basic appraisal procedures

Allocation Method

"A method of estimating land value in which sales of improved properties are analyzed to establish a typical ratio of land value to total property value and this ratio is applied to the property being appraised or the comparable sale being analyzed." The allocation method has a lot of similarities to the extraction method that we just studied. We start with the premise that value is composed of two components. However, in the extraction method we isolated one component and valued that first and then found the second component by subtraction. The basic assumption in the allocation method is that there is a normal or typical ratio between the land value and total value. So we quantify the value of the land as a percentage of the total value. As with extraction, the allocation method can be used when sales of vacant land are inadequate or non-existent, such as in built-up urban areas or remote rural areas. It would occupy a similar place in the hierarchy of possible methods. First, one would look to being able to complete a sales comparison method. If that fails, this would be one of the alternate methods to consider.

Ground Rent Capitalization Method

"A method of estimating land value; applied by capitalizing ground rent at a market-derived rate. This method is useful when comparable rents, rates, and factors can be developed from an analysis of sales of leased land or other market sources." This technique sounds complicated as well, but it's much more straightforward than the land residual method. First, remember that it is a specialized technique that should only be applied in the case where a subject site is rented under a land lease. The mathematics involved is simpler. We go back to our good old formula of value equals income divided by a rate. In this case the income would be the income generated by the land lease, called ground rent. In execution, it is simply dividing the ground rent by the appropriate cap rate for the land. This results in a direct capitalization. If the ground rent represents market rent for this type of property, the resulting value is the market value of the fee simple interest of the land. Quick example: we have a ground rent of $135,000 and a market derived rate of 9%. What is the value of the land? $135,000 divided by .09 = $1,500,000. That's all there is to it at this point but again it's not that easy to find the appropriate rate. We also need to investigate the terms of the ground lease to see if the contract rent represents market.

Determine Scope of Work"

"Understanding which analyses, methods and techniques are necessary and what data are necessary to correctly complete the analyses is an integral part of the scope-of-work decision. This decision cannot be made competently without understanding how the "conditions" in a market value definition work together with the other factors identified in compliance with Standards Rule 1-2 to determine what kind of data are relevant and which types of analyses are applicable and necessary in the assignment."2

Brownfields

A brownfield is defined as: "Real property for which the expansion, redevelopment, or reuse of the real estate may be complicated by the presence of environmental contamination that needs to be remediated to appropriate regulatory standards." The EPA, on their website, defines brownfield a little differently: "Brownfield - real property, the expansion, redevelopment or reuse of which may be complicated by the presence or potential presence, of a hazardous substance, pollutant or contaminant." The EPA estimates there are about 500,000 brownfields nationwide. Petroleum is the most common contaminant; approximately 200,000 of these brownfields are contaminated with petroleum. For the last 15 years or more, Congress has been debating the problems of liability; these properties are still contaminated and the owners face potential liability from state andfederal environmental agencies. In January 2002, President George W. Bush signed H.R. 2869, which provides liability insurance for those who buy brownfield sites. States will handle most lower-level cleanups, but the Environmental Protection Agency (EPA) will control sites that cross state lines or that pose an imminent threat to public health or the environment. The law also provides seed money for the states to assess and clean up brownfield sites. It authorizes $1.25 billion over five years; including $150 million annually for grants for states to assess sites and $50 million annually for grants for cleanup. If you want to learn more about the current efforts, log on to www.epa.gov/brownfields. This is the homepage of the EPA's efforts in this area. There are some good success stories of brownfield clean-ups in San Diego, Tucson and other areas. You will also find news of ongoing projects and recent grants.

Manufactured Home

A manufactured home is defined as "A factory-built house manufactured under the Federal Manufactured Home Construction and Safety Standards Act of 1976, commonly known as the HUD Code." HUD maintains and enforces the code, which pre-empts all state and local codes. Congress gave HUD the authority because it involved interstate shipment, and they wanted to preserve access to affordable housing. No manufactured home may leave the factory unless it complies with the HUD Code and is released for shipment by an independent third party inspector, certified by HUD. Each HUD code manufactured home has a label on the exterior of each section containing a three-letter designation plus a six- or seven-digit number. This is a red, metal 2" x 3" tag that is pop-riveted to the exterior siding. Each HUD code manufactured home also has a serial number that is stamped into the foremost cross member of the frame. A data plate (also sometimes called compliance certificate) is installed inside the home with the name of the manufacturer, list of factory installed equipment, and the roof load and insulation zones. This is a paper sticker, which unfortunately is very easy for a property owner to remove.

Modular Home

A modular home is defined as "A factory-built house built in compliance with a building code other than the HUD Code. This usually means that the home is constructed to the standards of the state or local building code used by the governmental unit where the house is to be located. Note that the California Factory-Built Housing Program uses the term factory-built housing (FBH) in place of the term modular home." There are some similarities between HUD code manufactured and modular homes. Both are built by assembly techniques in factories and then transported to the site. Sometimes modular homes are even constructed on the same assembly line as HUD code manufactured homes. However, the manufactured home is constructed on a permanent steel chassis and has wheels and axles. It is meant to be hauled down the highway and arrives 100% finished. The sections are joined together at the site and it is complete. Most significantly, it is built to meet the HUD Code. A modular home is built in sections, called boxes, which are lifted onto a truck and transported to the site. The boxes are lifted off with a crane, or rolled off, onto the foundation. Then the boxes have to be joined and finishing work performed at the site. A modular home is built to meet state and local codes, not the HUD Code. Most modulars have conventional wood floor framing systems. However, there are some recently constructed with steel frames (called "on-frame" modulars). However, even with the steel undercarriage these are modular homes that have no wheels and axles, and they are built to state and local codes. Conversely, manufactured homes are built to the HUD Code and have wheels and axles, along with a steel undercarriage. They also will have the HUD label attached. Modular homes have no permanently-attached tags or labels that identify them as modular homes.

