What is an appraiser?
Real Estate Appraisers are licensed professionals that inspect properties and provide unbiased estimate of the properties most probable sale price.
Typically appraisers are engaged by a diverse range of For Sale by Owner clients to provide a professional opinion or consultative evaluation services on the quality, value, or utility of a specific property.
Appraisals may be required for just about any type of property, including:
- Single family homes
- Apartment buildings
- Office buildings
- Shopping centers
Whenever real estate is sold, mortgaged, taxed, insured or developed an appraiser is used.
Who is an Accredited Appraiser?
A qualified appraiser is recognized by the AACI, P.APP, or CRA designations, which are awarded by the Appraisal Institute of Canada to members who successfully complete a rigorous course of studies in all aspects of real estate evaluation and meet other educational and experience requirements.
All institute members are governed by a Code of Ethics and Uniform Standards of Professional Appraisal Practice, which establish a minimum standard of performance in the rendering of professional services. This ensures that the users of appraisal services can have full confidence in institute designations.
A real estate appraisal or property evaluation is a written report of an opinion presented by a licensed or certified appraiser.
These reports are the appraiser's opinion of the probable sale price at a given or fixed time. Depending on the fluctuations in the market, they are usually fairly accurate for up to 3 months. (Some time frames may vary).
Reasons for Appraisals:
The reasons for performing a real estate property appraisal are varied. For Sale by Owner clients typically seek out a professional evaluator the determine the:
1. Current value of property being bought or sold
2. Future value of property being built
3. Value for mortgage or lending purpose
4. Value to assist in investment decisions
5. Value to measure property tax assessments or other taxes
6. Verification of damage claims resulting from fire, rain, hail, wind or other disasters
7. Value of property to determine compensation where property is to be expropriated
8. Value of property involved in litigation
9. Value of private property acquired by government or public use
10. Value of property as it affects pending business mergers or dissolution
Today's professional real estate property evaluation are highly qualified and better able to serve the expanding needs of the market place with a wide range of value added real estate property advisory and consulting services. Contact your local appraiser for more details.
Appraisers use a number of generally accepted evaluation approaches to develop market value estimates - direct comparison, cost and income.
Each approach analyzes highest and best use of the property and which use would return the highest value, considering legal, economic and social factors.
Types of Value:
- Market value - the price at which an asset would trade in a competitive setting. Market value is the estimated amount for which a property should exchange on the date of evaluation between a willing buyer and a willing seller in an arms-length transaction after proper marketing wherein the parties has each acted knowledgeably, prudently and without compulsion.
- Value in use - the net present (NVP) of a cash flow that an asset generated for a specific owner under a specific use.
- Investment value - this is the value to one particular investor and is usually higher than the market value of a property.
- Insurable value - this is the value of real property covered by an insurance policy (Generally it does not include site value).
- Liquidation value - this may be analyzed as either a "forced liquidation" or an "orderly liquidation" and is commonly sought standard of value in bankruptcy proceedings. It assumes a seller is compelled to sell after an exposure period, which is less than the market normal time frame.
Approaches to Value
The Direct Comparison Approach:
The Direct Comparison Approach is based on the premise that the value of a specific property is set by the price an informed appraiser would pay for a comparable property, offering a similar desirability and usefulness. This requires an understanding of all market variables, including location, property size, physical features and economic factors. Assessors may make adjustments, if required.
For example, if an analysis of a property sold in May indicated that the overall market price for similar properties has moved as of July 1 the previous year, an adjustment would reflect the sale price as of July 1.
Since the real estate market changes, the adjustment process is an important part of developing market value indicators. The process of identifying and analyzing comparable property sales is repeated until a satisfactory range of value indicators for the subject property is established and a final estimated of value is possible.
The Cost Approach
The Cost Approach to property assessment is based on the premise that an informed purchaser will judge the value of a property by market price and rents of similar properties, and will also consider the cost of buying land with similar characteristics and constructing a new building. This assumes the cost of replacing the existing building plus the value of the land equals market value.
The steps in applying the Cost Approach include:
- Estimating the site value (land and site improvements) through review of comparable sales;
- Estimating the cost of replacing the existing building with one of similar usefulness (reflecting current building design and materials); and
- Deducting all sources of depreciation. Including physical deterioration ("wear and tear" on a building) and functional and economic obsolescence. Functional obsolescence is the reduced ability of the building to perform the function it was originally designed and built for. Economic obsolescence refers to external forces that affect the ability of the buildings to continue to perform, including changes in transportation corridors, new types of building design demanded by the market, etc.
The Cost Approach is used most often when the property being appraised is new or nearly new, where there are no comparable sales, or where the improvements are relatively unique or specialized.
The Income Approach:
The Income Approach to value is based on the premise that the value of a property is directly related to the income it will generate. The appraiser analyzes both the property's ability to produce future income and its expenses and then estimates the property's value.
The appraiser also develops a capitalization rate by analyzing the sales of similar income properties and determining the relationship between the sale price and net income.
The steps in applying the Income Approach are to determine the stabilized, net operating income by:
1. Estimating potential gross income from all sources;
2. Deducting an allowance for vacancy and bad debts; and
3. Deducting all direct and indirect operating expenses.
The resulting net operating income is capitalized by a market rate, which reflects the property type and effective date of valuation, to produce an estimate of overall property value.
To determine the potential gross income, the appraiser determines market rents by analyzing rents in both the property being assessed and in comparable properties in the neighborhood. The appraiser makes allowances for vacancy and collection loss. To determine the effective gross income the appraiser deducts operating expenses.
Generally accepted appraisal practice is to not deduct mortgage interest from operating expenses, since these vary greatly from property to property.
The appraiser determines the capitalization rate by analyzing sales (comparing net operating income to sale price) in the same market to determine rates of return.
The capitalization rate will vary, depending on the attractiveness of a property as an investment, income risks and physical factors.
The Income Approach is used when appraising properties that produce a rental income from single to multiple tenants. The capitalized value of the income stream provides an estimate of the market value of the property (land and improvement).