Appraisal principles Massimo Cerrato

Definition Estimate teaches how to give technical or economical judgments on an asset for a specific purpose

Are all the economic assets Appraisal subject Are all the economic assets Tangible (land, buildings ...) Intangibles (rights, obligations ...)

Estimate judgement The fundamental nature of the estimate judgment is predicting To be objective it must be based on a logical estimate method

Price VS estimated value Certain and historic data which manifested itself during a transaction Estimated value Probabilistic data; it depends on the estimate purpose

Ordinariness principle Estimate cardinal principle which considers, in a preliminary assessment, an asset in the normal situation that is generally more widespread, therefore most likely In a second step, the resulting ordinary value, might eventually be corrected if the asset has different characteristics from comparables

Addictions/Deductions Ordinary value Addictions/Deductions Real value

Ordinary value It is the normal value, the one with maximum frequency Ord V Max f Under estimate Over estimate

The four appraisal steps 1 - Question interpretation 2 - Economic aspect choice 3 - Estimate method application 4 - Final judgment

Step 1 - Question interpretation Estimate purpose identification Key step, delicate, eventually to be clarified with the customer

Step 2 – Economic aspect choice It must be the most suitable for the appraisal purpose The estimated value may be different depending on the considered economic aspect Market value Cost value Capitalization value Transformation value Surrogacy value Complementary value

Step 3 – Estimate method application The appraisal method is the logical process to find an objective assessment It is unique and comparative, that is based on the comparison

Step 3 – Estimate method application It provides Reliefs Surveys Data processing …

Step 3 – Estimate method application It can be applied in two different ways Synthetical approach Analytical approach

Synthetical approach It is based on little data It provides a final synthetic calculation Being able to adequately judge the quality of the subject asset and find right comparables is at the heart of the synthetic comparison approach ?

Analytical approach It is based on a detailed analysis of the components that affect value The data to process are many Example of the analytical procedure is the income approach to probable market value

Step 3 – Estimate method application It is divided into two phases Values scale construction Insertion on the right step of the scale

Step 3 – Estimate method application It uses two types of parameters Technical (ie. surface, volume ....) Economic (ie. rent, cadastral income...)

Step 3 – Estimate method application It consists in an initial search of the ordinary value and later in its correction if the subject asset is different from ordinariness The more information provided, the more reliable the final judgment is

4 – Final judgement Question solution contained in a well structured valuation report

Economic aspects Market value Cost value Capitalization value Transformation value Complementary value Surrogacy value

Market value The price at which an asset could change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having reasonable knowledge of relevant facts

Can not be used for assets that have no market (ie Can not be used for assets that have no market (ie. public buildings, churches, castles, ancient buildings ...) It is the most common economic aspect in assessments

The asset market value depends on two types of features Intrinsic Extrinsic

Intrinsic features Related to the specific asset

Intrinsic features For land Fertility Size Drainage...

For building areas (lots) Intrinsic features For building areas (lots) Building index Size Shape...

Intrinsic features For buidings Finish Age Maintenance state...

Related to the environment Extrinsic features Related to the environment Location Street Infrastructures...

Cost value Production cost Reproduction cost Probable cost that an ordinary contractor should support to produce a not existing asset Reproduction cost Probable cost that an ordinary contractor should support to reproduce an existing asset It considers the asset state at the appraisal time by a correction factor

Applications Construction cost Damages appraisal Machines management cost Agricultural production cost...

Capitalization value Probable asset value obtained by using its future net incomes Coincides with the market value if the rate used is the real estate one

Application Mortgage remaining debt Usufruct Annuity Maximum purchase price of an asset for a certain yield

Transformation value Probable value of an asset which can ordinarily be trasformed It is identified with the value resulting from the transformation

It corresponds with the difference between the probable market value of the transformed asset and the probable processing cost As to the building, it can be used when the transformation is legally and technically feasible and economically viable Transf. cost Market value Transf. value

Applications Building areas Demolition value Value of added floors on an existing building Trasformation cost-effectiveness

Complementary value Is the difference, for an asset which is part of a property, between the probable market value of the whole property and the remaining or original part It’s the loss or benefit for the remaining or original part

Applications Partial expropriations Breaking of planning rules Right to build value

Surrogacy value Probable market value or cost of an asset which can provide a similar utility It is rarely used and only in case of market lack (ie., fodder, manure ...)

Key words

Key words Video 1 Video 2 Video 3 Real estate appraisal Crosswords Multiple choice Cloze