Multiple Listing Services

Another drawback of multiple listing services is that typically, their concentration is on single-family residences. If you are trying to find sales and rental information on 2-4 unit properties, you might have trouble finding it in the MLS. The MLS system may or may not have a separate section for multi-unit properties. If the MLS does carry multi-unit sales, the reporting form may not include the type of information that appraisers typically need in appraising income-producing properties. Also, the typical real estate agent does not have specific training in gathering and reporting pertinent information on leases, rents, and expenses. But, if nothing else, you might discover sales of such properties and then you could investigate further to obtain and verify the necessary information from the buyer, seller, real estate agent, or property manager. Also, most MLS systems provide limited information regarding listings and sales of vacant land.Typically, most commercial and industrial sales and listings will not appear in a local or regional MLS. The main focus of most local and regional MLS systems is on residential properties.

Builder Sources

Builders and developers can be a reliable source of information that can support a land value ratio. This is their business. Many times builders purchase groups of lots and build new houses on them. Typically, they work with standardized percentages that represent market reactions. Particularly if someone is building on speculation, they want to produce an easily salable product. They don't want to mis-improve a property. It doesn't make sense to build a million-dollar house on a $10,000 lot or put a $100,000 house on a $500,000 lot. The Principle of Balance states that "real property value is created and sustained when contrasting, opposing, or interacting elements are in a state of equilibrium." The Principle of Conformity states that "real property value is created and sustained when the characteristics of a property conform to the demands of its market." In appraisal courses I've taken over the years and in appraisal texts, it has been reiterated over and over that a normal or typical ratio is that in residential properties the land represents 25 to 30% of total value. However, in recent years that percentage has changed in many parts of the country. This demonstrates that it is not always a good idea to rely on old "rules of thumb". Usable land is getting scarce and hence more valuable. The cost of land has risen more quickly than the cost of building improvements. Also many municipalities, through their zoning ordinances, are requiring larger lot sizes. This alone would tend to raise the cost of a building site. What percentages are you seeing in your local area?

Chambers of Commerce

Chambers of commerce cannot be ignored as prime data sources. Their ostensible purpose is to provide information about a locale. They may be a chamber of commerce for a town, village, county, region, or state. If you have one near you, just drop in. Better bring a big box. Chances are you can fill it up with all kinds of free booklets, pamphlets, maps, and magazines. Much of what they have is oriented towards tourism and touting their community as a destination. But you will also find a lot of hard facts about population, job opportunities, recreation, school systems, and the like. Chambers of commerce are always desirous of attracting new people and businesses to settle permanently. You may not even have to leave your office to obtain good data from your local or state chamber

Purpose and Intended Use of the Appraisal

NTENDED USE: the use(s) of an appraiser's reported appraisal or appraisal review assignment results, as identified by the appraiser based on communication with the client at the time of the assignment"1

Types of Commercial Construction

Commercial buildings differ in type of construction. Here is the breakdown that is recognized by Marshall & Swift in their Marshall Valuation Service. They classify the construction characteristics by type of framing, walls, floor and roof structures, and fireproofing. They categorize commercial buildings as: Class A - fireproofed steel frame Class B - reinforced concrete frame Class C - masonry or reinforced concrete Class D - wood or steel studs Class S - pre-engineered structural; members

Condemnation Appraisals

Condemnation appraisals are required when a municipality exercises power of eminent domain. Under eminent domain, any level of government can take a property for the public good, provided there is "just compensation" (i.e., a fair payment) paid to the property owner. The just compensation is where the appraiser comes in. The appraiser will perform an appraisal on the property, which is used to determine an equitable amount to be paid for the taking of this private property. Sometimes a whole property is condemned and taken. More commonly, however, just a part of the property is condemned. As an example, a state department of transportation plans to widen an existing highway for the purpose of straightening a curve. Then, just a portion of a homeowner's property along the front averaging 35 feet in depth will be taken.Ostensibly, the just compensation will be the value of this small sliver of land. So an appraisal must be done to ascertain what this portion of the land parcel is worth. It can be a complicated process in that the methodology requires that the value of the small land parcel is determined by the difference between the value of the whole property before the taking

General Data

Data that relates to the four forces that affect real property values—social, economic, governmental, and environmental forces. This type of data is usually not specific to any particular property but is applicable in many assignments of similar types of properties. Also known as macro-level data." General data concerns influences that are a little further removed from a subject property. General data tends to influence all properties in an area equally. For example, the tax rates in a town impact equally across the board on all properties in that taxing jurisdiction. Mortgage interest rates or unemployment rates would tend to have an equal impact on properties in a region or market area. They are important in driving trends in general; however, when comparing two nearby properties the effects tend to cancel out as they have equal influence.

Specific Data

Details about the property being appraised, comparable sale and rental properties, and relevant local market characteristics." Specific data is more direct and applies specifically to the subject of your appraisal assignment. We need to gather specific information about the subject property. How much are its taxes? What are its specific property rights? Are there any easements or restrictions on this particular parcel? We also need to gather specific data concerning sales and/or rentals that would be comparable in the local market area to the subject property. We need to research local trends in the specific subject environment.

Tax Maps

Each municipality has tax maps. These are prepared and maintained by the assessor's office. In some locations, the tax maps are organized on a county level. They show each individual tax parcel on a map. Here is a sample from Colorado Springs.

State Websites

Each state has a lot of demographic information on line. The amount of detail will vary from state to state. To reach your state's home page, the standardized format is www.statename.gov. However, some states have their own formats. For example, Florida is http://www.myflorida.com/ Once you get there, you will have to navigate around and see what is available. Look for something like the Department of Commerce. Florida is well organized. Go back up to the link for the state of Florida and click on it. You will see this.

Departments of Transportation

Every state has a Department of Transportation or Department of Highways. Depending on where you are, there may be regional, county, or city departments as well. They study traffic patterns and are again involved with trying to predict patterns for the future. Where will the growth be for residences, commercial, and industrial properties? They need to think ahead for the purpose of constructing new roads, as well as widening or improving existing ones. Decisions they make can also impact real estate values. A new highway or a new interchange can increase property values in that vicinity. Or, if it brings increased traffic to a residential area, it could reduce values. New commuter roads may make properties on the periphery more valuable by lowering commuting times. Improved access may make commercial or industrial properties more likely or more valuable.If you are appraising a vacant lot in a commercial area and want to know how many vehicles a day pass that point - simply contact the transportation department. They conduct traffic counts on a regular basis.

