbing,lightening,heating,and air conditioning in an industrial building
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1.3 Purpose of Valuation
 Valuation is the art or science of estimating the value of a
property for specific purpose.
 The expression specific purpose refers to the fact that
properties may be used for different purposes such as
Ø Residential
ØCommercial
ØIndustrial etc
 This means there is a wide range of reasons for requiring
valuation of a property.
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Financing and credit
ØTo develop an opinion of the value of the security offered for a
proposed mortgage loan
ØTo provide an investor with a sound basis for deciding whether to
purchase real estate mortgages, bonds or other types of security
Insurance
ØTo establish a basis for a decision to insurance
Litigation
 Eminent domain proceedings
ØTo develop an opinion of market value of a property as a whole
before taking
ØTo develop an opinion of market value of the remainder after taking
ØTo estimate the damages to a property created by taking
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Cont.
 It is possible to have different values for one property at one particular
moment in time depending up on the purpose of the valuation.
 Hence
 The purpose for which valuation is required
 The availability of data and
 the type of property that is to be valued will determine
 the nature of the valuation instruction, including
 the techniques employed and
 the basis on which value is to be determined.
 Purpose for which valuation may be required include :
Transfer of ownership
Ø To help prospective buyers set offering prices
Ø To help prospective sellers determine acceptable selling prices
Ø To establish a basis real property exchange
Ø To establish a basis for reorganizing or merging the ownership of multiple properties
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 Property divisions
ØTo develop an opinion of the market value of a property in contract
dispute
ØTo develop an opinion of market value of real estate as pert of
portfolio
ØTo develop an opinion of market value of partnership interests
 Environmental litigation
 To estimate damages created by violating environmental laws
 To estimate damages created by environmental accidents
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Tax matters
ØTo develop an opinion of assessed values
Ø to determine transfer, gift and inheritance ... taxes
Investment counseling, decision making and accounting
ØTo set rent schedules and lease provisions
ØTo determine the feasibility of construction or renovation program
ØTo serve the needs of insurers, policy makers, etc
ØTo facilitate corporate mergers
ØTo develop an opinion of liquidation value for forced selling or
auction proceedings
ØTo advise clients by considering their investment goals, alternatives,
resources, constraints and timing of their activities
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Ø To advise zoning boards, courts, planners on the probable
effects of proposed actions
Ø To assist in arbitrating valuation issues
Ø To analyze supply and demand trends in a market
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1.4 Nature of Value
1.4.1 Distinction among Price, Cost andValue
Market- is a set of arrangements in which buyers and sellers are
brought together through the price mechanism.
 Markets exist in many forms.A market may be defined in terms
of :
Ø Geography
Ø Products or product feature
Ø Number of available buyers and sellers
Ø Or some other arrangements
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 A Real estate market is a market formed by the interaction of
individuals who exchange real property rights for other assets
such as money.
 Specific real estate markets are defined on the basis of
Ø Location
Ø Property type
Ø Income producing potential of the property
Ø Typical investor characteristics
Ø Typical tenant characteristics
Ø Other attributes recognized by those participating
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Appraisers have to make careful distinctions among the terms price, cost
and value.
Price –a particular purchaser agrees to pay and a particular seller agrees
to accept under the circumstance surrounding their transaction.
 Once finalized, price refers to a sale or transaction price and implies
an exchange. It is an accomplished fact.
Cost: - appraisers used the term cost in relation to production, not in
exchange.
 Cost may be either an accomplished fact or a current estimate
 In real estate market, cost represents the total expenditure incurred
on
Øconstruction and
Ødevelopment of real estate.
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 Construction cost normally includes the
Ødirect costs of labor and materials,
Ø indirect costs which are expenditures that are necessary for
construction but are not typically part of construction contract.
Example: Architectural fees, property taxes, administrative expenses,
marketing costs, etc
 Development cost is the cost to create a property, including the
land, and bring it to an efficient operating state. It includes
Øacquisition costs,
Øactual expenditures, and
Øthe profit required to compensate the developer
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UNIT I:Theoretical ….
Value: - the relationship among price, market and cost includes the
concept of value.
§ Value can have many meanings in property valuation.The
applicable definition depends on the context and usage.
§ In the market place, value is usually considered as an anticipation of
benefits to be obtained in the future.
§ Since value changes over time, valuation reflects value at a
particular point in time.
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UNIT I:Theoretical ….
§ Value as a given time represents the monetary worth of
property, goods, or services to buyers and sellers.
§ To avoid confusion, appraisers don’t use the word value alone.
Instead, they use the word
Ømarket value
Øuse value
Øinvestment value
Øassessed value and other specific kinds of value.
