Principles of Real Estate

Chapter 13-Valuation and Economics

This chapter explores the principles of value, the forces that impact the value of property, and the
appraisal process.

Overview

Objectives
At the end of this chapter, the student will be able to:

List the steps in the cost approach

Name the three methods for computing replacement or
reproduction cost
Describe the three types of depreciation
Compute the depreciation on a building, with given
information
List the steps in the income approach
Write the formulas that are essential to the income approach
Compute the value, cap rate, or net income, with given information

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 Provide the formulas necessary for GRM/GIM
Calculate the value of a rental property, with given information
Explain "weighted averaging" in terms of reconciliation

Appraisal

An appraisal is an analysis, opinion, or conclusion relating to the

nature, quality, value, or utility of specified interest in, or aspects of, a
specific piece of real estate or real property.

An appraisal may be performed for a variety of reasons. An appraiser may

be doing one for insurance reasons, for a condemnation proceeding, or for a
lender making a loan.

Whatever the reason for the appraisal, an appraisal is an opinion of value.

Federal requirement for licensing and certification of appraisers became
effective Jan 1, 1993.

Value has many definitions, but the goal of an appraiser in a real estate
appraisal is to estimate fair market value or market value. Fair market
value is defined as the most probable price a property will bring if:

The buyer and seller are aware of market conditions.

Neither is under abnormal pressure.
The property is exposed on the market for a reasonable period of time.
Payment is made in cash or its equivalent.

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 The seller is capable of delivering marketable title.

Cost to the current owner is never a consideration of an appraiser in

estimating the present value of a property.

Appraisal-Prerequisites of Value
For a property to have value in the real estate market, it must have four
characteristics:

Demand: The need or desire for possession or ownership backed

up by the financial means to satisfy that need.
Utility: The capacity to satisfy human needs and desires.
Scarcity: A finite supply.
Transferability: The transfer of ownership rights from one person to
another with relative ease.

Appraisal-Principles of Value
There are a number of economic principles at work
that affect the value of real estate. They include:

Highest and best use

Substitution
Supply and demand
Conformity
Anticipation
Progression and regression
Plottage
Contribution
Competition
Change

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Highest and Best Use

Highest and best use: The most profitable use

to which the property is adapted and needed or
the use that is likely to be in demand in the
reasonably near future is the highest and best
use.

For example, a highest-and-best-use study may

show that a parking lot in a busy downtown area
should, in fact, be replaced by an office building. It
is that use which will provide the owner with the
highest net return.

Substitution

Substitution: The principle of substitution states

that the maximum value of a property tends to
be set by the cost of purchasing an equally
desirable and valuable substitute property,
assuming that no costly delay is encountered in
making the substitution.

The principle of substitution is the underlying

principle for the direct sales comparison and
cost approaches.

For example, if there are two similar houses for sale

in an area, the one with the lower asking price would normally be purchased
first.

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Supply and Demand
Supply and demand: This principle states that the value of a property will
increase if the supply decreases and the demand either increases or
remains constant -- and vice versa.

For example, the last lot to be sold in a residential area where the demand
for homes is high would probably be worth more than the first lot sold in that
area.

Conformity
Conformity: This means that maximum
value is realized if the use of the land
conforms to existing neighborhood
standards.

In residential areas of single-family houses,

for example, buildings should be similar in
design, construction, size, and age to other
buildings in the neighborhood.

Principles of Value-Anticipation

Anticipation: This principle holds that value can increase or decrease in

anticipation of some future benefit or detriment affecting the property.

For example, the value of a house may be affected if there are rumors that
the block on which the house is located may be converted to commercial use
in the near future.

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Returns
Increasing and decreasing returns:
Improvements to land and structures will
eventually reach a point at which they will
no longer have an effect on property
values.

As long as money spent on improvements

produces an increase in income or value, the
law of increasing returns is applicable.

But at the point where additional

improvements will not produce a
proportionate increase in income or value, the
law of diminishing returns applies.