Flood Maps

Flood maps are prepared by the Federal Emergency Management Agency (FEMA). They detail areas that are prone to periodic flooding. If a property lies in a Special Flood Hazard Area (SFHA) as designated by FEMA, the property cannot be mortgaged unless the property owner procures flood insurance. When an appraisal is done, the appraiser is usually asked to state whether or not the subject property, or any part of it, lies in a Special Flood Hazard Area. These areas are designated as Zones A or V on the flood maps. The flood maps may be obtained directly from FEMA as hard copy, paper maps. FEMA is preparing electronic versions of the maps on their web site, but the whole country is not electronically mapped yet. You may check the progress and see if your area is mapped at the FEMA website. Click Here.

Government Sources

Government data sources are found on all levels of government: national, state, county, and local. The most prolific sources usually are on the federal level. Some of them are comprehensive enough that they do actually have locally pertinent statistics. Let's look at a few websites first. In the Basic Appraisal Principles course we directed you to www.census.gov, which is the official site of the U.S. Bureau of the Census. That is still by far the largest repository of demographics. There is valuable free information concerning people, housing, and businesses. On the following pages we will look at a few more federal government sites.

Gross Living Area

Gross Living Area (GLA) is defined as "Total area of finished, above-grade residential space; calculated by measuring the outside perimeter of the structure and includes only finished, habitable, above-grade living space. (Finished basements and attic areas are not generally included in total gross living area. Local practices, however, may differ)." On the next page, we will address the guidelines of Fannie Mae related to measurement and calculation of GLA. It is important to remember that these requirements only apply to the appraisal of single-family homes for mortgages that are going to be sold to Fannie Mae.

Verification

HUD makes a firm statement and provides a good explanation of what they expect in the way of verification in FHA appraisals. They state in Section 4-6 of HUD Handbook 4000.1: "The appraiser must verify all market and comparable information used in the appraisal process and is accountable for any information presented as 'fact' used to develop the subject property's value estimate. Verification ensures that the information is meaningful, and provides the appraiser with a firm understanding of market motivations and trends." "During the verification process, it is necessary for the appraiser to gain an understanding of the motivations surrounding the sale in order to: determine if the sale was arm's length and not distressed understand current market conditions that influence value." "The appraiser must verify sale information with the buyer, the seller or one of their representatives (broker, lender, lawyer, etc.). If the sale cannot be verified with someone who hasfirst-hand knowledge of the transaction, use public records. However, the appraiser must clearly state how the sale was verified and to what extent." That specifically applies to FHA appraisals, but it may still be appropriate guidance in other types of appraisals as well. E

Adjustment Grid

Here is the adjustment grid from the most commonly used land appraisal report form. By the way, please note that this is not a Fannie Mae or Freddie Mac appraisal form. It is a generic form that has been around for many years and has been adopted by all the major software companies. Notice the fields that are labeled for adjustments. At the top, there are fields that are labeled to provide space to make adjustments for date of sale, location and site/view. Then there are four blank lines. At the bottom is one last field in which you may enter an adjustment for sales or financing concessions. Interestingly enough, the placement of the field for sales concessions adjustments is contrary to traditional appraisal theory which dictates that adjustments for sales concessions be made before adjustments for date of sale (market conditions), location, and physical characteristics.

Hypothetical Condition

Hypothetical conditions are contrary to known facts about physical, legal, or economic characteristics of the subject property; or about conditions external to the property, such as market conditions or trends; or about the integrity of data used in an analysis."1 To continue our example from the previous page, let's change the scenario to where the appraiser observes that an underground tank is leaking. An appraisal can be done of the property in its "as-is" contaminated condition, or it could be appraised under the hypothetical condition that the property is free of contamination. This type of appraisal could be significantly misleading to intended users if the use of the hypothetical condition were not properly disclosed. USPAP requires "clear and conspicuous" disclosure of hypothetical conditions, for obvious reasons.

Sales Comparison Adjustments

I realize that it is not always that simple to extract such nice, clean adjustments. We may have a shortage of land or site sales, and it may not be possible to make direct comparisons for one outstanding difference. As a potential solution, it may be possible to study trends among groups of property sales (group data analysis) instead of finding and comparing two individual sales that are similar except for one significant difference (paired sales analysis). For example, we might analyze 20 sales in a market and conclude that lots on the west side of the highway, facing the view, typically sell for between 10% and 20% more than properties on the east side. Of course it might not be true that all of that difference in value is attributable to the view. We have to be careful! Perhaps the properties on the west side also are larger or have more level topography.At times, the best we can do is to analyze two different properties and decide that there are two or three significant differences between them, and that the value difference is 20% or $30,000. Then we do the best we can with our professional judgment as to how to allocate the dollar amounts among the differences. As an example, we may conclude that Lot A is better than Lot B because it has more frontage and town water. The market may indicate a total difference in value of $30,000, but we're not sure how much each component individually contributes to that total. Perhaps the increased frontage accounts for $10,000 of the $30,000 and the municipal water accounts for the other $20,000. Maybe, each advantage accounts for half of the difference or $15,000. The important thing is that you make the appropriate adjustment and adjust the total price accordingly.

Sales Comparison Adjustments

If we look closely enough at two different sites, we could probably distinguish 20 or 30 very minor differences between the two. It is not necessary or appropriate to make that many adjustments. We only need to adjust for items that are significant. "Significant" means those differences that a typical purchaser would be able to recognize and then translate into dollar preferences. For example, a buyer might note that one site has a little bit more road frontage than another. However he or she may not think it is important enough to make a higher offer. However, if the property has frontage on a lake, a few feet of frontage one way or the other could make a substantial difference in the value. So we need to get inside the head of the typical purchaser and think like he/she would. Which two or three or four things are particularly significant about this site? What are the main value-creating factors? They can run the gamut from physical factors, such as size and shape, to governmental factors, such as zoning, to economic factors. Maybe the prime factor concerning a particular site is its access right off an interstate highway or its location near a golf course or state park

Reconcile the Estimated Values into the Final Opinion of Value

If we utilize more than one appraisal approach, it is likely that the approaches will produce differing indications of the value of the property. For example, the cost approach might indicate a value of $200,000, the sales comparison approach might indicate a value of $210,000, and the income capitalization approach might indicate value of $195,000. Our job as an appraiser is to come to one reasoned opinion as to the value of a property, as of the effective date. We therefore will have to reconcile the various indications of value into one final opinion of value. This reconciliation process will be the subject of a later chapter in this course (Chapter 11).

