Real Estate Appraiser Guidelines - Part 9u - 5/21/2003 - Expert Real Estate Advice

Real Estate Appraiser Guidelines - Part 9

TYPICAL OUTLINE FOR WRITING THE SINGLE FAMILY RESIDENCE NARRATIVE APPRAISAL REPORT 

A. Title Page: 
1. "A market value appraisal of the single family residence known as (Address)." 
2. Name of client. 
3. The name and address of the appraiser 

B. Table of Contents: 
1. Preface. 
2. Body of report. 
3. Addenda section. 

C. Letter of Transmittal: 
1. Date. 
2. Name and address of addressee. 
3. Salutation. 
4. Authorization. 
5. Legal description or reference thereto. 
6. Purpose of appraisal, including type of value estimated. 
7. Date of evaluation. 
8. Reference to following report of pages, including exhibits as well as limiting conditions, factors considered and reasoning employed in arriving at the final conclusion of fair market value. 
9. Estimate of value (written and numbered). 
10. Certification of appraiser. 
11.Signature. 

D. Summary of Salient Facts and Conclusions: 
1. Recap of pertinent information such as value estimate, date of value, purpose of appraisal, etc. 

E. Premise Section: 
1. Statement of intended use of the appraisal report. 
2. Statement of limiting conditions on which the appraisal is based, including full definition of value as estimated in report. 

F. Regional, City and Neighborhood Analysis: 
1. Pertinent features. 
2. Economic factors. 
3. Significant trends. 

G. General Property Information: 
1. Record or legal owner. 
2. Legal description. 
3. Legal address. 
4. Location. 

H. Site Analysis: 
1. Description of parcel: 
a. Size and shape. 
b. Topography and surface drainage. 
c. Soils including subsoil (foundational). 
d. Access. 
e. Landscaping, etc. 
2. Street improvements and utilities. 
3. Deed restrictions and zoning. 
4. Assessed valuation and tax information. 
5. Current use and adaptability. 
6. Highest and best use. 
 
I. Improvement Analysis: 
1. Basic description: 
a. Type and date of construction. 
b. Architectural form. 
c. Number of rooms. 
2. Summary of square foot areas: 
a. Residence. 
b. Garage. 
c. Other structures, walks and drives. 
3. Exterior description: 
a. Foundation and sub-structure. 
b. Exterior treatment. 
c. Roof design and cover. 
d. Porches. 
4. Interior description: 
a. Room descriptions (space allotment; floor, walls and ceiling finish; built-­ins and fixtures). 
5. Mechanical Equipment: 
a. Heating and air conditioning. 
b. Electrical. 
c. Miscellaneous - garbage disposal, etc. 
6. Miscellaneous Improvements: 
a. Outbuildings. 
b. Patios and walks. 
c. Landscaping. 

J. Analysis and Valuation: 
1. Statement of problem. 
2. Methods of appraisal. 
3. Investigation. 

K. Estimate of Land Value: 
1. By market data approach. 
2. By sales abstraction. 
3. Economic approaches: 
a. As percentage of annual income classification. 
b. As percentage of total property value. 
4. Reconciliation of various approaches. 
5. Final estimate of land value. 

L. The Cost Approach: 
1. Reproduction cost estimate: 
a. Justification. 
2. Estimate of accrued depreciation: 
a. Physical deterioration with justification: curable and incurable. 
b. Functional Obsolescence with justification: curable and incurable. 
3. Economic obsolescence with justification. 
4. Depreciated reproduction cost. 
5. Addition of estimated land value. 
6. Value indicated by cost approach. 

M. The Market Data Approach: 
1. Market data presentation including statement of source and verification: a. Summary of pertinent data (sales and listings). 
2. Analysis of market data: 
a. Factors of adjustment. 
3. Application of adjusted market data factors: 
a. Comparison by various common denominators: e.g., ratio of sales price to living area; ratio sales price to number of rooms. 
b. Direct property comparison. 
4. Reconciliation of indications using reliability coefficients. 
5. Value indicated by market data approach. 

