Property Valuation – Appraisal Approach and Process

Property Valuation

Property valuation is described as the process where the worth of property investment is determined, and its main goal is to define the impartial market value of property. Therefore, the intended buyer hires an appraiser to collect data that will have a significant influence on the decision of the client whether to invest into the property. Each property type has a different appraisal process and approach. The three techniques, namely income approach, cost approach and comparable sale approach, can be employed in different domains such as single-family, condominium, commercial retail and land depending on their nature. The Uniform Standards of Professional Appraisal Practice provide the actions that need to be followed when undertaking an assessment and establishing ethical guidelines for the evaluation practice. Different appraisal approaches can be used uniquely in evaluating different types of properties. In order to provide a comprehensive appraisal, it is essential to compare and contrast the appraisal approach for each property type referring to value approach, data, and application of the USPAP in each property type.

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Appraisal Process

The appraisal process is described as the process of generating an approximation of value for real estate. The client can either be a realtor, an investor or a market loan analyzer, but their main goal is to develop a pricing policy on the type of property. Understanding the planned use of property is important since it allows the evaluator to define the actual date, the suitable market to investigate, appropriate value description and to define if the assessment is competent enough to resolve the evaluation problem that has been identified.

Single-Family Property

When it comes to single-family property appraisal, the sales comparison approach is preferable. It is mostly associated with the standard method since the information collected is used for a typical mortgage. The value of surrounding properties with similar attributes is compared to estimate the value of a single-family property. Adjustments on the appraisal value are made in regards to the difference between the comparables and the house to be purchased. For example, if there is remodeling in the house, it rises in quality in contrast to comparables thus increasing its appraisal value. However, if the house suffers destruction or cannot reach the comparables in standards, its appraisal value diminishes. This method enables banks to offer fair terms of loans for purchase since they rely on valuable data. The income appraisal method can also be employed to value single family property with income potential. In some circumstances, single-family homes may have rentable space. For instance, if the house is an apartment complex with several rooms, the rates per room will be considered during the appraisal. Firstly, the value of property based on the comparison method is calculated, and then the monthly income obtained from the rent or the gross income multiplier is evaluated. After the cost is determined, the value of property can be determined by multiplying the gross income multiplier with the rental income expected (Evans et al., 2019). Before purchasing a new home, the sales comparison is the most practical method. Nonetheless, one can use the income appraisal method if it has the potential to generate income. Lastly, single homes have to be appraised for the owner to access the right amount of loans.

Condominium

Appraising a condo begins with data collection of all basic facts and figures such as location, unit size and building size. In terms of size, the property is measured using the square footage that is contained in its legal description, as the size consists of the proportion of shared areas in the building. After defining the basics of location and size, one proceeds to physical inspection of the property (Sidransky, 2018). The condition is examined by considering renovations and maintenance. Proper maintenance has a considerable influence on the appraisal price. In the building, one looks for amenities that make the property unique. In a condominium, the cost approach is not applicable since the cost of the unit will have to be extracted from the whole project that is not practical. Therefore, only the other two approaches can be taken into account. The income approach can be challenging with regard to many restrictions in allowing sublets. On the other hand, the comparable approach can be used as the primary determinant of value for the individual units as long as the comparable information is reliable. An appraiser can start by evaluating the sales activity in particular building on a similar line. Favoring units in the same building is necessary, as they are influenced by similarities such as underlying financing, common area, amenities and proportional maintenance. Another area to consider is the sales of neighboring buildings with similar attributes, including amenities, types of buildings among other factors. Hence, the appraisal process has to involve a few adjustments to enhance reliability of the comparison.

Commercial Retail

Commercial retail property can be appraised using the three approaches. The cost approach equates the property value to the construction costs of a similar model. It factors in depreciation to ensure that a fair market value is reached. The sales comparison method is employed to estimate the amount, which investors should pay for similar properties sold. This strategy is based on the similarities and cost of features in a property. Significant attributes in this approach are floor plan, location, size, surroundings and condition (Sidransky, 2018). This method is convenient since it takes into account the existing market value. Besides, the income approach can be applied to value commercial property, as it rationalizes the income generated by property over a specified period. This method is appropriate for this kind of property because it considers the net income generated in determining the current market value. A final estimate of commercial retail property is the focus on values given any of the three approaches. Lastly, the reliability or applicability of the desired approach is measured according to the type of property appraised, the suitability of processed data, and the use of appraisal.

