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Appraisal in Real Estate: Concepts and Principles of Value

In the world of real estate in the United States, appraisal plays a critical role in determining the value of properties. Understanding the concepts and principles underlying appraisal is essential for real estate professionals and investors. Below, we will explore these concepts and principles in detail.

Concepts and Principles of Value

Supply and Demand (Supply and Demand)

  • Offer and demand They are fundamental concepts in economics that also apply to real estate. When demand exceeds supply, scarcity is created and values increase. When supply exceeds demand, excess is created and values decrease. When supply and demand are balanced, the market stabilizes and values remain constant.

Utility

  • The utility refers to the usefulness of a property in the market and how it contributes to demand. The way a property can be used directly affects its market value.

Transferability

  • Transferability refers to how easily ownership rights to real estate can be transferred. This can significantly influence the value of a property, as properties with easier transferability often have a higher value.

Anticipation

  • The anticipation involves the benefits that a buyer expects to obtain from a property during a holding period. Buyers' expectations can influence how much they are willing to pay for a property.

Substitution

  • The principle of substitution provides that a buyer will pay no more for a property than he or she would have to pay for an equally desirable and available substitute property. This principle helps determine the maximum value a buyer would be willing to pay.

Contribution

  • The contribution Value refers to how much a specific improvement contributes to the value of a property. This contribution is based on how the market value changes due to the addition of an improvement.

Change

  • The value of a property can change due to market conditions and other external factors. The beginning of change recognizes that these conditions affect the value of a property.

Highest and Best Use

  • A property reaches its maximum value when it is used in a way that generates the highest possible income and return. The highest and best use of a property must be legally possible, physically feasible, financially viable and maximally productive.

Conformity

  • The accordance refers to the fact that a property reaches its maximum value when its form and use are consistent with surrounding properties and uses. Compliance with the environment is essential to determine the value of a property.

Progression and Regression

  • The value of a property is influenced by the values of neighboring properties. When a property is among higher-value properties, it may experience a progression in its value. On the contrary, if it is surrounded by properties of lower value, it may experience a regression in its value.

Grouping (Assemblage)

  • Group involves combining adjacent properties to create a combined value that exceeds the value of the ungrouped properties. This additional value is called the grouping value.

Subdivision

  • The subdivision involves dividing a single property into smaller properties, which may result in a higher total value.

Types of Value

Market Value

  • He market value It is an estimate of the price at which a property will sell at a specific time. This type of value is the most sought after in appraisals and is used in real estate brokers' value estimates.

Insured Value

  • He insured value is the amount an insurance policy will pay if a property becomes unusable due to events such as natural disasters. This value is used in real estate insurance.

Reproduction Value

  • He replay value is based on the cost of constructing an accurate replica of the subject property improvements, assuming current construction costs.

Replacement Value

  • He replacement value is based on the cost of constructing a functional equivalent of the property improvements, assuming current construction costs.

Salvage Value

  • He salvage value is the face value of a property that has reached the end of its economic life. It is also used as an estimate of the price a structure will sell for if it is dismantled and moved.

Assessed Value

  • He appraised value is the value of a property estimated by a taxing authority and is used as the basis for ad valorem appraisal.

Depreciated Value

  • A depreciated value It is established by subtracting accumulated depreciation from the purchase price of a property.

Book Value

  • He Value in books is the value of a property as it appears in the owner's accounts. Generally, this value is equal to the acquisition price plus capital improvements, minus accumulated depreciation.

Investment Value

  • He investment value It is based on the capitalized value of the cash flow that an income property generates. This value is fundamental for real estate investors.

Market Value Requirements

To determine the market value of a property, certain requirements must be met, including:

  • That there is a buyer and a seller willing to agree on a price.
  • That the transaction be in cash.
  • That the property has reasonable exposure in the market.
  • That both parties have information about the market and the use of the property.
  • That there are no external pressures to complete the transaction.
  • That the transaction is equal to equal (the parties are not related).
  • That there is a clear property title without hidden influences.

