QUESTIONS
REGARDING THE APPRAISAL PROCESS
The three most commonly utilized and
accepted valuation approaches include: 1) a "Reproduction"
or "Replacement Cost Approach" where the
appraiser estimates the actual cost to rebuild the property to
near like kind. This would involve establishing a site value and
an improvement value as of a specific date with allowances for
physical, functional, and economic depreciation; 2) an "Income
Approach" where the appraiser utilizes the actual or
estimated income and expenses from an income producing property to
estimate market value through gross income multipliers or the
capitalization of net operating incomes supported by market
indicators as of the effective date of the appraisal, and; 3) the
most commonly accepted methodology for the valuation of
residential properties, the "Sales Comparison
Approach", where the appraiser estimates the value of the
property by locating closed sales that have occurred recently in
reasonable proximity to the property being appraised, that can be
considered "competing" with the property being
appraised, and with similar features and conditions that will tend
to "bracket" the primary features of the property being
appraised. After adjustment for the apparent market reaction to
any such differences in features and conditions, the appraiser
will estimate the market value from a weighted calculation based
upon the degree of adjustment required to reflect any value
impact.... where the lesser the required adjustment the greater
the comparability and the greater the required adjustment the
lesser the comparability. The appraiser may use one, all, or any
combination of these approaches in determining an opinion of
value.
Remember...the three primary
approaches are the Replacement (or Reproduction) Cost approach;
the Income approach; and the Market Comparison (or Sales
Comparison) approach. The weight of each approach, or the
exclusion of one or more approaches, is a direct result of the
appraisal problem itself and the answer, while usually obvious,
is at the discretion of the appraiser performing the assignment.
If the appraisal does not include improvements, a replacement cost
is usually excluded from analysis. When the property is improved
and the improvements are new, the cost approach can be the most
accurate approach available. If the property is not income
producing, the income approach is usually excluded, and when the
property is income producing, the approach is typically the most
valuable approach to the exclusion of all others. The market
comparison approach typically allows for the impact of all other
considerations (income, cost, and comparable sales) when sales
negotiations are concluded between a prudent buyer and seller, but
the approach loses reliability when sales are infrequent or when
sales are dated or less than ideally comparable to the subject
property.
The appraiser will use their best judgment and consideration of
the problem in determining which approaches to utilize and which
to weight heaviest. There is no set rule or guideline that
specifies which approaches must be included or to what degree the
approach must be weighted in the final analysis.
Why does the appraiser need copies
of purchase contracts, disclosures, etc.?
The appraisal of real property is
predicated on the parameters of the order placed by the client. If
the assignment is based on a purchase money lending decision, then
it follows that the entire purchase must be clearly understood by
the appraiser performing the task of analyzing all value
influencing impacts. The entire meeting of the minds between buyer
and seller are found in the written agreements that complete the
purchase. The contract, all addenda thereto, and all disclosures
made must be provided in order to assure that the appraiser is
aware of any and all factors that may impact value. Examples could
include a list of personal property included in the price; that
old antique boat in the garage; a seller concession regarding pest
control work to be done; a concession where the seller may lease
back the property until a new home is built elsewhere; a new roof
to be installed prior to close of escrow; and any number of other
concessions that would have an impact on value. Even more
important, the appraiser is obligated by the Uniform Standards of
Appraisal Practice to review all applicable purchase agreements.
Typically, the purchase agreement will refer to, or be conditioned
upon, such items as disclosures, pest control reports, or the
happening of a certain event. If such items are referenced in the
purchase contract, the appraiser is obligated to review the item
and consider its impact on value, if any.
