Module 1: The Valuation Process Flashcards
Valuation Process
A systematic procedure employed to provide the answer to a clients question about the value of real property
Steps of the valuation process
- Identification of the problem (also referred to as Definition of the problem)
- Scope of Work
- Data collection and property description
- Data analysis
- Land value opinion
- Application of the three approaches
- Reconciliation
- Report of defined value
Six elements of problem identification
- The client and any other intended users
- Intended use of the appraisal
- Type and definition of value
- Effective date of the value opinion
- Relevant property characteristics
- Assignment conditions (such as extraordinary assumptions, hypothetical conditions, jurisdictional exceptions and laws and regulations that may apply to the assignment)
CLIENT
: The party or parties who engage, by employment or contract, an appraiser in a specific assignment
INTENDED USER
: The client and any other party as identified, by name or type, as users of the appraisal, appraisal review, or appraisal consulting report by the appraiser on the basis of communication with the client at the time of the assignment.
intended user
must be identified prior to accepting assignment and must be identified in the appraisal report, information provided in the report must be designed to accommodate the needs of the intended users
intended use
: The use or uses of an appraiser’s reported appraisal, appraisal review, or appraisal consulting assignment opinions and conclusions, as identified by the appraiser based on communication with the client at the time of the assignment.
Intended use
depending on what the intended user(s) plan to do with the appraisal (the intended use), the amount of analysis and research the appraiser performs will vary accordingly.
Intended use
drive scope of work decision
intended use
must be identified prior to accepting an assignment
purpose of an appraisal
the stated reason for an appraisal, i.e., to develop an opinion of the defined value of an y real property interest
purpose
The purpose of an appraisal is usually to develop an opinion of a certain type of value.
- Market Value
- Use Value
- Insurable Value
- Investment Value
- Assessed Value
market value
The most commonly sought value; considers typical investors not under duress
use value
Refers to the value that a property may have in a particular use, not necessarily in the use that would maximize value.
insurable value
Used for insurance purposes to replace the building in the event of destruction, which may have nothing to do with market value.
Investment Value
This is the value of a property to a particular investor. Think about an adjoining owner that may be justified in paying a price (investment value) higher than other non-adjoining owners (market value).
Assessed Value
This value is generally used by tax assessing authorities for ad valorem (at value) tax purposes. In many markets the assessed value represents only a percentage (e.g. one third) of the market value.
In what terms can the defined value be reported?
the value defined in the appraisal must address whether the opinion is report in terms of cash, cash equivalency, or other precisely defined terms.
why must an appraiser state the date of the value opinion?
because market forces are subject to change
Identification of Relevant Property Characteristics
The appraiser must identify the characteristics of the property that are relevant to the type and definition of value and intended use of the appraisal, including:
•Its location and physical, legal, and economic attributes;
•The real property interest to be valued;
•Any personal property, trade fixtures, or intangible items that are not real property but are included in the appraisal;
•Any known easements, encumbrances, leases, reservations, covenants, contracts. declarations, special assessments, ordinances, or other items of a similar nature; and
•Whether the subject property is a fractional interest, physical segment, or partial holding
identify assignment conditions
There are three possible assignment conditions that you may have to employ in your appraisal, depending on the nature and complexity of your assignment.
- Extraordinary assumptions
- Hypothetical conditions
- Jurisdictional exceptions
Extraordinary assumption:
An assumption, directly related to a specific assignment, as of the effective date of the assignment results, which, if found to be false, could alter the appraiser’s opinions or conclusions.
Hypothetical condition
: A condition, directly related to a specific assignment, which is contrary to what is known by the appraiser to exist on the effective date of the assignment results, but is used for the purpose of analysis.
Jurisdictional exception
: An assignment condition established by applicable law or regulation, which precludes an appraiser from complying with a part the Uniform Standards of Professional Appraisal Practice (USPAP).
Scope of work
the type and extent of research and analyses in an assignment. This includes how much data you need and where you get it from. It also includes reaching a conclusion as to which approaches to value are applicable and which are necessary.