N. The Income Approach: 
1. Seldom employed in analysis of single family residential property. 
2. Justified gross rent multiplier of neighborhood. 
3. Justified fair rental estimate for subject. 
4. Indicated value by income approach. 

O. Reconciliation and Discussion of Value Estimates: 
1. State values estimated by three separate approaches. 
2. Analysis: 
a. Major, but not exclusive, weight to approach that: 
>> Is most closely related to purpose of the appraisal; 
>> Is most appropriate for property classification concerned; 
>> Has greatest amount of supporting data; 
>> Most accurately reflects attitude of typical purchaser; and 
>> Is most sensitive to current trends. 
3. State final value conclusions: 
a. Suggested arbitrary separation: 
>> Land; and 
>> Improvements. 

P. Addenda Section: 
1. Market data. 
2. Market data map. 
3. Plots, maps, pictures, charts, statistical and factual data pertinent to the value estimate and necessary as supporting evidence not included in body of report. 

Q. Appraiser’s Qualifications.  

CONCLUSION 
In concluding this information on concepts, valuation and appraisal techniques, let us wave three warning flags. It is to be noted that there are subtle differences between valuation and appraising. The first is broader, tends to be economic in origin and emphasizes theory; the latter refers more to practice, methods and techniques. Next, anyone can make an appraisal, even a lay person, but the worth of an appraisal report is determined by the experience, knowledge, qualifications, and motives of the person behind it. Finally, let us not be deceived by any broad statement that appraising is an exact science. It is a science as is any of the other social sciences, but people and property cannot be appraised with the exactness and accuracy reached by the mathematical and physical sciences. 

ADDITIONAL PRACTICE PROBLEMS 

The following are some additional practice problems with suggested solutions. 
 
Applying the Income (Capitalization) Approach 
1. A 50 unit apartment building and lot are being appraised. The 30 two-bedroom units rent for $600 and the 20 one-bedroom units rent for $475 monthly, which rent is comparable to market rent in the area. Vacancy and collection losses are estimated to be 5% of potential gross income. The parking structure and laundry facility contribute an additional estimated $1,200 income per month. What is the property’s (land and building) total estimated annual effective gross income? 

2. The owner’s operating statement shows the following annual expenses:

After reconstructing owner’s statement (determining proper allowable expense items), what is property’s annual estimated net income?

3. The appraiser determined a proper capitalization rate for the above property is 9.5%. What is the estimated property value?
Solution:

$263,380 net income ÷ .095 cap rate = $2,772,421 estimated property value. 
 
4. Suppose the net income of the property is only $189,000 and similar properties are valued at $1,929,000. What is the indicated overall cap rate?
Solution: 

$189,000 (Income) ÷ $1,925,000 (Value) = 9.8% overall cap rate. 

5. Given, based on comparative sales technique:

What is the indicated interest rate for the property?

6A. Building Residual Technique Problem (Land value known; building value unknown.)  

What is (1) the building value and (2) the property value?

6B. Land Residual Technique Problem (Building value known; land value unknown.) Assume the same figures as above in building residual technique problem, except building value is $88,700 and land value is unknown.

What is (1) land value and (2) property value?

7A. Assume that comparisons show comparable single-family houses in a neighborhood rent for about $380 per month and sell for an average of $45,600. What is the indicated gross rent multiplier for a subject property in this neighborhood? 
Solution:

Formula: sales price ÷ gross monthly rent = gross rent multiplier 

Therefore, $45,600 ÷ $380 = 120 

The gross rent multiplier is 120 
 
7B. Suppose that, when compared to other rentals, the above property lost $24 per month rental income due to poor kitchen location. What is the estimated depreciation attributable to incurable functional obsolescence? 
Solution:

120 x $24 = $2,880