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The Appraisal Process
There are three basic valuation methodologies that
may be used in estimating the market value of real estate. These three
approaches analyze data from the market to develop independent value indications
for the subject property. Although the three approaches are applied
independently to the subject property, they are interrelated as they are all
based on market derived data. These three approaches are the Cost Approach, the
Direct Sales Comparison Approach, and the Income Approach.
The Cost Approach is based on the
premise that an informed buyer will pay no more for a property than the cost of
constructing a comparable property with similar utility. In this analysis, the
cost to reproduce or replace the improvements is adjusted to reflect the depreciation that has occurred.
Accrued depreciation includes physical depreciation, functional obsolescence,
and external obsolescence. To the depreciated value of the improvements is then
added the site value, which is estimated through the direct comparison with
other vacant sites that have sold in the area in recent years with adjustments
made for dissimilarities. The Cost Approach is particularly applicable and
reliable when the property being appraised is relatively new with little accrued
depreciation or is of a highly specialized design and/or utility for which there
exists few market sales comparables.
The Direct Sales Comparison Approach has as its premise a comparison of the
subject property with others of similar design, utility, and features that have
sold in the recent past. To indicate a value for the property, adjustments are
made to the comparables for dissimilarities with the subject property. This
approach is based on the proposition that an informed buyer would pay nor more
for a property than the cost of acquiring an existing property with the same
utility. This approach is most applicable and reliable when an active market
provides sufficient sales of comparable properties for analysis.
The Income Approach develops a value estimate for a property predicated on a
detailed analysis of its earnings potential and the rate of return on an
investment demanded by prudent investors in the marketplace. This analysis
converts anticipated benefits and income to be derived from ownership of a
property into a value estimate. Detailed income and expense analysis results in
a net operating income that the subject is able to generate, which is then
converted to a value indication for the property through the capitalization
process.
Normally, these three approaches will each indicate a different value for the
property being appraised. The last step of the appraisal process involves the
appraiser analyzing the strengths and weaknesses of each of the three approaches
utilized with the value indications reconciled and correlated to arrive at a
final value estimate of the property.
Appraisal Report Options
The Self-Contained Appraisal Report should contain all
information to the solution of the appraisal problem and the intended user(s) of
the report should expect to find all significant data reported in comprehensive
detail.
The Summary Appraisal Report should contain a summary of
all information significant to the solution of the appraisal problem and the
intended user(s) of the report should expect to find all significant data
reported in tabular or abbreviated narrative formats.
The Restricted Use Appraisal Report should contain a brief
statement of information significant to the solution of the appraisal problem.
The client for this report should not expect to find all significant data
reported.
The attached page displays a rule by rule comparison of the
reporting rules for the three types of reports.
Appraisal Report Comparison Chart
Appraisal Regulations
The attached information identifies those requirements imposed by
the Appraisal Foundation when preparing all appraisals. These include
the regulations imposed under Uniform Standards of Professional Appraisal
Practice (USPAP). The Financial Institutions Reform, Recovery, and
Enforcement Act (FIRREA) imposes additional standards on the appraiser when
performing appraisal assignments for federally insured financial institutions.
These standards can be found in checklist form on the attached page.
FIRREA and
Regulatory Checklist
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