Data Collection and Property Description :
2 categories of Data:
General and Specific
General Data
items of information on value influences that derive from social, economic, governmental, and environmental forces and originate outside the property being appraised
Specific Data
Details about the property being appraised, comparable sale and rental properties and relevant characteristics
Market area data
falls into category of general and focus on trends that are affected by the four forces that influence value
Trend
as series of related changes brought about bby a chain of causes and effects. Trends are forecast through economic base analysis, statistical analysis, market analysis of economic indicators and surveys
COMPARABLES
: A shortened term for similar property sales, rentals, or operating expenses used for comparison in the valuation process; also called comps.
COMPARABLES
extremely important that you are comparing apples to apples
Data Analysis
Market Analysis and Highest and Best Use Analysis
Market Analysis
Demand Studies
Supply Studies
Marketability Studies
Highest and Best Use Analysis
Land as though vacant
Ideal Improvement
Property as Improved
Market Analysis
A process for examining the demand for and supply of a property type and the geographic market area for that property type
Highest and Best Use
4 Criteria (or tests) used to reach a highest and best use conclusion:
- consider all the uses that are physically possible for the vacant site based on size, shape and topography.
- consider all the uses that are phycially possible as well as currently legal by zoning, deed restrictions, or other regulations (such as change of zoning or a zoning variance)
- look at all the physically possible and legally permitted uses that are financially feasible, meaning they produce a positive land value
- Analyze all of the physically possible, legally permissible and financially feasible uses and conclude which one best maximizes value
Highest and Best Use as Improved (A Two-Step Process)
if the property is improved, the appraiser must reach two separate conclusions of highest and best use
as though improved
as though vacant
Potential conclusions for the highest and best use of a property as improved include
- Continue in use as is
- Modify the improvements through renovation or conversion to another use
- Demolish the improvements.
Highest and Best Use Procedures
H&BU of Land as though Vacant
• Test of physical possibility of land as though vacant
• Test of legal permissibility of land as though vacant
• Test of financial feasibility of land as though vacant
• Test of maximum productivity of land as though vacant
H&BU of Property as Improved
- Test of physical possibility of the property as improved
- Test of legal permissibility of the property as improved
- Test of financial feasibility of the property as improved
- Test of maximum productivity of the property as improved
- In which step of the valuation process does an appraiser analyze the ideal improvement for the appraised property?
A) Data analysis—highest and best use analysis
type of improvement would be ideally suited to the property as though vacant.
B) Data collection and property description—subject property data
C) Identification of the problem—identification of relevant characteristics of the subject property
D) Scope of work
A) Data analysis—highest and best use analysis
type of improvement would be ideally suited to the property as though vacant.
Feedback: Correct. Highest and best use considers what
Feedback: This step involves analyzing the property as though vacant as well as analyzing it as improved. Please review the content identified under “STEP 4: Data Analysis” found in Module 1.
- While analyzing a property’s value, an appraiser observed that some sites in the immediate area of the subject have unstable soil conditions. The subject site shows no evidence of this issue, but no determination could be made at the present time. When completing the assignment, what assignment condition should the appraiser consider in order to address this issue?
A) Laws and regulations
B) Jurisdictional exception
C) Hypothetical condition
D) Extraordinary assumption
D) Extraordinary assumption
Feedback: Correct. The unstable soils present a situation where the information about the condition is uncertain. If the assumption is proven false, the appraiser’s conclusions would be affected.
Feedback: Assignment conditions must be considered by the appraiser during the problem identification process. Please review the content identified under “STEP 1: Identification of the Problem” found in Module 1.
- An appraiser is performing an assignment related to a tax appeal. The tax assessed value is assigned by the county on January 2nd and the appraiser received the assignment 4 months later. What type of effective date should the appraiser use in this assignment?
A) Any date the appraiser chooses is acceptable if it is within the identified 4-month span
B) A prospective date that extends to January 2nd of the following year
C) A current date that is contemporaneous with the date of the appraisal report
D) A retrospective date back four months earlier to January 2nd
D) A retrospective date back four months earlier to January 2nd
Feedback: Correct. A retrospective valuation date is appropriate and offers the best comparison to the tax assessed valuation.