Units of Comparison

If your comparable sales are not sufficiently similar so as to allow for direct comparison, then we can resort to breaking the available sales into common units of comparison. We may have three sales with gross sale prices of $60,000, $95,000, and $140,000. However, after we break them down into units of comparison, we may find that they sold at prices ranging from $28,000 to $33,000 per acre. That is a lot more workable. When appraising land or sites, the most common units of comparison are: Price per square foot Price per acre Price per front foot Price per lot Price per buildable unit Price per animal unit We should choose what is appropriate according to the market. We need to employ the units that are utilized by typical buyers and sellers for that type of property. Of course, we can also use several different units of comparison and then compare the results

Separate Site Valuations

In appraising, there are occasions in which it is necessary or desirable to estimate the value of the site separate from the total value of the property. In most residential appraising, we are valuing site rather than land. Land is improved into a site, creating the necessary support for the improvements. Total property value can be viewed as a combination of two elements: the value of the site and the value of any building improvements on the site. Separate site valuations may be required in: Cost approach Assessments and taxation Condemnation appraisals Certain income capitalization methods Highest and best use analysis

Multiple Listing Services

In most areas today multiple listing services (MLS) provide the best source of information on residential real estate sales. Virtually all of these MLS systems are internet-based. In many cases their data is updated in real time. As such, it is possible to perform very fast computerized searches according to specified parameters. Many MLS systems also routinely print monthly or quarterly and annual surveys that provide median or average sales prices for various types of properties. Also it is possible to obtain information concerning marketing times, seller concessions, and/or sale price trends. These figures can even be broken down into categories such as data concerning two-bedroom houses versus three-bedroom, old versus new, etc. Remember, however, that the information is compiled for the convenience and use of the salesagent members and the information is configured for their purposes. Even though appraisers can gain access to this information (typically for a fee), appraisers are not the primary intended users. MLS information and data is generally formatted in a manner that is more useful for real estate agents and brokers.

Land/Site Valuation

In the Basic Appraisal Principles course we defined land as "1. In law, the solid surface on the earth, as distinguished from water. 2. One of the four agents of production in economic theory" So, land is the physical thing. It is in its raw state. Land has not been improved. It's just the way we found it. Land is also one of the four agents of production (land, labor, capital, entrepreneurial coordination). It is the most basic of the agents. We need to start with land before we can put it to use, such as agriculture, or erect structures on it. Then we can employ labor and capital to try toproduce an entrepreneurial profit.

Verification - Fannie Mae and Freddie Mac

In the URAR appraisal form, jointly published by Fannie Mae and Freddie Mac, there is one mention of verification. On Page 2 of the form, it asks for "Data Source(s)" and "Verification Source(s)" for the data that is to be input in the Sales Comparison Approach grid. Fannie Mae does state in Section B4-1.1-01 of its Selling Guide that one unacceptable appraisal practice is: "use of data - particularly comparable sales data - provided by parties who have a financial interest in the sale or financing of the subject property without the appraiser's verification of the information from a disinterested source." [emphasis added] What exactly does this mean? Let's look at an example. An appraiser has been asked to complete a mortgage lending appraisal on a property that is being sold in a new subdivision. The listing real estate agent for the subject property meets the appraiser at the property and gives him information on recent comparable sales in the subdivision that did not appear in the local MLS. Can the appraiser use this sales data that came from a party who has a financial interest in the sale of the subject property? Yes, but only if the appraiser verifies these sales from a disinterested source. If the appraiser simply uses the sales provided by the sales agent without verifying with a disinterested source, this is unacceptable according to Fannie Mae. Simply put, the agent who provided the sales data to the appraiser has an interest in the subject property transaction, and could, theoretically, provide misleading or bogus information in an effort to affect the appraised value.

Extraction Method

It bears repeating - the sales comparison method is the best, most accurate and reliable method to employ when valuing sites. That should be our first line of attack whenever possible. Of course, sometimes we can employ several techniques and have the luxury of being able to contrast and compare the results. This gives a system of checks and balances and provides a more secure and defensible opinion of value. There are additional methods of site valuation that we are going to cover in this chapter; the first is the extraction method, which is sometimes also called the abstraction method. The extraction method is defined as: "A method of estimating land value in which the depreciated cost of the improvements on an improved property is calculated and deducted from the total sale price to arrive at an estimated sale price for the land." Improved sales in rural areas are frequently valued this way because the building improvements may have a minimum contributory value in comparison to the underlying land value. You might have an agricultural property with several hundred acres and an old farmhouse. The building improvements could contribute little, if anything, to the overall value of the property. Another reason why you might use the extraction method in rural areas is that there is often a lack of land sales in those areas. We try to use the sales comparison method whenever possible, but we can't do it if there is not a demonstrable quantity of sales of reasonably similar type properties. The extraction method also has good application in many older urban areas. You may be appraising in an older city that has been fully built-up for 50 years or more. There has not been a vacant land sale in that neighborhood in the last 10 years, because there is no vacant land left. So we start our appraisal assignment by looking for sales of vacant land. Every once in a while we might find a site that has been redeveloped; for instance, when a lot was sold after a fire in which the building was destroyed. However, that might not be a clean sale as there certainly were demolition costs involved and there may have been parts of the property, such as the basement or foundation, that were reused or reclaimed. If we can't find a sufficient number of sales of comparable vacant land we cannot employ the sales comparison method. But we have to do something! We will have to fall back on one of the other five alternate methods of site valuation. As stated above, extraction may be acceptable as an alternative method

identify the client and other intended users."3

It is very important to know who the intended user of your appraisal will be. If the intended user is Fannie Mae or Freddie Mac, then the appraisal needs to conform to their guidelines. If the intended user is FHA or VA, then the appraisal needs to conform to their specific requirements. If the intended user is a court of law to determine the value of a property in a condemnation proceeding, then the appraisal report must be structured to conform to their required standards. It may need to be a detailed report written in narrative fashion.