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1.4.2 Types of Value
MarketValue
 Market value is the focus of most property valuation assignments.
 Several appraisers debate on the definition of the term market value.
However, the definition which includes most widely accepted
components of market value is:
Market value is the most probable price, as of a specified date, in
cash or in other terms equivalent to cash,or in other precisely revealed
terms, for which the specified property rights should sell after
reasonable exposure in a competitive market under all conditions
requisite to a faire sale, with the buyer and seller each acting
prudently, knowledgeably and for self interest, and assuming that
neither is under undue duress.
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 This definition indicates the situation that market value is based on the
objective observation of the collective actions of the market.
 According to the agency that regulates the Federally Insured Financial
Institutions in the United States:
Market value is the most probable price which a property should bring in a
competitive and open market under all conditions requisite to a fair sale,the buyer
and seller each acting prudently and knowledgeably and assuming the price is not
affected by undue stimulus.
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 What implicit in this definition are
Øbuyer and seller are typically motivated;
Øboth parties are well informed or well advised, and acting in what
they consider their best interest;
Øa reasonable time is allowed for exposure in the open market,
Øpayment is made in terms of cash or in terms of financial
arrangements comparable there to and
Øthe price represents the normal consideration for the property sold
unaffected by special financing amounts and/or terms, services,
fees or credits incurred in the transaction
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 According to the InternationalValuation Standards Committee, market
value is defined for the purpose of international standards as follows;
Market value is the estimated amount for which a property should exchange on the
date of valuation between a willing buyer and seller in an arm’s-length transaction
after a proper marketing where in the parties had each acted knowledgeably,
prudently and without compulsion.
 Arms-length transaction means a transaction between unrelated parties
under undue duress.
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UseValue represents a value of a specific property for a specific use. It is not
based on the highest and best use of the property.
 In estimating use value, the appraiser focuses on the value the real estate
contributes to the enterprise.
 The property designed for certain purpose may have one use value before
a major change and another use value afterward.
 Limited purposes properties such as house of worship, museums, schools,
public buildings, clubhouse etc may be appraised based on their current
use.
Investment value- represents the value of a specific property to a
particular investor based on that person’s investment requirement
ØIt shows the subjective relationship between a particular investor and the
given investment.
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 It differs in concept from market value, although investment
value and market value indication sometimes may be similar.
 If the investor’s requirement is typically of the market,
investment value will be the same as market value.
 When measured in monetary units, investment value is the price
an investor would pay for an investment in light of its perceived
capacity to satisfy individual’s desire and investment goals.
 Specific investment criteria must be known to determine an
opinion of investment value.
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Going ConcernValue
 Going concern- is an established and operating business with an
indefinite future life.
 The physical real estate assets of certain property such as
Øhotels,
Ømotels,
Ørestaurants, and
Ømanufacturing enterprises are integral part of an ongoing
business
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 The value of such properties (including all the tangible and
intangible assets of the going concern as if sold in aggregate) is
referred to as going concern value.
 Going concern value includes the incremental value of the property
associated with the business concern
Assessed value- refers to the value of the property determined for
taxation purpose.
 Assessed value can be a percentage of market value or ratio of cost
to value
 Assessed value may not conform to market value but it is usually
calculated in relation to market value base.
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1.4.3 Factors that CreateValue
 There are four interdependent factors which create value of a
property.These are:
Ø Utility
Ø Scarcity
Ø Desire
Ø Effective purchasing power
Utility - refers to the ability of the product to satisfy human wants, need
or desire.
 All properties have to have utility to tenants, owner investors or
owner occupants. For instance, residential properties satisfy the
need for shelter and commercial properties generate income.
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 The influences of utility on property value depends on the features
of the property. Size utility, design utility, location utility and
other forms of utility can influence property value.
Scarcity - is the present or anticipated supply of an item relative to
the demand for it.
 If demand is constant, scarcity of a commodity makes it more
valuable.
 No object including real estate can have value unless scarcity is
coupled with utility.
Desire -An item must be needed by potential buyer to have value.
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Effective purchasing power- is the ability of an individual or group of
individuals to participate in the market for acquiring goods or
services in a market.
 A valid opinion of the value of a property includes an accurate