Progression and Regression

Progression and regression: The principle that,
between dissimilar properties, the worth of the
better property is adversely affected by the
presence of the lesser-quality property is known
as regression.

Thus, in a neighborhood where the homes average

in the $75,000 range, a structure that would be
worth at least $90,000 in another neighborhood
would tend to be valued closer to $75,000.

Conversely, the principal of progression states

that the worth of a lesser property tends to
increase if it is located among better properties.

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Principles of Value-Plottage
Plottage: The principle of plottage holds that the merging or consolidation
of adjacent lots held by separate land owners into one larger lot under
a single land use tends to produce a higher total land value than the
sum of the two sites valued separately.

For example, if two adjacent lots are valued at $35,000 each, their total
value, if consolidated into one larger lot under a single use, might be
$90,000.

The process of merging the two lots under one owner is known as
assemblage. The increase in value is called a plottage increment and is a
form of unearned increment.

Contribution

Contribution: The value of any component

of a property consists of what its addition
contributes to the value of the whole or
what its absence detracts from that value.

For example, the cost of installing an air-

conditioning system and remodeling an older
office building may be greater than is justified
by the rental increase that may result from
the improvement to the property.

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Principles of Value-Competition

Competition: This principle states that excess profits tend to attract

competition.

For example, the success of a retail store may attract investors to open
similar stores in the area. This tends to mean less profit for all stores
concerned unless the purchasing power in the area increases substantially.

Principles of Value-Change
Change: No physical or economic condition
remains constant. Real estate is subject to
natural phenomena, such as tornadoes,
fires, and routine wear and tear of the
elements. The real estate business is also
subject to the demands of its market, just as is any business.

Economic life is the period of time during which improvements to a

property will yield a return in excess of rents attributed to the land
itself. Usually economic life will be shorter in duration than physical life.

It is an appraiser's job to be knowledgeable about the past, and perhaps,

predictable effects of natural phenomena and the behavior of the
marketplace.

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Forces Affecting Value

Four major forces are constantly at work influencing the value of real
property. They work externally and within each property itself to create,
sustain, and change its value. These forces are:

Physical Forces
Governmental/Political Forces
Economic Forces
Social Forces

The next few screens show the four major forces that influence value and
give some examples of what the appraiser must consider in collecting,
organizing, and interpreting the necessary data to arrive at his estimate of
value.

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Forces Affecting Value- Physical Forces
Physical forces would include:

Location - convenience to schools,

shopping, churches, recreation, jobs, and
transportation.
Climate - extreme weather condition,
influences value either up or down
Topography - steep hill may require
excessive grading (leveling), or provide a
great view
Utilities - availability
Improvements - exterior, interior, age,
size, condition, depreciation
Orientation - placement of the
improvements on the lot in relation to other
features of the lot
Size and shape - irregular shapes, proportion of depth to width
Soil - adequate to drainage and percolation (ability to absorb water),
subsoil
Assemblage - combining two or more lots into one large tract
Corner Influence - for commercial use, corner lots tend to increase in
value due to double access and exposure
Environment - air and water pollution, flood and earthquake areas
Exposure - merchants usually prefer south and west sides of a street
to receive the most shade
Pedestrian Traffic Count or Traffic Count - especially important in
planning, developing, and leasing shopping centers and retail stores

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Forces Affecting Value-Government/Political
Forces

Forces falling within the realm of the political include:

Taxes - may increase values if used to upgrade the community or if

especially low
Zoning - regulates size, height, and placement of buildings; regulates
use and construction standards
Rent Controls - tends to increase demand but discourages investors
Credit Controls - lowers demand
Government Spending - loan guarantees, subsidies
Community Services - fire and police protection, street lights

Forces Affecting Value-

Economic Forces

Economic factors appraisers must consider

include:

Existing Supply of Property - current vacancy rates and unsold

properties on the market (price range)
Wages, Salaries, and Savings - property values increase in
proportion to purchasing power
Mortgage Money and Rates - availability of funds and interest rate
influence effective demand
Employment - growth patterns, sources, availability of labor

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Forces Affecting Value-
Social Forces

Social forces involve:

Population Growth - marriage,

birth, divorce, and death rates
Demographic Trends - education, income, age, occupation,
household density
Amenities - quality of schools and churches, convenience of public
transportation
Directional Growth - property in a path of growth tends to increase in
value

Forces Affecting Value-

Unearned Increment

When the impact of physical,

governmental, economic, and social
forces increases a property's value, that increase is called an unearned
increment.

