The Real Estate Appraisal
Professional real estate appraisers perform a variety of functions and services; however, the most common service is to estimate market value. A definition of market value is included in every appraisal, and may be referred to as the price a willing seller is willing to accept and willing buyer will most likely pay for a property, given neither party is under duress. An appraisal is defined as “an analysis, opinion, or conclusion relating to the nature, quality, value, or utility of specified interest in, or aspects of; identified real estate”. The appraiser assembles appropriate market data and applies the appropriate analytical techniques and experience to arrive at a professional judgment of value. Appraisals may be requested for a variety of reasons, including financing, taxes, establish sale prices, estate purposes, or as a part of prudent business practice. Typically, all appraisals are completed based on an estimate of market value, thus all will result in a similar analysis. Federal and lender regulations require that appraisals be completed for a lending institution if their intent is to be used for lending. Thus appraisals which are completed for individuals may not be accepted by all lending institutions.
How we do appraising
The first traditional step in the valuation process includes assembling factual data for use in the valuation process. The appraisal process involves collection of data for estimating the highest and best use of the subject property and the market value of the subject property. The data collection includes a personal inspection of the subject property. Other primary information is available from the appraiser’s files, contact with participants in the real estate market and other properties appraised. Secondary information sources included contact with market participants about properties listed as well as sold, verification of expenses, income, costs new, depreciation and capitalization rates or discount rates. Other information is obtained from public records. The second step in estimating the market value of the property utilizes the three classical approaches to value: the cost approach, the sales comparison approach, and the income approach. The conclusions are then reported in compliance with the Uniform Standards of Professional Appraisal Practice.
Collection of Data
The appraiser collects data on the subject property at the time of inspection, utilizing public records and market data maintained in the appraiser’s office. While at the property the appraiser gathers physical data on the property and its improvements. This data collection includes noting the size, quality, and construction of the improvements. The appraiser also may inquire about the age, recently completed improvements, or upgrades, as these items relate to value. Housekeeping is not an important factor, although the overall condition of the property is important. Federal and State appraising guidelines require appraisers to report sale prices and pending contracts in the appraisal, thus the appraiser often asks purchase prices, lease rates or details on pending contracts. While the appraiser is required to report this information it is not to affect the final estimate of value. The appraiser utilizes public information from the County Assessor’s, Recorder’s and Treasurer’s offices to assemble data on the subject property. The appraiser may use Multiple Listing Service data, Realtor data, or past appraisal data maintained in the appraiser’s office. All this information is explored and reported on the appraisal form in an attempt to provide the reader with a clear picture of the subject property.
Scope of the Appraisal Assignment
The scope of the appraisal assignment is one of the most important aspects of the appraisal process. The scope if the assignments are the defining aspect of what the appraisal problem is and how it will be reported. The scope is determined by the appraiser and the client working together to understand the appraisal problem and how the client would like to have the conclusions reported. The Uniform Standards of Professional Appraisal Practice have some define guidelines for reporting and what must or may be included in these specific report types. The scope of the work is important to understand the appraisal process and who will be utilizing the report and the conclusions there in. It is important that the intended users as well unintended users of the appraisal report understand the appraisal process and the scope of the assignment.
Determining Highest and Best Use
Properties are always appraised based on the appraiser’s estimate of highest and best use. This refers to the legal, physical, and financially feasible use which will create the greatest return or highest value. If a use is not legal or physically possible the value will be affected. The appraiser estimates the highest and best use for the subject site as if it was vacant and the highest and best use of the property as improved. These uses may not be the same as the actual use(s) for the property.
Effective Age and Condition of the Property
The appraiser estimates the effective age of the property and utilizes the effective age as a unit of comparison and in estimating depreciation. Effective age is “the age indicated by the condition and utility of a structure.” The effective age reflects recent improvements or deferred maintenance. For example, a home which is actually 100 years old, but has been extensively renovated, may have an effective age of 25-30 years and be considered similar to other homes which are only 25-30 years old.
New Construction Appraisals
In proposed construction the appraiser must estimate value, based on plans and specifications provided by the client. These plans and specifications are the only source of physical data. Hand drawn plans or elaborate detailed drawings may be utilized in the value estimate; however, if all the data is not available the appraiser is forced to make assumptions. Typically, the appraiser assumes that the subject property will be constructed and finished in a manner standard for the market; however, the appraiser may overlook built-in upgrades if incomplete details are provided. With construction appraisals, the appraiser is required to return to the property once the property is complete and verify that the quality of construction and finished work is standard and consistent with the specifications originally provided. Some lenders require further inspection on the property to assess the progress of construction.
Approaches To Value
The three classical approaches to value include: the sales comparison approach, the income analysis approach, and the cost approach. These approaches are somewhat self explanatory and should always all be considered by the appraiser. In the residential market it is common to not fully develop the income approach due to the typical purchaser not utilizing the property to produce income and the lack of market data to support an income analysis on a predominately owner occupied market. The cost approach may not be employed in appraisals of older properties, due to the subjectivity in estimated cost new and depreciation. The sales comparison approach is typically the most reliable method of residential valuations. Finally, the appraiser correlates the applicable approaches to a single value estimate for the subject property. A brief description of each approach follows.
The Cost Approach
The cost approach typically utilizes the cost to replace the property in a similar manner, functionally, and considers any and all depreciation which may be affecting the value. “Depreciation encompasses both deterioration and obsolescence.” As part of the cost approach, the appraiser estimates the land value, based on the highest and best use of the site if it were vacant, which may be different from the actual use of the site. The appraiser estimates the depreciation based on the effective age of the property. The cost new estimated is the cost of functional replacement of the structure or structures and not the actual cost or the reproduction cost. The cost may not reflect over improvements or additional cost incurred in the construction, which are not common for the market.
