Real Estate Appraiser Guidelines - Part 3e - 9/17/2005 - Expert Real Estate Advice

Real Estate Appraiser Guidelines - Part 3

ECONOMIC TRENDS AFFECTING REAL ESTATE VALUE 

Regional, National and Global Economics 
Property values increase, decrease, or remain stable based on the interaction of the four forces influencing value. Appraisers must examine and evaluate these forces. 
 
Economic trends and forces at higher levels (regional, national and international) affect property values at the local level. The real estate appraiser must recognize that the general pattern of statistical analysis that guides in interpreting value influences on a national level should be used in the general analysis of state and regional forces which in turn influence local property values. 
 
An appraiser should follow national and regional economic trends, changes in national income levels, international developments and government financing policies because the greater the severity and duration of any economic swing, the wider and deeper is its influence. Conditions to be observed include: gross national product; balance of payments to other countries; national income levels; employment; price level indexes; interest rates; fiscal and monetary policies; building starts; and credit availability. 
 
Factors Influencing City Growth and Development 
An appraiser is constantly concerned with the conditions and prospects of the local economy because the value of local real estate is largely determined by the health of the community, as measured by household purchasing power, population changes, employment diversification and stability, wage and price levels, and area growth potential, including environmental conditions. 
 
Cities are classified generally by the functions that stimulate and determine their potential and growth. These classifications are: 

> Commercial. Primary source of revenue stems from commercial enterprises. These are usually farming cities, cities located at railroad terminals or on ocean ports. 
 
> Industrial. Primary source of revenue is derived from manufacturing and processing of commodities. 
 
> Extractive industry. Primary source of revenue comes from natural resources, e.g., mining, fishing and lumber. 
 
> Political. Primary source of revenue is government employment. 
 
> Recreation and health. Primary source of revenue comes from tourist trade, vacation and health resorts. 
 
> Education. The anchor point of these cities is a college or university. 
 
Population Trends 
Because of the direct relationship existing between the value of real property and population growth, the appraiser should be concerned with population trends and other demographic factors affecting local population, such as: opportunities for employment; quality of local government; civic and social conditions; demand for goods and services; transportation and living conditions; and, opportunities for education and personal improvement. 
 
Neighborhood Analysis 
A neighborhood may be defined as a group of similar land uses which are similarly affected by the operation of the four forces influencing value: utility, scarcity, demand(desire) and effective purchasing power. A common definition for a neighborhood is a grouping together of individuals within the community for similar purposes and interests, whether the reasons be commercial, industrial, residential, cultural or civic. The life cycle of a neighborhood includes growth in desirability, peak desirability, stability for a time, then deterioration. The cycle then tends to turn again as the neighborhood becomes more desirable due to change in use or renewal. 
 
Neighborhood analysis is important because the neighborhood is the setting for the property to be appraised and the property has value, to a large extent, as it contributes to or detracts from the neighborhood. 

A neighborhood tends to be a somewhat self-contained community, frequently defined by physical boundaries such as hills, freeways, or major streets and usually with some sense of community. In urban areas, the neighborhood tends to become somewhat blurred due to modern transportation and area-wide cultural, educational, recreational, and commercial services. In analyzing the “neighborhood” of the parcel to be appraised, a good starting point is to ascertain the community identity and boundaries.  

After defining, even in vague terms, this community identity, an appraiser will look to common services and features, such as local shopping, street patterns, zoning boundaries, and cultural, religious, educational and recreational services. In short, an appraiser searches the local area by observation and through government and public utility investigation to find the factors most affecting use and value patterns in the area. 
 
Neighborhood analysis also tends to define the best search area for comparable market data. As the appraisal progresses, the appraiser may extend or contract this search area. 
 
Some sources of neighborhood data: 

> U.S. Census tract maps and data (local library or vendors). 
> City and county population demographics (planning departments). 
> City, county, and state street and highway systems (city, county and state road/engineering/highway departments). 
> Local zoning and general planning, including community plans (planning departments). 
> School locations, capacities, policies (local school districts). 
> Public utility services: water, sewer, natural gas, electric power, telephone (local public utility companies and government agencies). 
> City and county economic statistics (local chambers of commerce). 
> Local tax information (county tax assessor). 
> If pertinent, private wells and septic laws (local health departments); national forest/park laws (local forestry and park dept.), etc. 
 
SITE ANALYSIS AND VALUATION 
Although the location of the neighborhood and city must be weighed in analysis and valuation of a particular site, the location of the site itself, in relation to the neighborhood, is a very important factor. 
 
Since sites in a neighborhood are not usually uniform in size, shape and other physical and economic characteristics, some are superior to others. It is important that the site be analyzed separately and evaluated in conformity with the principle of highest and best use. 
 
Other reasons to separate the land from the value of an entire property, along with important factors contributing to site value, are discussed on the following pages. 
 
Legal Data of Site Analysis 
Legal description. 
> An appraiser must determine the legal property description as set forth by a deed or official record. 
> The proper legal description to locates the property physically within the neighborhood. 
 
Taxes. 
> A comparison is made between the subject and similar properties to ascertain if the property being appraised has been fairly assessed (assessed value, tax rate and tax total). This comparison of properties is not as useful since the adoption of Proposition 13. 
> The extent of the tax burden will have a bearing upon the desirability of the property, particularly when taxes are out of proportion to income. 
 
Zoning and General Plan. 
> Copies of the latest zoning ordinances and general plan should be studied to inform the appraiser as to the present usages to which the land may be developed. Sometimes the highest and best use of land is limited by zoning restrictions. 
> Proposed or contemplated changes in the existing ordinances should be determined, since this could have a bearing upon the valuation of the property. However, zoning by itself does not create value unless there is a demand for the land so zoned. 
 