An appraiser must consider that land has certain physical and economic
characteristics as well. The physical characteristics greatly influence the
way in which land is bought and sold.

They are:

Immobility - Its location cannot be changed.

Indestructibility- it remains basically the same through natural and
man-made changes.
Nonhomogeneity - no parcel has an exact replica.

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Forces Affecting Value-Economic
Characteristics
Certain economic characteristics play a
large part in making land the unique
commodity that it is. They are:

Location or Situs - Because land is

immobile, it occupies a specific
location. One parcel may be valued
at substantially more than a similar
parcel due to the difference in
desirability of its locations. People
prefer a particular location because of
such things as weather, scenery,
employment opportunities, or proximity
to schools, shopping, jobs, and
transportation -- things that fulfill human
needs or meet human demands. The
sum of all economic factors which
influence the value of land is called
situs.
Improvements - Another economic characteristic of land is the impact
that improvements have upon its value. Improvements like buildings,
driveways, or landscaping attach to the land and become a part of
it.
Fixed Investment (fixity) - Improvements are made with the intent of
lasting a long time. In fact, more buildings are torn down than fall
down. Because improvements become a permanent part of real
estate, they are influenced by the economic changes in the
neighborhood. Most investments in buildings, for instance, are
made initially for twenty to thirty years.
Scarcity - The value of every commodity is influenced by its
scarcity. An acre of land in a rural area, for example, cannot fulfill as
many needs as an acre of land in an urban area, generally speaking.
The land in an urban area is scarcer because of the demand for it,
resulting in an increase in value.

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The Appraisal Process
The key to an accurate appraisal lies in the
methodical collection of data. The appraisal
process is an orderly set of procedures used to
collect and analyze data in order to arrive at an
ultimate value conclusion.

The data are divided into two basic classes:

Specific data, covering details of the subject property as well as

comparative data relating to costs, sales, and income and expenses of
properties similar to and competitive with the subject property.
General data, covering the nation, region, city, and
neighborhood. Of particular importance is the neighborhood where
an appraiser finds the physical, economic, social, and political
influences that directly affect the value and potential of the subject
property.

The Appraisal Process-

Neighborhood Cycles
In the neighborhood analysis, an appraiser
must consider the neighborhood cycles.

They are:

Growth - While a neighborhood is

in the process of being developed,
values tend to increase at a more
rapid rate. Usually lasts 10-15 years.
Stability - When the neighborhood
is completely developed, values tend to stabilize or increase at a
slower rate. Usually lasts 20-25 years.
Decline - A neighborhood may have declining values if properties
are not maintained. Usually lasts 5-10 years.
Renewal - Property values will increase when a neighborhood in
decline experiences renewal.

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The Appraisal Process-Steps
There are a total of eight steps in the appraisal
process. They are:

Define the problem

List the data needed and the sources
Gather and analyze the data
Determine the highest and best use,
according to the appraiser's opinion
Estimate the land value
Estimate the value by each of the three
approaches
Reconciliation
Report the final opinion of value

Of the eight, the four main steps in the appraisal process are:

Define the problem -- the kind of value to be estimated must be

specified, and the valuation approach(es) used must be the most valid
and reliable for the kind of property under appraisal. In this step, the
appraiser determines the time and cost involved and sets the fee.
Gather and analyze the data -- depending upon the approach(es)
used, comparative information relating to sales, income and
expenses, and construction costs of comparable properties must
be collected. All data should be verified, usually by checking the
same information against two different sources.