Date of Value and Date of Report

It was stipulated on the previous page that identification of two dates is necessary - the effective date of the appraisal (i.e., the date of value) and the date of the report. USPAP goes on to say that providing both of these dates establishes the perspective from which the appraiser is examining the market. In many cases, the effective date is the date the appraiser inspects the subject property. But that is not always the case. The effective date can be any date, whether past, present, or future. If it is a retrospective appraisal, the appraiser has the luxury of knowing what went on after the date in the past. If the effective date of value was six months ago, we know what transpired since then. It may help us evaluate value trends, but we need to be careful in applying our knowledge of events that transpired after the effective date. If our effective date of value is in the future, there will be an amount of uncertainty built in. We don't know for sure what will happen tomorrow. Even if it is a current value, we need to pay attention to the two dates. Typically, if there are no other restraints or client requests for another date, the effective date of value will be the date of the last inspection of the property. The date of the report is the date you sign and issue the final report. This usually is a few days later. If you get sloppy and make the effective date of value the same day you signed the report, it could potentially lead to trouble. Things can change, even in a few days. The house might have gotten flooded or burned down, or the market might have changed overnight. Standards Rule 1-2(d) of the 2020-2021 USPAP says an appraiser must "identify the effective date of the appraiser's opinions and conclusions."1

Land/Site

Land and site are really two different things with unique specifications and characteristics. Unfortunately, however, in common practice these terms are used interchangeably. We may talk about land and buildings when we are discussing a property or we may refer to site and improvements analysis. In many cases it doesn't make that much difference, because we essentially value land and sites in the same fashion. If we are estimating land value, in most cases, we would compare it with sales of similar parcels on vacant land. If we are estimating site value we try to compare it to other similar, recently sold sites. If we are developing an opinion of the value of a land parcel and wind up comparing it to another land parcel that has been improved to some extent, such as having a well or a driveway, we can adjust for the difference in those site improvements.

Summary of Site Valuation Methods

Let's summarize the six valuation methods available for site valuation. At the beginning of this chapter, we detailed the sales comparison method. We lauded this method and said it should be our first choice. It is the best for many reasons and should be applied whenever possible. Its only limitation is that you need a reasonable quantity and quality of comparable sales. In the event that absence of sales precludes the use of the sales comparison method then we have to fall back on one of the other methods. The next most desirable methodologies are the extraction method and the allocation method. As we mentioned, they have particular application in built-up urban or rural areas where there tends to be a lack of vacant land sales. The last three methods are specialized applications and should only be used when appraising specific property types. The subdivision development method should only be attempted when the subject property is right for subdivision and development. The land residual method and the ground rent capitalization method should only be utilized when the subject property is income producing by nature. These six methods are all quantitative in nature. They require specific value judgments to be made based on market evidence. Sometimes there is just not adequate market evidence to support any of these kinds of techniques. There may not be adequate sales in the market area, or the property may not be income-producing. There may not even be enough sales of similar improved property properties in the market area to make judgments based on the extraction or allocation methods. Then, we may have to rely on qualitative techniques instead of quantitative.

Extraction Method

Let's take a look at the methodology of this extraction method. The theory behind this is similar to the cost approach, in that value is the sum total of two components - land and improvements. If we can ascertain reliably the value of one of the components, then it is simply a matter of subtraction to find the value of the other component. For example, an improved property sold for $200,000, which represents the current value of both the land and the improvements. If we know that the land is worth $50,000, then the improvements (in their present depreciated state) must be worth the balance, or $150,000. It's simple mathematics: $200,000 - $50,000 = $150,000. If we are able to estimate the value of the building improvements and subtract them from the sale price of the property, we have an indication of land value. In the example above with a property that sold for $200,000, if we can calculate that the present value of the building improvements was $125,000, then the land value, by subtraction, would be $75,000. On the next several pages, we'll discuss how that $125,000 estimate of the building improvements is derived.

Utility Companies

Local utility companies can also be fruitful information sources. They are constantly studying trends in local market areas. They are vitally interested in future growth trends. Their livelihood and profitability depend on it. They want to know: Are populations growing or shrinking? At what rates? What will the population be in two years? Five years? Ten years? What is the direction of growth? Which are the fastest growing areas? What are trends in family size? How many people will be served in the future? What are the trends with local businesses and industries? What demands will they have in the future?

Percentage Adjustments

Location When we are comparing one neighborhood or market area to another, it is common to think in terms of percentages. There are many factors to compare in such a catch-all category as location, but when all is said and done, we feel confident that one location, for example, is 10% inferior to a second location. We think that if we could just pick up the property and move it to the second location it would certainly be worth 10% more. We may not be able to break down the contributing factors exactly, but overall there appears to be a 10% differential. Market Conditions When making comparisons for changes in market conditions, or time adjustments, people normally think in terms of percentages. In our research we may uncover the fact that this type of property has appreciated 8% over the last year. In the final analysis, we would adjust acomparable sale that sold a year ago by a factor of 8%. However, when we process this in the adjustment grid, we would add a dollar amount equivalent to 8% of the sales price. So we may start out thinking in terms of percentages, but in making the adjustment we often turn back to the good old dollar.

GPS

Many properties today are being identified through the use of longitude and latitude coordinates. The Global Positioning System (GPS) is a satellite-based navigation system consisting of a network of 24 orbiting satellites. Handheld GPS systems are readily available in the range of $200 to $500. Many cars are now equipped with built-in GPS systems. These can be useful tools for appraisers. Most MLS listings today employ GPS coordinates in the property description. That makes it a snap for an appraiser to quickly and definitively locate comparable sales when making an inspection. Certain software systems will allow you to input GPS coordinates for your subject property and comparable sales, which will then be automatically transferred to a location map. It will also allow accurate determination of the distances between your subject property and each comparable sale. GPS systems can also be a valuable resource in locating vacant land parcels. You can drive up and down a road looking for a fifty acre parcel and never be sure just where it begins and ends. But if you first located the parcel on a map that employed GPS coordinates and then downloaded those coordinates to your GPS system - you could go directly to the property with no problem.