assessment of the market’s ability to pay for the property.
 The complex interaction of the four factors that create value is
reflected in the basic economic principle of supply and demand.
 The supply and demand for the property, in any given situation, are
affected by
 the utility of a property,
 its scarcity or abundance,
 the intensity of human desire to acquire it and
 the effective purchasing power
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1.4.4 Forces that InfluenceValue of a Property
 There are four forces that affect the value of a property.These are
ØSocial forces
ØEconomic forces
ØGovernment forces
ØPhysical/Environmental forces.
Social Forces
• The value of a property may be affected by:
ØTotal population
ØIt’s composition by age and gender
ØThe rate of household formation
ØThe rate of household dissolution etc
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Economic Forces
 The economic forces that can affect the value of a property are:
ØEmployment
ØWage level
ØIndustrial expansion
ØEconomic base of the region and the community
ØPrice level
ØThe cost and availability of mortgage credit
ØThe stock of available vacant and improved property
ØNew development under construction
ØOccupancy rate
ØThe rental and price pattern of existing properties
ØConstruction cost etc
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Government Forces-
 The value of a property can be affected by political and legal
activities at all levels of the government.
 Some of the factors which may affect the value of a property are:
ØPublic services such as fire and police protection, utilities, refuse
collection and transport network
ØLocal zoning, building codes
ØNational, state and local fiscal policies
ØSpecial legislations that affect value, such as legislation affecting the type
of loans, loan terms, and investment power of mortgage lending
institutions.
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Physical/Environmental Forces- there are many natural and
man made physical/environmental factors that affect the values of
a property.These are:
ØLocation
ØClimatic conditions such as rain fall, snow, temperature, humidity
ØTopography and soil type
ØNatural barriers to future development such as rivers, mountains,
lakes, oceans
ØTransportation systems
ØToxic contaminants
ØThe nature and desirability of the immediate area surrounding the
property
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1.5 Foundations/Principles ofValuation
The major principles that govern property valuation are:
 Progression: A property’s value may increase due to the existence
of similar properties in similar locations, containing greater quality.
 Regression: A property’s value may decrease due to the existence
of similar properties in similar locations, containing lower quality.
 Conformity:A property is most likely to appreciate in value along
with other, similar properties in the same neighborhood.
 If the neighborhood consists of 2,000 square feet, three-bedroom,
two-bath homes 10 years old, improving property above that standard
may not be profitable.
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 Substitution: A property’s greatest potential market value is
limited by the market value of other, similar properties.A prudent
purchaser would pay no more for a home than it would cost him or
her to build another one.
 Change:No condition remains the same indefinitely; change is part
of the economic cycle. Property values are affected by change in
several forces.These include
Ø local economic and demographic trends,
Ø physical age and condition of the property and surrounding properties,
Øcharacter of a neighborhood or city, and
Ø natural events like disasters
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 Anticipation: Market value often is affected by expectations
about future events.
 For example, if an investor believes that a particular area is likely to
experience growth in the coming years, that would mean property
value would rise in that area.
 If rezoning is proposed in an area, properties in the affected area
could experience rise or fall in property value in anticipation of the
change.
 Contribution: Improvements add to market value of a property
as a factor of current supply and demand, and not necessarily on
the basis of actual cost.
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 For example, a swimming pool which costs 10,000 birr to install
may not necessarily increase the value of the residential property by
10,000 birr.The contribution of the swimming pool to the value of
the property may be
 higher than its cost,
 equal to its cost, or
 lower than its cost depending on current demand and supply of
residential property in that area.
 Plottage: Land values tend to increase when adjacent lots are
combined into single ownership and put into a single zoning or use.
 Highest and best use: real estate valuation is maximized when
land is utilized in the best possible way.
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 Competition:Opportunities for profitable investment lead to
competition.That means profit tends to increase competition.
 Balance :The principle of balance relates both to the property as
well as the environment in which the property is located. Related
to the property itself, this principle holds that value is achieved
and maintained when all elements are in proper proportion.
 Externalities:the principle of externalities holds that factors
external to the property can have either positive or negative
effective on its value.
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UNIT II: TheValuation Process
2.1 Introduction
 The valuation process is a systematic procedure that an appraiser
follows to provide answers to a client’s questions about real
property value.
 It is a model that can be adapted to a wide variety of questions
that are related to value.
It is a systematic and logical method of collecting, analyzing, and
processing data into intelligent and well reasoned value
estimates.
44