In the case of sales data, one source should be a person directly

involved in the transaction. The information collected must be reviewed
to ensure that all relevant facts have been considered and handled
properly and that no errors have been made in calculations.

Reconciliation -- the appraiser finally makes a definite statement

of conclusions reached. This is usually in the form of a value
estimate of the property derived by reconciling the data analyzed.
Prepare the report -- After the three approaches have been
reconciled and an opinion of value reached, the appraiser
prepares a formal written report for his or her client. The statement
may be a completed form, a short summary, or a lengthy written
narrative.

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The Appraisal Process-Estimating Value

In order to arrive at an accurate estimate of value, three basic

approaches, or techniques, are traditionally used by appraisers:

The direct sales comparison approach

The cost approach
The income approach.

Each approach serves as a check against the others and narrows the range
within which the final estimate of value will fall. Each approach is generally
considered most reliable for specific types of property.

The Sales Comparison Approach

In the direct sales comparison approach, sometimes just called direct
approach, an opinion of value is obtained by comparing the subject
property (the property under appraisal) with recently sold comparable
properties (properties similar to the subject). It is based on the principle of
substitution, and is used on new and older homes, alike.

This approach is most often used by brokers and salespeople when helping
a seller set a price for his or her residential real estate in an active market. It
is the most reliable approach in appraising residential property. Since
no two parcels of real estate are exactly alike, each comparable property
must be compared to the subject property, and the sales prices must be
adjusted for any dissimilar features.

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Adjustments
The principal factors for which adjustments must be made fall into four
basic categories:

Date of sale: An adjustment must be made if economic changes

occur between the date of sale of the comparable property and
the date of the appraisal.

The differences in original cost of two properties being compared by

this approach is not important as long as the proper adjustments are
made.

Location: An adjustment may be necessary to compensate for

locational differences.

For example, similar properties might differ in price from neighborhood

to neighborhood, or even in more desirable locations within the same
neighborhood.

Physical features: Physical features that may cause adjustments

include age of building, size of lot, landscaping, construction,
number of rooms, square feet of living space, interior and exterior
condition, presence or absence of a garage, fireplace, or air
conditioner, and so forth.
Terms and conditions of sale: This consideration becomes
important if a sale is not financed by a standard mortgage
procedure

After a careful analysis of the difference between comparable properties and

the subject property, the appraiser assigns a dollar value to each of these
differences. On the basis of their knowledge and experience, appraisers
estimate dollar adjustments that reflect actual values assigned in the
marketplace.

The value of a feature present in the subject property but not in

the comparable property is added to the total sales price of the
comparable. This presumes that, all other comparables being equal,
a property having a feature (such as a fireplace or wet bar) not present
in the comparable property would tend to have a higher market value

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 solely because of this feature. Likewise, the value of a feature present
in the comparable but not the subject property is subtracted from the
value of the comparable. The adjusted sales price represents the
probable value range of the subject property. From this range, a single
market value estimate can be selected.

The sales comparison approach is essential in almost every appraisal of real

estate. It is considered the most reliable of the three approaches in
appraising residential property.

Below is a sample market data worksheet.

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Direct Approach To Vacant
Land Valuation
When looking at vacant land, an
appraiser will first need to determine the
use for the property.

Subdivided lots zoned for commercial,

industrial or apartment buildings are
usually appraised and sold on a square
foot basis. Thus, if land is currently selling for $3.00 per square foot, a
100,000-square-foot parcel of comparable zoning and usefulness would be
appraised at $300,000. Another method is to value on a front-foot basis.

For example, if a lot has 70 feet of street frontage and if similar lots are
selling for $300 per front foot, that lot would be appraised at $21,000.
Storefront land is often sold this way. House lots can be valued either by the
square foot, front foot, or lot method. The lot method is useful when one is
comparing lots of similar size and zoning in the same neighborhood.

Rural land and large parcels that have not been subdivided are usually
valued and sold by the acre.