Restrictions and easements. 
> Public and private restrictions and easements affecting the land must be discovered. 
> The restrictions and the types of easements on the property have a direct bearing upon the use and value of the site being appraised. 
 
Determination of existence of other interests in property. 
> Life estates. 
> Leases. 
> These partial interests divide property values among the parties involved. This does not mean a mathematical division, but rather a division of the bundle of rights. 
 
Physical Factors Involving the Site 
The physical features of the site should be compared with typical lots in the neighborhood. 

Lot values will generally tend to cluster around a "site value,”… the price generally accorded a single, usable, typically-sized parcel of land in the area. Lots larger or smaller will tend to increase or decrease when compared to this usual “site value.” A good view will also tend to increase lot value. The effect of topography (drainage, low spots, rock, etc.) can frequently be measured by the cost to cure the problem to make the site usable.  

Shape of a lot. 
> The utility of the lot is the governing factor in irregular or odd-shaped lots. 
> The total area of the lot is not the most important factor. A 50’ x 150’ lot containing 7,500 square feet is more valuable than a 25’ x 300’ lot (also 7,500 sq. ft.) because of utility. 
> Irregular-shaped lots are frequently valued in terms of total site value expressed in dollars rather than in terms of unit values of price per square foot or frontage foot. 
 
Topography and soil conditions. 
> The topography and the type of soil can have an adverse effect upon the site value if it makes building costs higher. 
 
Corner influence. 
> In today’s market, it has generally been found that corner single-family lots are not valued appreciably more than inside lots. 
> Corner lots provide better light and more convenient access. 
> On the other hand, corner lots result in more traffic noise and trespassing and, if applicable, greater special assessments for streets and lighting. 
 
Relation of site to surroundings. 
> The site must be studied in its relationship to streets, alleys, transportation, and stores. 
> Does the home-site abut commercial or multi-residential uses? 
> Is it a key lot looking upon other back yards? 
> If a corner lot, does a bus line stop at the comer? 
 
Availability of public utilities. 
 
Title encumbrances and encroachments. 
 
Landscaping and underground utilities. 
 
Methods of Site Valuation 

A. Sales or market data comparison. 
1. Sales and listings (data) of vacant sites are obtained and compared with the property being valued. 
2. The data should be of comparable properties, including the same zoning and in the same or similar neighborhood. Since people make value, the data gathered should be from areas where the purchasing power or income levels are the same as the subject property. 
3. The sales prices should be investigated to determine whether the price paid was the result of a true open market transaction reflecting fair market value. Listings may also be considered. 
4. Some sources of comparable market data are: 
a. Title insurance company records. 
b. Tax assessor’s records. 
c. Recorder’s office. 
d. Multiple listing files. 
e. Financial news. 
f. Appraiser’s personal files. 
5. The verified market transactions should be compared with the subject parcel as to: 
a. Time. 
(1) Determine if prices have gone up, down, or remained stable from the time of each sale to the date of value. 
(2) A percentage factor or a dollar amount may be applied to the comparable sales in order to arrive at an adjusted price due to the time factor. 
b. Location. 
(l) Determine if the location of each comparable property is superior, equal or inferior to that of the subject property. 
(2) A percentage factor or dollar amount may be applied to the data in order to adjust for the difference in location. 
c. Characteristics of the lots. 
(1) The size, depth, and topography of the other properties are compared with the property being valued. 
(2) A percentage factor or dollar amount is determined for these characteristics and applied to the comparable properties to adjust their prices towards the property being appraised. 
d. The adjusted prices of the comparable properties are then compared and analyzed in order to arrive at an estimate of value for the property under study.

Through investigation, it was found that prices have been increasing approximately 1% a month during the past year. Sale No. 1 is believed to be located in an area inferior to the subject. This lot would sell for about $500 more if located in the subject’s block. Sale No. 2 is located in an area believed to be about $250 better than the subject. Sale No. 3 is also in a superior location, by the same $250 adjustment. The shape and topography of Sales No. 1 and No. 2 are better than the subject by an amount estimated to be $500 and $100 respectively. Sale No. 3’s topography and utility appear about the same as the subject.

The average adjusted price per square foot of the comparable sales is $.90. Therefore, the subject property has an indicated value as follows: 

7,500 square feet x $.90 per square foot = $6,750 

In actual practice, the use of more sales data is advisable in order to arrive at a well-supported adjusted price per square foot.
 
e. If all pertinent factors are considered, the adjusted prices will probably be in a fairly close range. If there is still a wide discrepancy, the appraiser will: 

(l) re-analyze work to find undisclosed pertinent factors; 
(2) reexamine data as being true examples of fair market transactions;
(3) re-compute adjustments to insure accuracy; and
(4) finally, discard the data or explain the apparent contradictions. 
 
B. Abstraction. 
1. The abstraction method is used to obtain land value where there are no vacant land sales. 
a. Sales of houses in the same neighborhood on lots with similar characteristics are obtained. 
b. An estimate of the cost new of the improvements is made. 
c. An amount is deducted from cost new for depreciation. 
d. The depreciated cost of the improvements is deducted from the selling price of the property. 
e. The difference represents an approximation of land value. 

Example: Appraised lot size is 65’ X 100’ = 6,500 sq. ft. Sale property is 6,000 sq. ft. lot with a single family residence and sold for $83,000. The sale building has an estimated cost new of $61,000 and an accrued depreciation estimated at $20,000. Land value by abstraction:  

C. Plot Plan. For better appraisal reporting, a plot plan can be prepared, with lot dimensions and improvements drawn to scale. It should show walks, driveways and other lot improvements and roof plans of the various structures on the site. The plot, together with pictures of the site, neighboring street and lot improvements are vital for an effective site analysis.