Appraisal and Valuation


Definition of Appraisal

To appraise means the act or process of developing an opinion of value; an opinion of value. (USPAP, 2000 ed., pg. 10) It may be said that value is the present worth of all rights to future benefits, arising out of property ownership, to typical users or investors. An appraisal report is usually a written statement of the appraiser's opinion of value of an adequately described parcel of property as of a specified date. It is a conclusion which results from the process of research and analysis of factual and relevant data.

Real estate appraising methods are being standardized by virtue of the experience and practice of qualified people in all parts of the country who encounter the same types of valuation problems, and who by various methods and processes succeed in solving them in an equitable manner. It is natural, however, that differences of opinion may exist as to the value of specific parcels of real estate and the means of estimating their value.

Property rights are measurable. Real estate as a tangible thing can be measured. It includes both land and improvements and exists independent of any desire for its possession. To distinguish between its physical aspects and rights in and to real property, the latter are called property interests in real estate.

These interests - ownership in fee simple and other lesser interests - have been discussed in preceding chapters.

Property rights in real estate are normally appraised at Market Value. There are many definitions of Market Value, but a good working definition is the most probable price the property would bring if freely offered on the open market with both a willing buyer and a willing seller.

Rights in real property are referred to as "Bundle of Rights," which infers: right to occupy and use; to sell in whole or in part; to bequeath (give away); and, to transfer by contract for a specific period of time (lease). It also implies the right not to take any of these actions.

These rights are limited by: the government's power of taxation; eminent domain; police power (for safety, health and general welfare of the public, such as zoning, building codes); and, right of property to escheat (revert) to the state in the event the owner dies and leaves no heirs.

The rights in a property must be known by the appraiser before making a proper valuation, and the appraiser must also be able to distinguish between personal and real property. Market value is the object of most appraisal assignments, and appraisals mainly are concerned with fee simple estate valuation as opposed to partial interest value.

The widespread need for appraisals is apparent. Everyone uses real estate in one way or another and must pay for its use, which involves a decision about value. Practical decisions concerning value must be based upon some kind of an appraisal or evaluation of real property collateral.

The term evaluation has a special meaning and use for institutional lenders since passage of the Federal Institutions Reform, Recovery, and Enforcement Act (FIRREA). In reality, it is an appraisal, an estimate of value.

Although an appraisal may be transmitted orally, it is usually a written statement of an estimate of value and is referred to as an appraisal report.

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