Universities

Many universities conduct studies on a regular basis. Part of this might be as a learning process for students in various disciplines such as economics, urban planning or government studies. Graduate students may embark on master's or doctoral theses on local topics. Professors who write articles for publication may decide to write about a topic such as local housing demand or trends in life styles. Many of these writings used to simply appear in obscure trade journals or be filed in the university library. Most of them are now posted on the internet and are easily available.You might look at www.terry.uga.edu/realestate (University of Georgia), or www.bus.wisc.edu/realestate (University of Wisconsin). It might prove worthwhile to do some investigation; particularly if you are near a university that has a program in real estate or urban economics.

Mass Appraisals

Mass appraisals by assessors can be utilized effectively in supporting an allocation ratio. Mass appraisals are defined by the International Association of Assessing Officers as: "1. The application of computer technology and statistical techniques to the solution of appraisal problems; used in assessment administration to derive value indications in the cost and sales comparison approaches and to perform other functions, e.g., assessment ratio analysis. 2. A system of appraising property, usually only certain types of real property, that incorporates statistical analyses such as multiple regression analysis and adaptive estimation procedure to assist the appraiser in estimating value." In almost all jurisdictions, assessors are required to place a separate assessment on the land value of each property on the tax roll. I would not take that as gospel, however. As before, I would not want to have to defend a value on the witness stand based solely on what appeared on a tax roll. I have encountered countless situations where, for example, all the land parcels seem to be entered on the tax rolls as $5,000 each - regardless of its size or location.

Geographic Characteristics of the Land/Site

One of the first things we need to do is make an unequivocal determination of the exact location of the subject property. The first step is to examine the legal description. As stated previously, a mailing address may be inadequate. The legal description may or may not enable us to specifically identify the property location, size, and shape. A metes and bounds description may have been prepared from a modern survey and be very accurate. An old metes and bounds description, in chains and links, may be inaccurate. A lot and block legal description will refer to a particular map number. In viewing that map, you should be able to ascertain a property's location, size and shape. You should be able to get in yourOne of the first things we need to do is make an unequivocal determination of the exact location of the subject property. The first step is to examine the legal description. As stated previously, a mailing address may be inadequate. The legal description may or may not enable us to specifically identify the property location, size, and shape. A metes and bounds description may have been prepared from a modern survey and be very accurate. An old metes and bounds description, in chains and links, may be inaccurate.

Other Limiting Conditions

Other clients may impose limiting conditions, as well. If you are doing an appraisal that will qualify for a mortgage loan that can be sold to Fannie Mae or Freddie Mac, you have to complete the appraisal report on one of their designated report forms. On page 4 of the URAR appraisal form, for example, there are six limiting conditions that are stated (see below). These limiting conditions may not be deleted or modified in any fashion. They impose limitations on the appraiser who completes the form.

Price Per Acre

Price per acre uses a very similar methodology to price per square foot, except that here we would usually be dealing with larger land parcels. The common unit of comparison for these larger parcels is the acre. Divide the sales price of each comparable sale by the number of acres. Then reconcile the results. Let's look at another comparison table. Sale Price Acres $/Acre 1 $375,000 34 $11,029 2 $267,500 24 $11,146 3 $425,000 46 $ 9,239 4 $342,000 28 $12,214 Buyers and sellers of large parcels such as this would undoubtedly think in terms of what these properties are worth per acre. You will usually find a pretty good consistency in studying sales like this. As before, we would want to consider the most similar qualities of the comparable sales and reconcile to a final value that is most appropriate - somewhere between $9,500 and $12,000 per acre - as the indicated value of the subject property.

Qualitative Methods

Ranking analysis is a variant of relative comparison analysis, in which the comparable sales are ranked in ascending or descending order. Then the relative position of the subject is determined within the array. See the next page for an example. Ranking analysis may also be employed to sort the comparables for differences in specific elements of comparison; such as size, location or zoning. Ranking may even indicate that the market does not recognize an element of comparison and does not make a value differentiation. It is not as precise as quantitative analysis, but can be worthwhile in your analysis. It may be used in a preliminary estimate of value.

Qualitative Methods

Relative comparison analysis is a less precise application of the sales comparison method, but it reflects the imperfect nature of real estate markets. Sometimes, it is all we have to go on. You analyze the comparables to determine whether each one is, overall, superior, equal to, or inferior in comparison to the subject. Sometimes symbols such as (+), (-) or (=) are used in a grid comparison. A more refined analysis might employ a broader range of variance; such as from (++++) to (----). Then the plusses and minuses are summed up to give an overall rating for each comparable property. The subject is then valued (perhaps with a range of value) in comparison to the comparable information. For example: Comparable 1 sold for $400,000 and is greatly superior to the subject; Comparable 2 sold for $250,000 and is significantly inferior to the subject; Comparable 3 sold for $300,000 and is slightly inferior. Based on a qualitative analysis of these sales, the indicated value for the subject would probably be in the range of $300,000 to $350,000.

Site Valuation Methods

SALES COMPARISON - Comparison with recent sales EXTRACTION - Subtracts estimated improvement value to arrive at land value ALLOCATION - Uses land-to-value ratios based on improved sale comparables SUBDIVISION DEVELOPMENT - Subtracts estimated development costs from discounted sale proceeds LAND RESIDUAL - Divides up and capitalizes the income between land and improvements GROUND RENT CAPITALIZATION - Capitalizes income from leased land

School Districts

School districts are just as desirous of ascertaining future trends as utility companies. They need to project future student populations. If they project 7,500 new residents in the next five years and 12% of them will be school age children, they know they will need more space. But it's not that easy. How many of them will be in the elementary schools? How many in junior highs and how many in the high schools? What are trends in birth rates? How many children are expected to start kindergarten over the next five years? These kinds of figures will impact the infrastructure of the schools. Do they need to build a newelementary school, and where should it be? Will they be looking to close down or consolidate certain facilities? These decisions may require floating bonds and will impact school tax rates. They may also change the "reputation" of certain school districts in the minds of potential purchasers.