Land

To appraise land, one has to obtain information about the land such as recent land sales in that location, which is similar in size. Afterwards, a visit to the clerk’s office is required to examine documents or public records. The details will be crucial in identifying property with the same zoning restrictions, water and mineral rights, as well as development levels of the land (Swango, 2015). An estimate of the appraisal is realized by adding the sale price of the properties to others that are similar and dividing the result by the number of properties. Land can be valued using six methods, including sales comparison, extraction, allocation, land residual, land rent capital, and subdivision development. Using the comparative approach, the price can be indicated by other similar properties sold. Comparison adjustment may be either positive when the subject is superior, or negative if it is inferior. Extraction is another method that can be employed; it estimates the value of the land by deducting the updates costs from the sales price of the property. The allocation method is applied to investigate the standard ratio of the market that represents the actual price of the property. One can also choose the land rent capitalization when a property is producing fair market income when it is leased, and the market capitalization rate can be retrieved from the market (Evans et al., 2019). When the entire property net income is available or can be estimated, while land and building capitalization rates can be traced, the residual land method may be used. Consequently, the last strategy, which is subdivision development, is applicable for land with a likelihood of near-term subdivision.

Data Comparison and Contrast

Different sets and types of data are used in various approaches. In the sales appraisal, sales comparison of surrounding property is critical. This method refers to the data associated with recently sold properties that are in the same area to determine its value. Besides, a little adjustment is made to improve the estimates. Appraisers take into account comparables and neighborhood factors, in particular proximity to schools or freeways and walk score. Moreover, the data considered includes property condition, features and sale date. The income sales appraisal data is also related to income potential such as the rate charged for rented rooms, costs of acquiring a property, and overhead costs. It also weighs in on income generation, operating efficiency and property condition.

The cost appraisal approach is commonly employed for buildings without the potential to generate income, namely schools, churches and hospitals. It uses data from land and property separately making assumptions that a reasonable individual would only pay more for improvements than an actual purchase cost of a building. Existing buildings, which are similar in nature, ensure that fair approximation of value is reached. Meanwhile, the appraiser considers the cost of rebuilding in case an older building includes updated materials and upgrading costs. The formulae for this approach is: value of property = value of land+ new cost-accumulated depreciation. This approach does not depend on any comparable; hence, it is effective when valuing property with unique attributes or using for a special purpose.

Approaches to Value

The given approaches depend on the property type, appraisal use as well as the quality and quantity of the information available for examination. Furthermore, the three approaches will most frequently produce three dissimilar suggestions of value, and one method would be allocated more attention compared to others depending on the type of property. When the appropriate approach is employed, a property will be valued accurately, and the rewards will be fair.

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Single Family Property

The first method is the sales comparison approach, which is employed in evaluating the value of a single family property. This technique aids in making certain that a reasonable value is set for the property. Additionally, the income appraisal is also used to appraise assets that have a potential of returns in a single family property. The income appraisal technique is established on the association between the return rate that a financier needs and the net income that an asset produces. Moreover, the future advantages of a property’s current value are assessed within this method.

Land

Sales comparison approach is effective in evaluating the value of land. This strategy is appropriate for this type of property since it is most valuable when similar units have been vended or presented for sale in the focus assets market. Additionally, appraisers use the cost approach to value land, as it is established on the fact that market partakers relate value to cost. In the cost approach, the value of a unit is obtained by calculating the projected value of the land to the present cost of building a property or a substitute for the enhancements and then deducting the depreciation cost in the structures from all foundations. Lastly, in the cost approach, the value of land is evaluated individually.

Condominium

The valuation of property in a condominium can be assessed through the sales comparison approach. The evaluator develops an assessment indication by differentiating the subject property with similar units identified as comparables. Moreover, the appraiser then evaluates the degree of likeness or variance between the focus asset and the comparables bearing in mind several basics of evaluation such as zoning, physical features, location, market conditions, outflows made instantly after acquisition among others. Besides, the income appraisal technique is appropriate in evaluating the value of a condominium since value is considered as the current value of prospect remunerations of property ownership.

