Chapter 4 Ch 4: The Valuation Process NOTE: read the ebook, Ling-Archer ch 7 first, then the Handbok Ch 4.

USPAP-compliant appraisals contain eight steps – This chapter gives an overview of the 8 steps

Step 1: Identification of the Appraisal Problem Identifying the client and intended users of the appraisal Identifying the intended use of the appraisal Type of value and its definition Effective date of the value opinion Identifying the relevant characteristics of the property Assignment conditions Extraordinary assumptions and hypothetical conditions Limiting conditions Chapter 4

Example of step 1 issues Initial discussion with the client suggests the following assumptions: A zoning change will be secured A building permit will be obtained The site is not contaminated with hazardous materials There will be adequate water, sewer and electrical supply to the site All such assumptions and limiting conditions must be clarified in writing before beginning the assignment Chapter 4

Step 2: Scope of Work – See the Vintage Case study for a good example. What were you asked to do? What level of detail was requested by the client? Carefully worded statements of scope: limit expectations as to what the appraiser is expected to do limits legal liability. Prevents “scope creep” – extra work not part of the original assignment and not compensated Scope statements help in planning the next steps Chapter 4

Step 3: Data Collection and Property Description Describe the characteristics of the property being appraised, the subject site (SS). E.g., a 3 story, 50 unit apartment building built in 1960. Describe its location. A typical appraisal collects data on properties recently sold - within past 3 years. These are the “comparables” (comps) The comps should be as similar as possible to the SS. E.g., same type (e.g., similarly sized apartment building); roughly similar age. If the subject is an elevator building, the comp should be too. Chapter 4

Step 3: Data Collection (continued) When collecting data on comps, the same “property interest” should be sold. Typically this means fee simple ownership of the entire property, not a partial ownership or a long term lease. Data collection includes information for market analysis. The purpose of this is to identify changes in prices, rents, costs, vacancy rates and the like. Trends in characteristics (e.g., population and employment) of the region, city and neighborhood. Trends in characteristics (e.g., rents and vacancy rates) of properties similar to the subject. Chapter 4

Step 4: Data Analysis Market analysis is the study of supply and demand of comparable properties in the local market. It includes trend analysis, and time to rent vacant units (marketability analysis) Highest and best use (HBU) analysis determines whether the building should be substantially renovated or torn down and rebuilt. For this course, we will work with properties that are already improved to their highest and best use: i.e., their HBU is “as improved.” Application of HBU is beyond the scope of this course: we only need to know what it is. Chapter 4

Step 5: Land valuation In its simplest form, land valuation is just another application of comparable sales analysis. I.e., the appraiser collects data on vacant land sales comps For this course, we will not get into the details of allocation, extraction and other land valuation methods. I.e., application of land valuation is beyond the scope of this course: we only need to know what it is. Chapter 4

Step 6: Application of the three approaches to value The sales comparison approach is the most common appraisal technique for valuing the SS as improved. It uses the data on sales comps to estimate the most probable sales price for the SS. The cost approach can be simplified to an option facing most investors: buy vacant land and build on it. The income capitalization method values the SS by calculating the present value of net income generated by the property. An appraisal typically considers all 3 approaches, but emphasis can be placed on only one. For an apartment building, the income approach usually gets most weight. Chapter 4

Step 7: Final Reconciliation of Value Indications The results from the 3 approaches are compared and evaluated. All appraisals must be based on data. The appraiser must justify his or her value conclusion by referencing the data and analysis used for the 3 approaches to value. Chapter 4

Step 8: Report of value Write a report on the previous 7 steps. Single family residential reports are are typically based on filling out a form For an apartment building, we will emphasize a summary of the data, methods and findings. A lengthy narrative appraisal report may be required for some purposes. Chapter 4

Review exercises are strongly recommended The PowerPoint Slides for the ebook, Ling-Archer Ch 7, and Ch 7 itself, have a lot more detail on this material. Chapter 4