 The valuation process begins when the appraiser agrees to take an
assignment and ends when the conclusions of the appraisal are
reported to the client.
 Each property is unique, and opinions of many different types of
value can be developed for a single property.
 The most common appraisal assignment is performed to render an
opinion of market value.The valuation process contains all the steps
appropriate to this type of assignment.
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2.2 Steps ofValuation Process
 The valuation process is accomplished through specific steps.The
number of steps followed depends on the nature of the appraisal
assignment and the available data.
 Research begins after the appraisal problem has been defined and
the scope of work required to solve the problem has been identified.
 The analysis of data relevant to the problem starts with an
investigation of trends observed at the market level: international,
national, regional, or neighborhood.
46

 This investigation helps the appraiser understand the
interrelationships among
 the principles,
 forces, and
 factors that affect real property value in the specific market area.
 Such trends may include positive or negative percentage changes in
property value over a number of years.
 In assignments to develop an opinion of market value, the ultimate
goal of the valuation process is a well-supported value conclusion
that reflects all of the pertinent factors that influence the market
value of the property being appraised.
47

 To achieve this goal, an appraiser studies a property from three
different viewpoints which are referred to as the approaches value.
 These three approaches are
ØCost approach
ØSales comparison approach
ØIncome capitalization approach
 Cost Approach: value is estimated as the current cost of
reproducing or replacing the improvements (including an
appropriate entrepreneurial incentive or profit) minus the loss in
value from depreciation plus land or site value.
48

 In the Sales comparison approach: value is indicated by recent
sales of comparable properties in the market.
 In the income capitalization approach: value is indicated by a
property’s earning power, based on the capitalization of income.
 The income capitalization approach is the dominant approach when
estimating the value of any income producing type of property.
 It assumes a property’s value is determined solely by its expected
future cash flows.
 The three approaches are interrelated, each requires the
collection and analysis of data the pertains to the property being
appraised.
49

 From the approaches applied, an appraiser drives separate value
estimates for the property being appraised.
 One or more of the approaches may not be applicable to a specific
assignment or may be less reliable to that assignment due to
Ø the nature of the property
Ø the needs of the client or
Ø data available
 The important steps in the valuation process are shown in the
figure below.
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Step 1. Definition of the problem
 The definition of the problem should include the following:
 Identification of the client and intended users of the appraisal
 Intended use of the appraisal
 Purpose of the appraisal (including the definition of value)
 Date of the opinion of value
 Identification of the characteristics of the property (including its
location, the property rights to be valued, and other features).
 Extraordinary assumptions
 Hypothetical conditions
52

Identification of the client and intended users of the appraisal
The valuation process begins before the client even engages the
appraiser.
 In deciding whether or not to take on assignment, the appraiser
must consider the client and any other professional obligations
that the assignment will bring.
 The appraiser must clearly identity
 the client and,
 intended users of the appraisal
53

 Even if the client wishes to remain anonymous, the appraiser must
still identify the client in the work file for the assignment.
 Identifying the client and other intended users leads directly to
 identifying the intended use of the appraisal, which in turn is an
integral part of determining the scope of work.
Intended Use of the Appraisal
 The intended use of an appraisal is the manner in which the client
will use the information contained in the appraisal report.
 The client may specify the intended use of the appraisal when
requesting it; if not the appraiser may have to solicit this
information.
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 An opinion of value may be needed to determine the following
decisions involving real property:
Øprice at which to buy or sell
Øamount of a loan
Øbasis for taxation
Øterms of a lease
Øvalue of real property assets in financial statements
Øbasis for just compensation during expropriation
Øother information useful in decision-making involving real property.
55

