Tea "Jargon" Real Estate Appraiser
A real estate appraisal is a service performed by an appraiser who develops an opinion of value based on the highest and best use of real estate. The highest and best use is the one that produces the greatest possible value for the property. This use must be profitable and probable. Defining the type of value being developed is also important and this should be included in the appraisal, ie fair market value, condemnation value, quick sale value, etc.
There are various types and definitions of value sought by a real estate appraisal. Some of the most common are listed:
– The price at which an asset would trade at a competitive Walrasian auction. Market value is usually interchangeable with fair market value or fair value. The legal definition of market value is generally given by some variant of the following: “The most probable price that a property would trade for in a stand-alone transaction in a competitive and open market, in which buyer and seller act prudently and with knowledge of the facts and in which the price is not affected by any special relationship between them”.
– The net present value (NPV) of a cash flow that generates an asset for a specific owner under a specific use. Value in use is the value to a particular user, which may be above or below the fair market value of a property.
– is the value to a particular investor, which may be above or below the fair market value of a property.
– is the value of real estate covered by an insurance policy. Generally does not include the value of the site. It is important to distinguish between market value and price. A price obtained for a specific property under a specific transaction may or may not represent the market value of that property: special considerations may have been present, such as a family relationship between the buyer and seller, or the transaction may have been part of a larger set of transactions in which the parties have engaged. It is the job of the real estate appraiser/property appraiser to judge whether a certain price obtained in a given transaction is indicative of market value.
There are three common approaches to determining the fair market value of a property, the cost approach, the sales comparison approach, and the income approach. The appraiser will determine which approach is applicable and develop a valuation based on information from each individual market area. Costs, income, and sales vary widely from area to area, and particular importance is placed on the specific location of the property. The market for the appraised property is also considered. Properties that are typically purchased by investors (i.e. high-rises) will give a higher weight to the Income Focus, while small commercial or office properties (purchased by owner-users) will give a higher weight to the Sales Comparison Focus. Single-family residences are most commonly valued with a higher weight for the sales comparison approach.
The cost approach is sometimes called the sum approach. The theory is that the value of a property can be estimated by adding the value of the land and the depreciated value of any improvements. It is the value of the land, plus the cost to rebuild any improvements, less depreciation on those improvements.
The sales comparison approach looks at the price or price per unit area of similar properties for sale on the market. Simply put, sales of properties similar to the subject are analyzed and sales prices are adjusted to account for differences in comparables to the subject to determine the subject’s fair market value. This approach is generally considered the most reliable, IF there are good comparable sales.
Income Capitalization Approach
Often called simply the income approach, it is used to value commercial and investment properties.
Automated Valuation Models (AVMs) are gaining acceptance. These are based on statistical models such as multiple regression analysis and geographic information systems (GIS). While AVMs can be quite accurate, particularly when used in a very homogeneous area, there is also evidence that AVMs are not accurate in other cases, such as when used in rural areas or when the assessed property does not fit the neighborhood. . Due to limitations, AVMs have begun to fall out of favor with many lenders, but are widely used in other appraisal problems, such as mass appraisals for ad valorem real estate tax purposes.