Appraising099

A brief overview

Part 1 of a series

Appraising 099

Part 1 presented by Dale Crump

General Certified Appraiser in Kentucky and Ohio

Central Office Reviewer

Right of Way Program Specialist II

Stand-up Philosopher

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Part OneControlling Documents

Controlling Documents

1. The URA or Uniform Act : http://www.fhwa.dot.gov/real_estate/uniform_act/

2. KYTC Appraisal Guidelines: http://transportation.ky.gov/Right-of-Way-and-Utilities/Documents/KYTC%20Appraisal%20Guidelines.pdf

3. USPAP: http://www.appraisalinstitute.org/

4. USAFLA or Yellow book: http://www.justice.gov/sites/default/files/enrd/legcy/2010/11/16/Uniform-Appraisal-Standards.pdf

Controlling Documents cont.

Uniform Relocation Assistance and Real Property Acquisition Policies Act of 1970, as amended (The Uniform Act):

1. The purpose is to promote the fair and equitable treatment of people displaced as a result of projects undertaken by a federal agency or state agency with federal financial aid.

2. Requires (except under certain conditions) the appraisal of real property before initiations of negotiations.

Controlling Documents cont.

KYTC Appraisal Guidelines:

was established to provide a consistent format for highway appraisals to ensure that fair and equitable treatment of the public is preformed throughout the valuation process on all KYTC approved projects.

Controlling Documents cont. Uniform Standards of

Professional Appraisal Practices (USPAP):

1. Developed, published and interpreted by The Appraisal Foundation’s Appraisal Standards Board on behalf of appraisers and users of appraisal services.

2. Used by state and federal regulatory agencies and others.

3. Contains Definitions, Preamble, Rules and Standards.

Controlling Documents cont.

Uniform Appraisal Standards for Federal Land Acquisition (UASFLA or “The Yellow Book”)

1. Developed and published by the (U.S. Federal) Interagency Land Acquisition Conference.

2. Intent is to promote uniformity in the appraisal of real property among the various agencies acquiring property on behalf of the U.S.

3. Developed in 1973 and revised in 1982 and 2002.

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Part 2Definitions & Terms

Personal Property, Fixtures and Trade Fixtures

Personal Property: is the items that are not affixed to the real estate. They are not transferred with the property but are transferred by a bill of sale.

Fixtures: are items that were once personal property but have since been permanently attached to the real estate so that the items are now regarded as part of the real estate.

Trade Fixtures: are not part of the real estate. They are personal property no matter how they are affixed. (found usually in rental situations)

Real Estate and Real Property

Real Estate: is the physical land and appurtenances (“something” that has been added to a property and has now become an inherent part of it and usually passes with title) to the land.

Real Property: is all the rights, interests and benefits inherent in the ownership of the real estate. It is the bundle of rights.

Bundle of Rights: All the rights of real estate ownership. A fee ownership of a real estate parcel that includes possession, enjoyment, disposal, etc. Any one, or several, of the rights may be transferred or conveyed to another, with the owner retaining any rights not conveyed.

APPRAISAL

Appraisal: is “the act or process of developing an opinion of value”. (USPAP)

An appraisal is “a written or verbal statement independent and impartially prepared by a qualified appraiser setting forth an opinion of defined value of an adequately described property as of a specific date, supported by the presentation and analysis of relevant market information.” (The Uniform Act of 1970)

Criteria for Appraisals

1. An adequate description of the physical characteristics of the property being appraised (and in the case of partial acquisition, an adequate description of the remaining property) including items identified as personal property, a statement of the known and observed encumbrances, if any, title information, location, zoning, present use and analysis of highest and best use, and at least a 5 year sales history of the property.

Criteria for Appraisal cont.

2. All relevant and reliable approaches to value consistent with established federal and federally assisted programs appraisal practices. If the appraiser uses more than one approach, there shall be an analysis in reconciliation of approaches to value used that is sufficient to support the appraiser’s opinion of value.

Criteria for Appraisal cont.

3. A description of comparable sales, including a description of all relevant physical, legal, and economic factors such as parties to the transaction source and method of financing, and verification by a party involved in the transaction.

Criteria for Appraisal cont.

4. A statement of the value of the real property to be acquired and, for a partial acquisition, a statement of the value of the damages and benefits, if any, to the remaining real property where appropriate.

Criteria for Appraisal cont.

5. The effective date of valuation, date of the appraisal, signature, and certification of the appraiser.

Cost, Price and Value

Cost: (as it relates to real estate valuation), is the amount spent to construct an object or improvement. While there are various types of cost, the most common ones in valuation are replacement cost (equivalent utility) and reproduction cost (exact replica).

Price: is the amount paid for a good or service. In real estate, the transaction price is the amount for which a property actually sells.

Value: is the worth of a good or service at a particular time. In real estate, there are several value types.

Factors that Create Value

D.U.S.T

Demand: includes not only the desire or need for real estate, but also the financial ability to meet the demand or need.

Utility: In order for real estate to have value, it must have

utility or usefulness. It must have the ability to satisfy wants, needs and desires.

Scarcity: it is the supply of real estate in relations to demand.

Transferable: in order for real estate to have value it must be transferable, the ownership rights must be able to pass from seller to buyer.

Factors that Affect Value

Economic factors: affect the management of limited economic resources.

Environmental factors: include both the natural environment and the developed environmental characteristics.

Governmental factors: zoning, tax levies, educational system, building codes, et.

Social factors: relate to the demographic characteristics of age and gender composition, population, population changes and social attitudes.

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Part 3The Valuation Process

Highest and Best Use

The reasonably probable and legal use that is physically possible, appropriately supported, financially feasible and that results in the highest value.