 To avoid wasted effort, the appraiser and the client must reach to a
mutual understanding
Øconcerning the intended use of the appraisal report and its conclusions
and
Øwho will own the final value estimate.
Purpose of the Appraisal
 The purpose of an appraisal is usually to develop an opinion of a
certain type of value.Types of appraised value include the following:
ØMarket value
ØUse value
ØGoing-concern value
ØInvestment value
ØAssessed value
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Date of the opinion of value
 The date of the opinion of value must be specified because the
forces that influence real property value are constantly changing.
 An opinion of value is considered valid only for the exact date
specified.
 Market value is generally seen as a reflection of market participants'
perceptions of future economic conditions.These perceptions are
based on market evidence at a specific point in time.
 The date of the opinion of value should not be confused with the
date on the letter of transmittal, which is usually a different date.
57

 Economic conditions at a particular time, and sudden changes in
business and real estate markets can dramatically influence value.
 Most appraisals call for a current opinion of value, but in some cases a
valuation as of a date in the past or in the future may be required.
 Retrospective appraisals, appraisals as of a date in the past, may be
required for
ØInheritance tax- date of death
ØInsurance claims- date of casualty
ØIncome tax- date of acquisition
ØCourt cases- date of loss
ØOther purposes
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 Prospective appraisals, appraisals as of a future date, may be
required to render an opinion of the likely value of property
interests in
Øthe proposed developments or
Øthe value at the end of a cash flow projection.
 In such cases care must be taken to avoid the implication that a
future value opinion is market value.
 Appraisers may be employed to derive an opinion of prospective
value that will be used by
Øowners,
Øbuyers,
Øinvestors, or
Ølenders to make decisions relating to real estate
59

Identification of the Characteristics of the Property
 The appraisal problem cannot be properly defined without certain
information about the subject property.
 The essential items to identify the nature of the property are:
ØLocation and physical, legal, and economic attributes
ØReal property interests to be valued (e.g., fee simple, fractional
interest, etc…)
ØItems included in the appraisal other than real property (e.g., personal
property or trade fixtures)
ØRestrictions on land use such as easements and leases.
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Extraordinary assumptions and Hypothetical Conditions
 To describe the scope of required in an assignment, the appraiser
must first identify any extraordinary assumptions and hypothetical
conditions affecting the appraisal.
 Extraordinary assumptions presume uncertain information to be
factual. If found to be false these assumptions could alter the
appraisers opinion or conclusion.
ØExample: Consider an appraiser of a warehouse property that may be
subject to environmental contamination. Even though the presence of
contamination is suspected, it is possible for the appraiser to be based
on the an extraordinary assumption that the property is not
contaminated.
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ØThis appraisal analysis and opinion of market value are subject to
building the 2,000 square meter on this vacant land as described in
the blueprint on a date six months from now.
ØThis appraisal is subject to obtaining the right and ability to be
connected to the sewer and water utilities.
ØThis appraisal is subject to remodeling the kitchen per the plans and
specifications provided.
 Hypothetical conditions are contrary to what exists, but the
conditions are asserted by the appraiser for the purpose of the
analysis.
ØFor example, in the case of a manufacturing plant that is known to be
subject to environmental contamination, it is possible for the
appraisal to be based on the hypothetical condition that it is not
contaminated.
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Step 2: Scope ofWork
 The scope of work is the amount and type of information
researched and the analysis applied in an assignment.The appraiser
is responsible for determining the appropriate scope of work in the
appraisal assignment, given
Øthe client's intended use and
Øthe nature of the problem to be solved.
 In the appraisal report, the scope must be clearly disclosed. It is
often important for the appraiser to indicate what was not done in
the appraisal.
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 The appraiser may want to indicate the time spent and the area
searched to gather the data, especially if only limited data was
available.
 While it is possible to describe the scope of work in various
sections of the appraisal report, it is best to include a separate
section for this topic.
 Defining the scope of work helps the appraiser to identify
Øresources and
Ødata that will be needed in the assignment
 This preliminary analysis helps the appraiser to plan the
subsequent steps in the valuation process.
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Step 3: Data Collection and Property Description
 Following the preliminary analysis (i.e., the identification of the
appraisal problem and determination of the scope of work), the
appraiser should collect data on
Øthe market area,
Øthe subject property, and
Øcomparable properties in the market
 The data needed by appraisers can be divided into
Øgeneral data and
Øspecific data
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 General data includes information about trends in the social,
economic, governmental, and environmental forces that affect the
value of the property in the defined market area.
 General data can contribute significantly to an appraiser's
understanding of the marketplace.
 Specific data relates to the property being appraised and to
comparable properties.This data includes
Ølegal,
Øphysical,
Ølocational,
Øcost, and
Øincome and expense information about the properties and the details of
comparable sales.
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 Financial arrangements that could affect selling prices are also
considered
 Data on comparable properties can be either
 general data that an appraiser has on file or
 specific data that must be gathered for a particular assignment.
 More often, comparable property’s data is specific supply and
demand data that relates to the competitive position of property
similar to the subject in its future market.
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 Supply data includes
 inventories of existing and proposed competitive properties,
 vacancy rates, and
 absorption rates.
 Demand data may consist of
Øpopulation,
Øincome,
Øemployment, and
Øsurvey data pertaining to potential property users.
 From this data an estimate of future demand for the present or
prospective use or uses of the subject property is developed.
68