Appraisal Process

The appraisal process follows a series of structured steps that help determine the market value of a property. These steps include:

  1. Identify the Purpose: Before commencing the appraisal, it is important to identify the purpose of the appraisal, as this will affect the approach and methodology used.
  2. Assimilate Relevant Data: The appraiser gathers relevant information about the subject property, as well as data on comparable sales and market trends.
  3. Evaluate the Highest and Best Use: Determines the highest and best use of the property, which can influence its value.
  4. Estimate Land Value: The value of the land is calculated based on various factors, such as its location and utility.
  5. Apply the 3 Approaches to Value: 3 different approaches are used to estimate property value: the sales comparison approach, the cost approach, and the income approach. Each approach provides a different estimate of value, and the appraiser must reconcile these estimates.
  6. Reconcile Values of Approaches: The values obtained from the three approaches are reconciled to arrive at a final estimate of the market value of the property.
  7. Compile the Report: Finally, an appraisal report is compiled that includes all value estimates, the methodology used and any other relevant information.

Sales Comparison Approach

He Sales Comparison Approach It is one of the most common methods used in appraisals. It involves identifying comparable properties that have recently sold and adjusting their values to reflect differences between those properties and the subject property. Key steps in this approach include:

  • Identify comparable sales.
  • Compare comparable properties to the subject property and make adjustments.
  • Weight the indicated values of comparable properties to obtain a final estimate of market value.

Cost Approach (Cost Approach)

He cost approach involves estimating how much it would cost to build a property similar to the existing one, assuming current construction costs. The value is then adjusted to reflect the property's accumulated depreciation. Key steps in this approach include:

  • Estimate the value of the land.
  • Estimate the replacement cost of the improvements.
  • Calculate the depreciation of the improvements.
  • Add the value of the land and the value of depreciated improvements to obtain an estimate of market value.

Income Approach

He income approach It is based on the principle of anticipation, which involves the present value of future cash flows that will be generated from the property. This approach is especially relevant for investment and income properties. Key steps in this approach include:

  • Estimate the potential gross income of the property.
  • Deduct income losses due to vacancy and operating expenses.
  • Calculate net operating income (NOI).
  • Select and apply a capitalization rate (NOI ÷ capitalization rate) to estimate market value.

Regulation of Appraisal Practice

Appraisal in the United States is subject to specific regulations to ensure the accuracy and integrity of the process. Some of the key regulations include:

FIRREA (Financial Institutions Reform, Recovery and Enforcement Act)

The Financial Institutions Reform, Recovery and Control Act (FIRREA) was enacted in 1989 to regulate appraisal practices. Requires competent individuals, whose professional conduct is appropriately supervised, to perform all appraisals used in transactions involving financial institutions.

USPAP (Uniform Standards of Professional Appraisal Practice)

The Uniform Standards of Professional Appraisal Practice (USPAP) are competency standards established by the Appraiser Qualifications Board of the Appraisal Foundation. These standards establish the requirements for conducting accurate and ethical appraisals.

In short, appraisal plays a critical role in determining the value of property in the United States. Appraisers use a variety of approaches and principles to arrive at accurate estimates of market value. These appraisals are essential for a variety of transactions, from buying and selling property to obtaining insurance and mortgage financing. Understanding value concepts and principles is essential to making informed decisions in the ever-changing real estate market.

Legal and Tax Disclaimer

Please be advised that the content presented in this blog is for informational purposes only and should not be construed as legal or tax advice. The articles and information provided here are written from the perspective of a real estate agent affiliated with Keller Williams, and do not represent legal or tax counsel.

As the author, I am a licensed real estate professional under Keller Williams, holding Brokerage DRE License Number: #02197031. However, it is important to note that my expertise is in the field of real estate, and not in legal or tax matters. The insights and opinions shared on this blog are based on my experiences and knowledge in the real estate industry and should be treated as general guidance rather than definitive legal or tax advice.

For specific legal or tax concerns relating to any real estate transactions or investments, readers are strongly encouraged to consult with a qualified attorney or tax advisor who can provide tailored advice based on your individual circumstances and the latest legal and regulatory requirements.

The information on this blog is provided "as is" without warranty of any kind, and I, along with Keller Williams and its affiliates, disclaim all liability for any loss, damage, or misunderstanding arising from reliance on the information contained herein.

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