For example, how would you value 21 acres of vacant land when the only
comparables available are 16-acre and 25-acre sales? The method is to
establish a per acre value from comparables and apply it to the subject land.
Thus, if 16- and 25-acre parcels sold for $32,000 and $50,000, respectively,
and are similar in all other respects to the 21-acre subject property, it would
be reasonable to conclude that land is selling for $2,000 per acre. Therefore,
the subject property is worth $42,000.

The 4-3-2-1 rule is a depth adjustment that appraisers sometimes

use when valuing vacant lots. It states that the land in the front
one-fourth of the lot is worth four times as much as the back one-
fourth. The direct sales comparison approach is used for single-
family resales and raw/vacant land.

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The Cost Approach

The cost approach or summation approach to value is also based on the

principle of substitution.

The cost approach consists of five steps:

Estimate the value of the land as if it were vacant and available to

be put to its highest and best use.
Estimate the current cost of constructing the building(s) and site
improvements.
Estimate the amount of accrued depreciation resulting from
physical deterioration; or economic, external, environmental, functional
and/or locational obsolescence.
Deduct accrued depreciation from the estimated construction
cost of new building(s) and site improvements.
Add the estimated land value to the depreciated cost of the
building(s) and site improvements to arrive at the total property
value.

Estimating Land
Land value is estimated by using the market comparison approach; that
is, the location and improvements of the subject site are compared to
those of similar nearby sites, and adjustments are made for significant
differences.

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Cost of Construction
There are two ways to look at the construction cost of a building for appraisal
purposes reproduction cost and replacement cost.

Reproduction cost is the dollar amount required to construct an

exact duplicate of the subject building at the current prices.
Replacement cost of the subject property would be the construction
cost at current price of a property that is not necessarily a
duplicate, but serves the same purpose or function as the
original. Replacement cost is most often used in appraising, since it
eliminates obsolete features and takes advantage of current
construction materials and techniques.

An appraiser using the cost approach computes the reproduction or

replacement cost of a building using one of the following methods:

Square foot or cubic-foot method: The cost per square foot or

cubic-foot of a recently built comparable structure is multiplied by
the number of square feet or cubic feet in the subject building; this
is the most common method of cost estimation. The appraiser uses
outside measurement for computing square footage.
Unit-in-place method: The replacement cost of a structure is
estimated based on the cost of individual building components,
as installed, per individual unit of use, such as square feet of dry
wall, insulation or paint. Such computations include the costs of labor,
and also include indirect costs such as overhead, building permits, and
builder's profits.
Quantity-survey method: An estimate is made of the quantities of
raw materials needed to replace the subject structure (lumber,
plaster, brick, and so on), as well as the current price of such materials
and their installation costs.

For example, reproduction might be stated as: 10,000 concrete slabs

at $3.50 per slab, 1,500 doorknobs at $7.00 each, and so forth. These
factors are added together to arrive at the total replacement cost of the
structure.

Quantity-survey method is considered to be the most accurate method.

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Depreciation

In a real estate appraisal, depreciation refers to any condition that

adversely affects the value of an improvement to real property. Land,
however, does not depreciate -- it retains its value indefinitely, except in such
rare cases as misused farmland.

For appraisal purposes, depreciation is divided into three classes according

to its use:

Physical deterioration - curable: Repairs that are economically

feasible, considering the remaining years of life of the building.

A new roof would be a warranted expense on a 40-year old brick

building in otherwise good condition.

Physical deterioration - incurable: Repairs that would not

contribute a comparable value to the building. Near the end of a
building's useful life, major repair work, such as replacement of
weather worn siding, may not warrant the financial investment.

Functional obsolescence - curable: Physical or design features

that are no longer considered desirable by property buyers, but
could be replaced or redesigned at low cost.

Outmoded fixtures, such as plumbing, are usually easily replaced.

Room function may be redefined at no cost if the basic room layout
allows for it. A bedroom adjacent to a kitchen, for instance, may be

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 converted to a family room.