 The amount and type of data collected for an appraisal depend on
Øthe approaches used to develop an opinion of value and
Øthe defined scope of work.
 In a given valuation assignment, more than one approach to value is
usually appropriate and necessary to arrive at a single value
estimate .
 Depending on the problems to be addressed, one approach may be
given greater emphasis than others in deriving the final opinion of
value.
69

 In conducting a particular assignment,
Ø the appraiser’s judgment and experience,
Øthe quantity of data and
Ø the quality of data available for analysis may determine which
approach or approaches are used
 The data collected should be meaningful and relevant.All pertinent
value influences, facts, and conclusions about trends should be
clearly indicated in the report and related specifically to the
property being appraised.
70

Step 4: Data Analysis
 Once the appropriate data on the market area, subject property, and
site has been collected and reviewed for accuracy, the appraiser
begins the process of data analysis.
 It has two components.These are:
Ømarket analysis and
Øhighest and best use analysis
4.1 MarketAnalysis
 Market analysis is defined as a study of market conditions for a
specific type of property.
 Broad market conditions provide the background for local and
neighborhood market influences that have direct impact on the value
of the subject property.
71

 Market analysis serves for two important functions.
ØFirst, it provides a background against which local developments are
considered.
ØSecond, knowledge of the broad changes that affect supply and
demand gives an appraiser an indication of how values change over
time.
 Market analysis yields the information needed to use each of the
three traditional approaches to value.
 In the cost approach, market analysis provides the basis for
adjusting the cost of the subject property for depreciation, i.e.,
physical deterioration and functional and external obsolescence.
72

 In the income capitalization approach, all the necessary income,
expense, and rate data is evaluated in light of the market forces of
supply and demand.
 In the sales comparison approach, the conclusions of market
analysis are used to the market and thereby identify comparable
properties.
 The extent of market analysis and the level of details appropriate
for a particular assignment depend on
 the appraisal problem under examination
73

4.2 Highest and Best UseAnalysis
 Analysis of the highest and best use of the land
Øas though vacant and
Øthe property as improved is essential in the valuation process.
 Through highest and best use analysis, the appraiser interprets the
market forces that affect the subject property and identifies the use
or uses on which the final opinion of value is based.
 Analyzing the highest and best use of the land helps the appraiser
identify comparable properties.
 Potentially comparable properties that do not have the same
highest and best use are usually eliminated from further analysis.
74

 Estimating the land's highest and best use as though vacant is a
necessary part of deriving an opinion of land value.
 There are two reasons to analyze the highest and best use of the
property as improved.
 The first is to help identify potentially comparable properties.
 The second is to decide which of the following options should be
pursued:
Ø Maintain the improvements as is.
ØCure items of deferred maintenance and retain the
improvements.
ØModify the improvements (e.g., renovate, modernize, or
convert).
ØDemolish the improvements.
75