Commercial Retail

Employing the sales comparison approach in a commercial retail property, the evaluator and the client are in a position to determine if the property is being sold at a comparably fair price in the current market. The next step for the appraiser is to define the unit’s value based on its features. In addition, the cost approach is effective in establishing the value of condominium. In this regard, gross rent multipliers are used for residential assets that have up to four elements and it’s grounded on the overall monthly payment of freshly retailed comparable properties. Moreover, GIM is used for residential properties that have five or more residential units as well as for commercial properties. GIM and GRM are thereby reconciled to attain the ultimate worth approximation. In addition, in a commercial retail property another efficient method to determine the value of property is the coast approach. Therefore, in the application of the latter technique, commercial revenue and incentive may also be incorporated in terms of value indication.

Application of the USPAP Standards in the Valuation of Each Property Type

Despite the variation in property attributes, all appraisal challenges can be addressed through the systematic valuation. The process starts by identifying problems and the work scope to solve the issue; then the data collected is analyzed and verified to facilitate a suitable opinion. When it comes to single-family property, the USAPAP firstly identifies the problem and use of property before determining whether one is competent enough regarding communication with a client. It is essential to ask the customer to identify the intended aim for the property before committing. Standard rule 1-2 b requires evaluators to recognize the envisioned use of opinion and assumption of the assessment. It is improper for the appraiser to allow the client to follow through with the intended purpose if it subjects the assignment to a biased outcome. Standard rule 2-2 and 2-2 b mentions the targeted use of the appraisal. Other elements needed to identify the problem are definitions and type of value, subject of assignment and pertinent attributes, as well as assignment conditions.

In the case of single-family property, the client is an individual; hence, the type of data needed for sales can be easily verified. The intended use of the property is family living, although it can involve renting. The type and definition of property varies, including marketable cash value, disposition value, replacement value, market value etc. Standards 1 and 2 institute the requirements for reporting and creation of the appraisal process in regards to real property. In the real property element covered by Standard 1, the appraiser identifies the issue, makes estimates of the work needed to address it and provides a reliable analyzed research (Young, 2018). Standard 2 deals with an appraisal of real property with reporting, which is not misleading, since the communication, opinion, and analysis are reliable. It contains specific or actual content and information relevant to the process. Standard 3 comprises the necessities associated with appraisal evaluation projects covering real property appraisal and individual property, as well as single-family property, land, condominium and commercial retail. Similarly to the first two standards, it accommodates the reporting and development of appraisals. Standard 6 directs the requirements linked to mass appraisal reporting and development for ad valorem taxation. It also establishes procedures for mass appraisal qualifiers. Therefore, such individuals should not only be informed about the techniques, but they should also employ them effectively; meanwhile, appraisers should adhere to property tax laws and understand the process.

A client with commercial retail property can decide to sell the property in the future as the intended use. The value type described under USPAP can be the temperament value with an actual date of the following two months. The subject could be stable or homogeneous subdivision and conforming tract residence, while the assignment conditions of the customer may have a restriction. The client may possess limited knowledge of the market since their residents are far. Nevertheless, he customers may be aware of the homogenous subdivision area of the property and the marketing duration. They are provided with an oral appraisal report on request, with a suggestion of value range along with a marginal amount of data and verification. Lastly, the appraisal is credible, as it is summarized and undertaken with the indicated conditions; thus, the client becomes convinced of the limitations of the opinion provided using the final value.

Conclusion

The most appropriate approaches and processes followed in evaluating single-family property, condominium, land and commercial retail property are to be compared and contrasted in order to ensure a comprehensive appraisal, efficient use of data as well as proper application of the Uniform Standards of Professional Practice to each type of property. The three main approaches may be offered for the property appraisal the application of which depends on the practicability or nature of property. USPAP established necessary standards relevant to most assets valuations in the United States. Appraisers in the real estate industry have to familiarize themselves with the guidelines of appraisals, which ensure that they act ethically and professionally. The process of appraisal involves several steps such as stating the purpose, listing of data, collection and verification of data, analyzing and interpretation of data, reconciliation of data and preparation of the report. Afterwards, an appraiser considers the most appropriate approach that will provide for the fair approximations of value.

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