Income Capitalization

Several income capitalization techniques require that the value of a site be determined separately from the value of the total property. For example, in the building residual technique, the starting point is the value of the land. Then, the portion of the net income that is attributable to the land is subtracted and the remaining net income is attributable to the building improvements. Then, that income stream to the building is capitalized into an indication of value by dividing by the appropriate capitalization rate.

Site

Site is defined as "Improved land or a lot in a finished state so that it is ready to be used for a specific purpose." That's the difference in a nutshell! Land is raw - site is improved. Site is land that has been improved to some extent so that it is ready for some purpose. We take raw land and we fix it up so that we can build something on it. Site is land that is ready to be developed. To bring it to that state may require adding items such as:Roads Curbs and gutters Water Sewage disposal Grading Fill Drainage Site plans Site approval Zoning changes Permits

Possible Adjustments

So what kind of possible adjustments could we make on those four blank lines on the land appraisal form? Again, adjustments could be made for anything that could cause a difference in value between two individual sites. They could be fairly minor (but nonetheless significant) differences or they could be strong, readily apparent blockbuster items. Some examples of the more common adjustments we might encounter would be: Traffic, cul-de-sac, etc. Size Shape Topography Exposure Usable area Corner location Floodplain Utilities Soil conditions Zoning Restrictions

Support for Allocation Method

So where do these numbers come from? How do we know what percentage to choose for our ratio of land value to total value? Support for an allocation ratio may be derived from: Mass appraisals Observed patterns Consultations with developers on their costs An appraiser's files Published studies We will provide some additional explanatory comments on these data sources on the next several pages. It is important to note that an appraiser needs to be able to support his/her allocation ratio. This support does not always have to be included in the appraisal report, but it must be retained in the workfile. Appraisal regulatory agencies state that a common violation is that appraisers include verbiage such as "site value obtained by allocation method" in their appraisal reports; but when the state investigator or reviewer looks in the appraiser's workfile, there is no support at all for the ratio. End of Page

Sources of General Data

Sources of general data will vary from area to area. You may not have all the sources mentioned. You will have to scout around to find what is available locally, but this should give you a good start. Ask around. Ask other appraisers. Ask real estate agents. Visit your local chamber of commerce. More and more community organizations like chambers of commerce or economic development agencies have websites, which means you may not need to leave your office when completing this type of research. I want to address some sources in particular: Government Trade associations Utility companies School districts Universities Departments of transportation Planning boards Multiple listing services Chambers of commerce

Identification of Property Rights

Standards Rule 1-2(e) of the 2020-2021 USPAP says an appraiser must: "identify, from sources the appraiser reasonably believes to be reliable, the characteristics of the property that are relevant to the type and definition of value and intended use of the appraisal, '.. including: (ii) the real property interest to be valued (iii) any personal property, trade fixtures, or intangible assets that are not real property but are included in the appraisal; (iv) any known easements, restrictions, encumbrances, leases, reservations, covenants, contracts, declarations, special assessments, ordinances, or other items of a similar nature; and (v) whether the subject property is a fractional interest, physical segment, or partial holding;"1

Cost Approach

The Cost Approach is sometimes referred to as the summation approach, although this term is generally considered somewhat outdated. The cost approach deals with two components, site and improvements, which are added together (i.e., summed) to produce a value indication. In developing the Cost Approach we start with the site value. There are a number of methods an appraiser can use to develop an opinion of site value. We will discuss six different methods a little later. Then we add to the site value, the present depreciated value of any building improvements and site improvements. To ascertain the depreciated value of the building improvements, we start with the cost to build them new and subtract depreciation. Let's allow the details to rest until later. I promise we'll

SCOPE OF WORK RULE

The SCOPE OF WORK RULE is a vital part of the valuation process. The appraiser decides, for each assignment, what work he or she will undertake in order to solve the appraisal problem at hand. Not every assignment is the same. The SCOPE OF WORK RULE gives the appraiser the flexibility to handle different assignments differently. The scope of work decision is solely the responsibility of the appraiser. The client may have some input into the decision, however the appraiser is ultimately responsible for making sure that the scope of work is sufficient to develop credible assignment results for the intended use. The appraiser must ensure that the scope of work is consistent with the expectations of intended users, and is also consistent with what the appraiser's peers' actions would be in the same or a similar assignment. EXAMPLE: Erica is an appraiser and is engaged by a lender to appraise a four-unit residential property for a mortgage lender. The lender tells Erica that he wants to save on the appraisal fee, and as a result, he does not want Erica to develop the income approach. He instructs Erica to value the property using the sales comparison approach only. Is this an acceptable scope of work? No, probably not. It is likely that when appraising an income-producing property that other mortgage lending intended users would expect the appraiser to develop the income approach to value. It is also likely that Erica's peers (other appraisers who have expertise in performing this type of assignment) would develop the income approach in completing an appraisal assignment of this type. The individual client's instructions do not matter; Erica must produce credible results by employing a scope of work that meets the tests of what intended users would expect, and what her peers' actions would be.

Sales Comparison Adjustments

The adjustments that we make in the sales comparison method of site valuation should be derived from the market, just as when we use the sales comparison approach in appraising improved properties. Hopefully, we will have adequate data so as to be able to derive adjustment values from a paired data analysis. For example, two similar sites sell within a few months along the same road. One site has many trees, whereas the other has been stripped of trees. The treed site (Sale #1) sells for $55,000, and the bare site (Sale #2) sells for $50,000. In this simplistic example, it would be easy to derive a difference of $5,000 or 10% attributable to the difference in trees. In other words, a property with trees is worth 10% more than a property without trees. Once we have derived this factor, we can use it to adjust for a similar difference intrees between two other sites. The subject property has plenty of trees, and it is very similar to Sale #3 except that Sale #3 has no trees. Sale #3 sold for $40,000. In comparison, the subject property is worth how much?