Physically possibleLegally permissibleFinancially feasibleMaximally productive

VALUATION PROCESS

The appraiser uses one or more of the three approaches to develop value opinion. Each approach has its applicability and its strengths and weaknesses. The three approaches to value are:

CostSales Comparison Income Capitalization

VALUATION PROCESS cont.

Cost Approach

Develops a value of opinion for the land, Estimates the cost new of the

improvement, as of the appraisal effective date,

Deducts depreciation from the cost new of the improvement,

Adds the land value opinion and the depreciated improvement value indication for the subject property by the cost approach.

VALUATION PROCESS cont.

Cost Approach cont. There are three primary methods to estimate

the cost new of the improvements. The comparative-unit method, the unit-in-place method, and the quantity survey method.

The Comparative-unit method is the most frequently used (e.g., dollars/per square foot, dollars per cubic foot)

Cost new = reproduction (exact copy) vs. replacement (equivalent utility) minus depreciation.

VALUATION PROCESS cont.

Cost Approach cont.

Depreciation is a loss in value from any and all causes. It is the difference between the cost new and the depreciated value, as of the appraisal effective date. Depreciation results from three causes, physical deterioration, functional obsolescence and external obsolescence.

VALUATION PROCESS cont.

Cost Approach cont.

There are three basic methods to estimate depreciation. The age-life method, market extraction method and the breakdown method. The age-life method is most frequently used.

Age- life method is the ratio between effective age and economic life.

VALUATION PROCESS cont.

Sales Approach In the sales comparison approach, the

appraiser compares recent similar property sales to the subject property. The sales are adjusted for the dissimilarities to the subject and an indicated value of opinion for the subject property is developed. If the sale is superior in a specific attribute, a minus adjustment is indicated, if the sale is inferior in a specific attribute, a plus adjustment is indicated, if the sale and subject are comparable in a specific attribute, no adjustment is made.

VALUATION PROCESS cont.

Sales Approach cont.

Adjustment can be qualitative (inferior to, equal to, superior to) or quantitative (dollars, percentages)

Quantitative is the preferred method used on Highway Appraisals

Typical adjustments considered include property rights, financing, sales conditions, market conditions, location, physical characteristics, other.

VALUATION PROCESS cont.

Income Capitalization Approach In developing a property value opinion by the

income capitalization approach, the appraiser converts income into value through the application of a rate or a ratio.

Gross Rent Multipliers: express the relationship between value and gross rent.

GRM= Sale Price/Gross Rent GRMs are appropriate for residential

properties. In this instance, the gross rent and the gross rent multiplier are generally based on monthly rent.

VALUATION PROCESS cont.

Income Capitalization Approach cont. To develop a gross rent multiplier, the

appraiser, researches the market for recent similar sales that were rented or available for rent at the time of sale. Next, the gross rent multiplier is determined by dividing the sale price by the gross rent. Once developed, the appraiser multiplies the subject property’s gross rent by the gross rent multiplier to arrive at a value opinion for the subject property.

VALUATION PROCESS cont.

Income Capitalization ApproachDirect Capitalization

1. Estimate the subject property’s annual potential gross income (PGI)

2. Determine a vacancy and collection loss (V&C)

3. Subtract the vacancy and collection loss from the potential gross income to arrive at the effective gross income (EGI)

VALUATION PROCESS cont.

Income Capitalization ApproachDirect Capitalization

4. Estimate annual property expense and subtract the expenses from the effective gross income to arrive at the net operating income (NOI)

5. Develop a capitalization rate.6. Convert the net operating income

into value through the application of a rate.

VALUATION PROCESS cont.

Income Capitalization ApproachDirect Capitalization

In the development of a market value opinion, the appraiser converts the net operating income into value through direct capitalization or yield capitalization. In direct capitalization, the formula is:

Property Value= Net Operating Income/Capitalization Rate

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Part 4Highway Appraisals

Highway Appraisals

APPRAISAL TECHNIQUES The regulations found in 49 CFR Part 24

provide that the format and level of documentation for an appraisal depend on the complexity of the appraisal problem. The documentation must include valuation data and the appraiser’s analysis of the data. In some cases, the appraisal problem will allow that “minimum standards” be used; others may require a “detailed” appraisal. However, any appraisal must contain sufficient documentation to support the appraiser’s stated opinion of value.

Highway Appraisals

These type of appraisals generally use two values, Before and After (BAV).

But there are times when the scenario does not require a complete BAV or when there is sufficient data that only one approach to value is required.

Minimum standards considerations must take into account the type of appraisal needed and the appraisal context, consistent with state appraisal standards. For example, eminent domain appraisals typically require more thorough data research, more in-depth analysis and more complete documentation and reporting than appraisals prepared for the mortgage lending industry. (BV & MINOR)

Highway Appraisals cont.BAV

In the Before, the appraiser considers the entire property and then takes the contributing value of each component to the whole, i.e., land, site improvements and all structures in its current use and gathers, analyzes and assembles market data to arrive at a opinion of value before the road project is constructed.

In the After situation, the appraiser considers any value loss to the fee simple and easements taken and any damages that the new construction may have on the parcel, i.e. but not limited to, proximity to the new road, elevation changes, curable functional obsolescence and changes in highest and best use.

Highway Appraisals cont.BV & MINOR

MINIMUM STANDARD APPRAISALS This form of appraisal may be utilized for whole

residential acquisitions, acquisitions of vacant land or for partial acquisitions involving easily supported damages to the remainder of the property.

In all instances, the highest and best use must be the same both before and after acquisition. The report must include a description of the property and the acquisition, an analysis of the comparable sales used, photographs of the property and an analysis of the value conclusions.

Highway Appraisals

Questions and/or Comments?

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