The Sales Comparison Approach
The sales comparison approach, the most commonly known approach, utilizes market data on similar properties which have sold. The appraiser compiles information on similar properties which have recently sold, and makes adjustments to their sale prices, thus providing an estimated range of value based on the adjusted sale prices. In Indiana, sale prices are not public information, thus appraiser data may be limited to sales for which the appraiser has access to necessary sale data and documentation. It is important to understand that the actual sale prices are adjusted and are not the list price or asking price of the comparable properties.
The Income Approach
The income approach incorporates the potential benefits which may be attributed to the property in the form of income as a result of leasing whole or part of the property. This analysis utilizes market data with respect to potential income produced by the property. The appraiser is required to utilize market rents and report current rents, with some properties considered under-rented, and others considered over-rented. The appraiser is also required to estimate expenses, which must include vacancy, maintenance, management, and reserve expenses. These expenses may not be actual, however, are customary and standard for the market. Market abstracted and reported capitalization rates are typically used in this analysis. The appraiser may also utilize a gross rent multiple in the income analysis. The GRM is a market abstracted number which when multiplied by the gross annual or monthly rent reflects a market value. The GRM is estimated by dividing the sale prices of similar properties by their market rent.
Appraiser Qualifications
The State of Indiana licenses appraisers in four categories: Trainee, Licensed Residential, Certified Residential, and Certified General Appraiser. Trainee appraisers must be associated with a licensed or certified appraiser for a two year period. Once licensed or certified, appraisers are required to have continuing education every two years. Certified Residential Appraisers can appraise all types of residential properties and some commercial properties. Certified General Appraisers can appraise all types of real estate. Designated appraisers are appraisers which have received designation from a professional appraisal organization, such as The Appraisal Institute. Appraisal designations are similar to Certified Accountants or CPA credentials. It is important to make sure the appraiser has experience with the type of property being appraised or the capability of associating with another appraiser who has the necessary experience. Vencel Appraisal Services, LLC has appraisers qualified to appraise all types of real estate. We strive to provide quality appraisals in a timely manner.
Governmental Regulations
The appraisal industry is governed by State & Federal laws. Many of the regulatory agencies that govern the Banking & Financial Industries also govern appraisal industry. Client’s relationships including confidentiality and independence are significant in appraisal standards. The Uniform Standards of Professional Practice, commonly referred to at the USPAP, are the standard rules for appraising. Lenders and brokers may have additional requirements or guidelines for the appraisers to follow and we work with our clients to provide appraisals that meet all the applicable standards.
Consulting
We perform consulting for a variety of reasons including financing, taxes, establish selling price, estate planning, or as an integral part of prudent business practice. We provide appraisal and market services for a variety of clients. Local and national lending institutions make up a large part of our client base, but with the growing need for appraisals and consulting in the daily business of individuals, we have seen an increase in individuals and companies requesting independent analysis of real estate as part of their business practice. By assembling appropriate market data and applying the appropriate analytical techniques and experience we arrive at a professional judgment of value.
Lending / Market Value Appraisal
Assignments for lending purposes require appraisals to be completed to the standards of the lender when the client is the lending institution. Some lending institutions have an approved appraiser list while others utilize most state licensed and certified appraisers. Typically lenders prefer form appraisal reports when the mortgage is to be sold and not held by the institution. The requirements of the appraisal may vary from lender to lender and we are able to accommodate all lender needs. We can also provide review services for lenders assessing appraisal quality.
Market Analysis
Market analysis assignments are requested to give an opinion of some aspect of the property other than market value of fee simple interest. These assignments typically include rental rate analysis, feasibility studies, marketing values, and projections of gross and net receipts. We can customize assignments to meet the needs of the clients and the real estate being analyzed.
Estate Analysis
Many parcels of real estate have been in families or held by individuals for many years and the actual total value of the estate is not easily calculated. With the need to protect one’s real estate holdings and interest and to accurately plan for the future, we are often called upon to provide market estimates for the real estate holdings. This allows for the owner(s) to plan for the future and often results in properties being transferred, sold or gifted as part of the estate planning process or as dictated by inheritance.
Government Agency
Appraising for governmental entities includes appraisals for cities, counties, the State of Indiana and other municipalities. We have experience in utility easements, right-of-way analysis, condemnation, analysis, and court appointed assignments. These assignments may also take the form of property tax appeals or property assessment appeals. We can also provide appraisal assignments for local agencies, consultants, or individual property owners as part of the imminent domain process.
Options for your appraisal report:
Narrative report
The narrative report is an analysis of a property or real estate interest in a format similar to a manuscript. A narrative report includes the information necessary to bring the reader to the same conclusions as the appraiser. Depending on the property type and the purpose of the report, portions of a narrative report may be summarized or expanded in an attempt to provide the reader or client with the necessary information. A narrative report is most commonly utilized when the assignment is complex and not your standard residential property. Commercial properties, large estates, lease or rental rate analysis or agricultural properties are typically reported in a narrative format.
Form report
The form report is a complete analysis reported in a summary format utilizing preprinted forms standard for the industry. These form reports are often referred to by their designated numbers and allow for speed in writing and reading the appraisal report. These forms are most common in the residential mortgage business, however, may also be appropriate for individual clients.