- THE APPRAISAL PROCESS AND METHODS
Over time, well defined ground rules have been developed by professional appraisers to arrive at an estimate of value. This orderly, systematic procedure is known as the appraisal process. Not every step is used every time or necessarily in the same order. However, this comprehensive check list for the appraisal process should serve to give a better understanding of the importance of properly evaluating the various elements that influence market value and market price.
Overview of the Appraisal Process
As governed by Standard 1 of USPAP, the orderly steps and considerations of the appraisal process are designed to answer two questions:
- What is highest and best use?
- What is this use worth?
To reach a legitimate conclusion:
A. Define the problem.
- 1. Identification of the property to be evaluated.
- a. Complete mailing address (including city and state).
- b Complete legal description (by lot, block and tract number, including county where recorded; by metes and bounds descriptions; or by the government survey system).
- 2. Description of use of property to be appraised.
- a. Vacant lot.
- b. Single-family residential.
- c. Multi-family residential.
- d. Special purpose (commercial, etc.)
- 3. Interests to be appraised.
- a. Which of the bundle of rights are to be evaluated? Rights affect value because they set the limits within which the property may be used.
- b. An appraisal estimates the value of the rights of ownership, not merely the physical land and its improvements.
- c. The extent of the research and the valuation opinion will vary depending upon which of the following rights are involved:
- (1) Fee Simple (complete ownership). (2) Easement across property. (3) Lessor's or lessee's interest. (4) Mineral Rights. (5) Miscellaneous interests.
- 4. Purpose and intended use of the valuation determine the types of information to be gathered and processed, such as:
- a. Fair value for sale of a home.
- b. Value for mortgage loan purposes.
- c. Value for insurance purposes.
- d. Value for condemnation proceedings.
- e. Miscellaneous purposes and functions.
- 5. Date of value is generally the date of the last inspection of the property, although it may be any time in the past. Prospective values may be rendered, such as for proposed developments where "future sales" are projected and discounted to present value.
B. Make a preliminary survey of neighborhood, site and data required for appraisal.
- 1. Make a preliminary estimate of the highest and best use of the subject property.
- a. Analysis of the site and improvements. Is it a proper improvement? Does the improvement meet the test? Take inventory of important site utilities and building construction features.
- b. Analysis of the neighborhood. What are the boundaries and what services are available?
- 2. The type of property determines the variety of specific data needed.
- a. For a single-family home, emphasis will be placed on data concerning similar lots and improvements.
- b. For a four-plex, emphasis will be placed on data concerning small multi-family units.
- 3. A definite plan facilitates the gathering of necessary data as indicated from the preliminary survey.
C. Collect other general and specific data. The value of a property is affected by demand and by purchasing power available. Data should be obtained on population trends, income levels, and employment opportunities. A number of sources should be investigated.
- 1. General data are obtained from government publications, newspapers and magazines.
- 2. Regional data (metropolitan area) are obtained from monthly bank summaries, regional planning commissions, and government agencies.
- 3. Community data (city) are obtained from the Chamber of Commerce, planning commission, city government, banks and savings and loan associations, and real estate boards.
- 4. Neighborhood data, obtained from personal inspection, real estate practitioners and builders active in the area, include:
- a. Age and appearance of the neighborhood.
- b. Hazards and adverse influences.
- c. Percentage build-out.
- d. Contemplated development.
- e. Proximity to schools, business, recreation, etc.
- 5. Obtain comparable market data, such as sales and listing prices, from:
- a. Assessor's records and county recorder's office.
- b. Title insurance and trust companies.
- c. Real estate boards and local real estate offices.
- d. Property owners in the neighborhood.
- e. Appraiser's/other appraisers data bases.
- 6. Collect and analyze data regarding the subject property's improvements from:
- a. Assessor's office for age and other non-confidential information.
- b. City building department.
- c. Contractors in area.
- d. Personal inspection of improvements.
D. Analyze the data to conclude what is the highest and best use and the estimated worth of this use. As discussed later in this chapter, the following are the three approaches to value which will be used:
- 1. Sales Comparison Approach, formerly known as the Market Data Approach. Study of value as indicated by the prices of recent sales and reliable listings of properties similar to the appraised property.
- 2. Cost Approach. Study of value by adding the value of the land, if vacant, to the cost new, less accrued depreciation, of improvements
- 3. Income Approach. Study of value of the property as an income stream as it would be sold in the open market.
E. Make final estimate of defined value and write the report. The form and extent of the report will depend upon the purpose, type of property, and request of the client.
The Departure Provision
The Departure Provision sets forth the portions of the USPAP Standards that can be left out or departed from in the appraisal process. Care must always be given in departing from the full appraisal process, since the analysis not undertaken may have a material impact on the final value conclusion. In addition to Standard 1 and the Departure Provision, there is Statement 7 and Advisory Opinions 11, 12, 13 and 15 which provide additional valuable guidance in developing a proper appraisal process. These can all be found in the current edition of USPAP.