Step 5: LandValue Opinion
 Land valuation is directly related to highest and best use analysis.
 What do you think is the difference between land and site from
appraisers’ point of view?
ØLand includes the earth’s surface, both land and water, and anything
that is attached to it, whether by the course of nature or by human
being.
ØSite refers to land that is improved so that it is ready to be used for a
specific purpose
 Land value can be a major component of total property value.
76

 Appraisers often develop an opinion of land value separately, even
when valuing properties with extensive building improvements.
 Land value and building value may change at different rates
because
Øimprovements are almost always subject to depreciation.
 For many appraisals, a separate opinion of value is required.
Step 6:Application of the Approaches to value
 The three important methods/approaches to property value are:
ØCost approach
ØSales comparison approach
ØIncome capitalization approach
77

6.1 Cost Approach
 In the cost approach,
Value of a property = Estimated land/site value
+
The current cost of constructing a
reproduction or replacement for the
improvements
+
Entrepreneurial profit and/or incentive
_
Amount of depreciation in improvements
78

 This approach is particularly useful in valuing new or nearly new
improvements and properties that are not frequently exchanged in
the market..
 The current costs to construct the improvements can be obtained
from
Øcost estimators,
Øcost manuals,
Øbuilders, and
ØContractors
 Depreciation is measured through market research and the
application of specific procedures.
 Land value is estimated separately in the cost approach.
79

6.2 Sales Comparison Approach
 The sales comparison approach is most useful when a number of
similar properties have recently been sold or are currently for sale
in the subject property's market.
 Using this approach, an appraiser produces a value indication by
comparing the subject property with similar properties, called
comparable sales.
 The sale prices of the properties that are judged to be most
comparable tend to indicate a range in which the value indication
for the subject property will fall.
80

 The appraiser estimates the degree of similarity or difference
between the subject property and the comparable sales by
considering various elements of comparison:
ØReal property rights conveyed
ØFinancing terms
ØConditions of sale
ØExpenditures made immediately after purchase
ØMarket conditions
ØLocation
ØPhysical characteristics
ØEconomic characteristics
ØUse/zoning
81

6.3 Income Capitalization Approach
 In the income capitalization approach, the present value of the
future benefits of property ownership is measured.
 A property's income and resale value upon reversion may be
capitalized into a current value.
 There are two methods of income capitalization:
 direct capitalization and
 yield capitalization.
 In direct capitalization, the relationship between one year's income
and value is reflected in either a capitalization rate or an income
multiplier.
82

 In yield capitalization, the relationship between several years'
stabilized income and a reversionary value at the end of a designated
period is reflected in a yield rate.
 The most common application of yield capitalization is Discounted
Cash Flow (DCF) analysis.
 The specific data that an appraiser investigates in the income
capitalization approach might include the
Øproperty's gross income expectancy,
Øexpected reduction in gross income caused by vacancy and collection
loss,
Øanticipated annual operating expenses,
Øthe pattern and duration of the property's income stream, and
Øthe anticipated reversionary value.
83

 After income and expenses are estimated, the income streams are
capitalized by applying an appropriate rate or factor and convert into
present value through discounting.
Step 7: Final Reconciliation of Value Indications
 The final analytical step in the valuation process is the reconciliation
of the value indications derived into a single monetary figure or a
range of values in which the value will most likely fall.
 The nature of reconciliation depends on
Øthe appraisal problem,
Øthe approaches that have been used, and
Øthe reliability of the value indications derived
84

 The final opinion of defined value, which is the goal of the
valuation process, is usually reported as a single figure or as a
range of value or as a value in relation to some stated benchmark
amount (i.e., more than or less than a given dollar amount).
Step 8: Report of DefinedValue
 The assignment is not complete until the conclusion is stated in
a report and presented to the client.
 The reported value is the appraiser's opinion and reflects the
experience and judgment that has been applied to the study of
the assembled data.
85

 The appraisal report is the tangible expression of the appraiser's
work and the last step in the valuation process.
 The conclusions of an appraisal may be communicated to the client
in writing or orally.
86

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