Functional obsolescence - incurable: Currently undesirable

physical or design features that could not be easily remedied.

Many older multi-story industrial buildings are considered less

desirable than one-story buildings. An office building that cannot be
air-conditioned suffers from functional obsolescence.

Economic (locational) obsolescence - incurable only: Caused by

factors not on the subject property, such as environmental,
social, or economic forces, this type of obsolescence cannot
usually be curable.

Proximity to a nuisance, such as a polluting factory or a deteriorating

neighborhood, would be an unchangeable factor that could not be
cured by the owner of the subject property.

In determining a property's depreciation, most appraisers use the breakdown

method, in which depreciation is broken down into all three classes, with
separate estimates for curable and incurable factors in each class.
Depreciation, however, is difficult to measure, and the older the building, the
more difficult it is to estimate.

The cost approach is most helpful in the appraisal of special-purpose

buildings such as schools, churches and post offices. Such properties
are difficult to appraise using other methods because there are seldom many
local sales to use as comparables, and the properties do not usually
generate rental income.

The Income Approach

The income approach to value is based on the present worth of the
future rights to income -- the principle of anticipation. It assumes that
the income derived from a property will, to a large extent, control the value of
that property.

The income approach is most reliable when used for valuation of

income-producing properties - apartment buildings, central business
districts, shopping centers, and the like.
In estimating value using the income approach, an appraiser must go

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through the following steps:

Estimate annual potential gross income.

Based on market experience, deduct an appropriate allowance for
vacancy and rent loss in order to arrive at the effective gross
income.
Based on appropriate operating standards, deduct annual operating
expenses of the real estate from the effective gross income in
order to arrive at the annual net income. Management costs are
always included as operating expenses, even if the current owner
manages the property him- or herself. Mortgage payments, however,
(including principal and interest), are not considered operating
expenses.
Estimate the price a typical investor would pay for the income
produced by this particular type and class of property. This is
done by estimating the rate of return (or yield) that an investor will
demand for the investment of his or her capital in this type of building.
This rate of return is called the capitalization (or "cap") rate and is
determined by comparing the relationship of net income to the
sales price of similar properties that have sold in the current
market.

For example, a comparable property that is producing annual net

income of $15,000 is sold for $100,000. The capitalization rate is
$15,000/$100,000, or 15%. If comparable properties sold at prices that
yield substantially the same rate, it may be assumed that 15% is the
rate that the appraiser should apply to the subject property.

Finally, the capitalization rate is applied to the property's annual

net income, resulting in the appraiser's estimate of the property's
value.

Capitalization Rate
With the appropriate capitalization rate and the projected annual net income,
the appraiser can obtain an indication of value by the income approach in the
following manner:

Net Income/Capitalization Rate = Value

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Example: $15,000 income/10% cap rate = $150,000 value

The most difficult step in the income approach to value is

determining the appropriate capitalization rate for the property.

This rate must be selected to accurately reflect the recapture of the

original investment over the building's economic life, give the owner
an acceptable rate of return on his or her investment, and provide for
the repayment of borrowed capital.

Note that an income property that carries with it a great deal of

risk as an investment generally requires a higher rate of return
than would a property considered a safe investment.

Gross Rent Multiplier

Certain properties, such as single-family homes or two-flat buildings, are not
purchased primarily for income. As a substitute for the income approach,
the gross rent multiplier (GRM) method is often used in appraising such
properties.

The GRM relates the sales price of a property to its rental income.
(Gross monthly income is used for residential property; gross annual
income is used for commercial and industrial property.)

The formula is:

Sale Price/Gross Monthly Rental Income = Gross Rent Multiplier

Example: If a home recently sold for $82,000 and its monthly rental income
was $650, the GRM for the property would be computed thus:

$82,000/$650 = 126.2 GRM

To establish an accurate GRM, an appraiser must have recent sales

and rental data from at least four properties that are similar to the
subject property. The resulting GRM can then be applied to the
estimated fair market value of the subject property in order to arrive at
its market value.