Feedback: The appraiser’s determination of the effective date in an assignment is dependent upon the intended use of the appraisal. Please review the content identified under “STEP 1: Identification of the Problem” found in Module 1.
- When an appraiser identifies an effective date of value, the value opinion is valid for what period of time?
A) For a minimum of one month after the identified date of value
B) If for lending purposes, the value opinion is valid for six months
C) The value opinion is valid for 120 days, after which, the opinion must be updated by the appraiser
D) For the exact date identified by the appraiser
D) For the exact date identified by the appraiser
Feedback: Correct. An appraiser identifies a specific point in time for the effective date of the value opinion.
Feedback: The date of value is a specific point in time even if a client makes a decision based on the opinion of value at some later date. Please review the content identified under “STEP 1: Identification of the Problem” found in Module 1.
- Which two dates must be stated in the appraisal report?
A) The current date and the retrospective date
B) The effective date and the report date
C) Date of the report and the property inspection date
D) Date of inspection and the date that the report is transmitted to the client
B) The effective date and the report date
Feedback: Correct. These two dates are required by professional standards in order to establish whether the appraisal report represents a retrospective, prospective, or current opinion.
Feedback: The purpose of requiring two dates is to establish whether the appraisal report represents a retrospective, prospective, or current opinion. Please review the content identified under “STEP 1: Identification of the Problem” found in Module 1.
- In a market value assignment, when must an appraiser identify the intended users of the appraisal?
A) Prior to accepting the assignment
B) At the scope of work determination
C) When reporting the final opinion of value
D) After collecting data and describing the property
A) Prior to accepting the assignment
Feedback: Correct. All components of problem identification (Step 1) should be identified prior to accepting the assignment.
Feedback: Some tasks in the valuation process must take place prior to other steps and therefore cannot be delayed to a later point in the process. Please review the content identified under “STEP 1: Identification of the Problem” found in Module 1.
- The appraiser’s initial collection of comparable property data is best categorized as…
A) general data only
B) reliable if the data is confirmed with a third-party source
C) specific data only
D) both general data and specific data
D) both general data and specific data
Feedback: Correct. Comparable property data collection involves both general and specific data.
Feedback: The data needed by appraisers can be divided into general data and specific data. Please review the content identified under “STEP 3: Data Collection and Property Description” found in Module 1.
- In the appraiser’s data collection process that involves a market value assignment, which of the following is an example of general data?
A) Economic indicators for the region
B) Capitalization rates applicable to the appraised property
C) Geographic characteristics of the subject site
D) Ownership history of the appraised property
A) Economic indicators for the region
Feedback: Correct. This is an example of general data because it originates outside the property being appraised.
Feedback: Data collection is divided into general data and specific data. Please review the content identified under “STEP 3: Data Collection and Property Description” found in Module 1.
- An appraiser’s analysis of highest and best use on a property will generally include which of the following?
A) Marketability study
B) Demand studies and supply studies
C) Extraordinary assumptions and hypothetical conditions
D) Analysis of the land as though vacant and also as improved
D) Analysis of the land as though vacant and also as improved
Feedback: Correct. This is a fundamental component of the highest and best use analysis.
Feedback: Data analysis involving highest and best use includes a decision process using two scenarios that the appraiser considers. Please review the content identified under “STEP 4: Data Analysis” found in Module 1.
- The intended use of an assignment guides an appraiser on the type and extent of research and analyses performed as one aspect of the valuation process. But intended use also guides the appraiser in what other aspect of the valuation process?
A) Intended use guides the data collection process
C) Intended use guides the determination of the scope of work
B) Intended use guides the report content and level of information provided
D) Intended use guides the identification of assignment conditions
B) Intended use guides the report content and level of information provided
Feedback: Correct. Intended use affects both development and reporting in an appraisal assignment.
Feedback: Intended use affects both development and reporting in an appraisal assignment. Please review the content identified under “STEP 1: Identification of the Problem” found in Module 1.