The formula then would be:

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 Rental Income x GRM = Estimated Market Value

The following is an example of GRM comparisons:

Comparable Sale Monthly

GRM
No. Price Rent
1 $70,000 $500 140.0
2 $68,500 $490 139.8
3 $70,500 $505 139.6
4 $67,900 $485 140.0
Subject ? $495 ?

Note: Based on an analysis of these comparisons, a GRM of 140 seems reasonable

for homes in this area. In the opinion of an appraiser, then, the estimated value of
the subject property would be $495x140, or $69,300.

Reconciliation
After the data is analyzed using as many of the appraisal approaches
possible, the appraiser uses a technique known as reconciliation (also
called correlation) to arrive at his final estimate of value.

Reconciliation does not mean averaging the preliminary estimates. It

considers each approach on the basis of the validity and
reliability of the data upon which it is based. Normally, the
approach that is the most reliable and given the most weight will be
determined by the type of property being appraised and the purpose of
the appraisal.

For instance, the direct sales comparison approach should be

emphasized when appraising a home (unless it is relatively new)
because of the availability of comparable sales in the market place.
The cost approach should be given the most weight on a special
purpose property, such as a church, museum, or school, because of
the lack of comparable sales or income data. In the appraisal of
income or investment property, the income approach should be given
the most weight.

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The Appraisal Report
The final step in the appraisal process is the appraisal report.

Here are the types:

An oral report is an appraisal delivered to a client orally. It saves time

but lacks written evidence as to what was said.
A form appraisal report is an appraisal made on a preprinted form.
The objective is to reduce the amount of time the appraiser must spend
on reporting findings and conclusions and to standardize the
information the lender is seeking.
A narrative appraisal is a written report by the appraiser in a narrative
format. It is typically 10 to 100 pages and sometimes longer. In it, the
appraiser reports on everything pertinent to the property and the
market for the property and gives his or her value opinion. This
thoroughness allows the reader to follow in detail the appraiser's
reasoning.

There are three types of reports:

Self-contained, which is provided in a narrative format

Summary, which is usually in a form report format
Restricted use, which may be very brief, but contains the notation that
it is restricted to the use by the client. It also warns that the appraiser's
opinions and conclusions may not be understood without access to the
appraiser's work file.

On the next page is a sample form report:

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Narrative Report
After identifying the property and the rights being
appraised, a narrative report will include:

Detailed information on the objective of

the appraisal assignment
The definition of value as used in the
report
Regional, city and neighborhood
influences on value
Economic trends
The physical characteristics of the land
and its improvements
The condition of title
The zoning
A survey or map
Photographs of the property
A statement as to the property's
highest and best use.

Each comparable sale is reported with its sale details and all facts
used are identified as to their sources.

The appraiser concludes by showing how the information was

analyzed in order to value the property.

In Review
A real estate appraisal is the opinion of the value of a
particular piece of property.
For a property to have value in the real estate market, it
must satisfy the requirements of demand, utility, scarcity,
and transferability.
The principles of value are guided by the affects of
highest and best use, substitution, supply and demand,
conformity, anticipation, progression and regression,

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 plottage, contribution, competition, and change.
Physical, economic, governmental and social forces all impact the
value assigned to real estate.
The appraisal process is an orderly set of procedures used to collect
and analyze data in order to arrive at an ultimate value.
There are a total of eight steps in the appraisal process: define the
problem, list the data needed and the sources, gather and analyze the
data, determine the highest and best use, estimate the land value,
estimate the value by each of the three approaches, reconciliation, and
report the final opinion of value.
Traditionally, there are three techniques used by appraisers
The direct sales comparison approach compares the subject property
with recently sold comparable properties.
The cost approach consists of five steps, including determining the
highest and best use of a piece of property.
The income approach to value is based on the present worth of the
future rights to income from a property.
After using as many of the appraisal approaches as possible, the
appraiser uses a technique known as reconciliation to arrive at his final
estimate of value.

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