Assessments and Taxation

The basis for real estate taxation is an assessed value that is placed on the tax roll for each property in the taxing jurisdiction. That assessed value bears a relationship to the value of that parcel of real property. In some jurisdictions the assessed value is purported to represent the full market value of the real property. In other taxing jurisdictions, the assessed value is applied as a ratio of full market value. As an example, all properties in a jurisdiction may be assessed at 50% of value or 90% of value. The bottom line amount of real estate taxes should be equal in either situation. The total taxes are the product of assessed value multiplied by a tax rate. Let's assume that a property is worth $100,000. If it is assessed at $100,000 and the rate per thousand is $5, the taxes would be $500. If it was to be assessed at 50% of value, or $50,000, then the rate would likely be $10 per thousand of assessed value. Multiplying 50 (thousands of dollars) by $10 would equal the same $500 in property taxes.

Levels of Influences

The definition of general data refers to the four main categories of external market forces that we studied in the Basic Appraisal Principles course. They are social, economic, governmental, and environmental. It also reiterates that these forces originate outside the subject property. Within each of those four categories, there are levels of proximity. In other words, there are broad national economic forces such as the prime rate, as well as influences on a state level such as a state income tax. Getting closer to home, there may be regional, county, city, and neighborhood or market area influences. These would be factors that influence the local economy and might include economic development agencies, wage rates, and unemployment rates. Here is a summary chart. The same hierarchy occurs in all four categories of external market forces. There may be some broad national, or even international, forces (such as the cost of a barrel of oil), that may ultimately trickle down and affect a local property. However, usually it is the closer and more proximate influences that exert the greatest pressure. So our focus needs to be more on the social, economic, governmental, and environmental influences in the local neighborhood or market area.

Sources of Specific Data

The general data we have been discussing gives us a look at the big picture. We can learn what is going on in the local market area, in general. We can identify and analyze trends that affect each property in the area. Specific data is collected to key in on one particular property and see what value creating forces are at play. We need to examine our subject property and see what makes it tick. What about its particular lot, buildings, location, etc.? We completed a macroeconomic analysis of the market area around our subject property and now it's time to get out the microscope and perform a microeconomic analysis. Some common sources of specific data include: Deeds ocation maps Tax maps Flood maps Assessor's records Title companies Zoning ordinances Multiple listing services

Land Residual Method

The land residual method is defined as: "A method of estimating land value in which the net operating income attributable to the land is isolated and capitalized to produce an indication of the land's contribution to the total property." The premise behind this method is similar to the extraction and allocation methods we studied earlier in that it identifies the two components of value - land and improvements. This method deals with income as the basis for value and only should be used in the appraisal of income producing properties. In income capitalization approaches the ultimate value is a function of the amount of net income available after operation of the property. The higher the net income, the higher the value. In the land residual method, the basis is that part of the income from real property comes from the land and that part of the income stream is attributable to the improvements. If we can isolate the portion of the income stream that is attributable to the land, then we can capitalize that into a value for the land.

Deed

The legal description of the property The owners of record Easements of record Deed restrictions Chain of title (when the property was purchased and from whom) You can ask the owner for the deed. The owners probably have a copy of the deed, somewhere. It's probably stashed away in a safe deposit box or a filing cabinet. When you make an appointment to inspect the property, ask the owner if they can please provide you with a copy of the deed when you arrive. If the owners are not around or they can't find it, then you'll have to get it on your own. If you are appraising the property for a mortgage, ask the lender for a copy.Deeds will be filed at the appropriate municipal office. Typically, it's the county courthouse. You can always go there and obtain a copy; however more and more county deed records are being made available on line, which may save you time and effort. In many cases, you will be able to view and print out a copy of the subject property deed without leaving your desk. In some parts of the country, it is possible to make arrangements with a title company. For a small fee, you can request a copy of a deed. This is a convenient way to get your hands on a necessary document.

Sales Comparison Method

The most commonly-used approach for valuing sites is the sales comparison method. Assuming there is adequate data available, it is the preferred method because it is the most accurate and most understandable, and should be utilized whenever possible. The only limitation to this approach is that you must have adequate market data. This is the same methodology, conceptually, used in the Sales Comparison Approach with improved property which will be covered later in this course. But there are a couple variations. The variations are (1) the Sales Comparison Approach with improved properties will typically use a minimum of three comparable sales that have closed within the last six months, preferably the last 90 days; and (2) most of the adjustments for physical characteristics on improved property will deal with the improvements instead of the land. In contrast to improved property, in using the Sales Comparison Approach for vacant land, theappraiser will typically need to use more sales, probably six or more comparable sales instead of the minimum of three sales. However, the appraiser is generally permitted to use land sales that have occurred further back in time.

Price per Front Foot

The price per front foot has two major applications. It is a primary measure of value for waterfront properties and for commercial properties along a major roadway. Property that fronts on a lake or river usually is measured in terms of the amount of direct frontage on the water. That is a prime determining factor in the value of the property. It almost doesn't matter, within reason, how deep the property goes or its shape. One lot with 50 feet frontage that is 100 feet deep often has substantially the same value as one with 50 feet frontage and 200 feet of depth. On the other hand, a property with 55 feet frontage and 75 feet of depth may have a significantly higher value than one that has 50 feet frontage, but 150 feet in depth. Frontage on commercial highways also is a major factor in the valuation of commercial or retail properties. There is usually a fairly tight range of values generated by frontage along the more desirable stretches of highway.

Assessments and Taxation

The process of determining these assessed values varies tremendously from jurisdiction to jurisdiction. In some areas assessed values are updated every year and are quite accurate. In other areas, the assessed values are updated on a sporadic basis and in some instances, are woefully out of date. At any rate, most states mandate that the total assessed value for each property be broken into two components: land and total values. Therefore, it is necessary that the assessor somehow estimate the value of the site along with the total value of the property. It has been my personal experience that in many cases, the opinions of site value used in ad valorem assessments are not particularly accurate. It seems that some assessing officers place primary emphasis on getting the total assessed value right. The division of that total value into two components sometimes seems arbitrary. Unless the assessor's opinion of site value is based on proper methodology, it may bear little relationship to true site value.

Zoning Ordinances

The zoning ordinance is the document that details the permitted uses in each zone. It is just as important as the zoning map. For example, you may find out from looking at the zoning map that the subject property is zoned R-2. But what exactly does that mean? You will probably need to read the zoning ordinance to find out that the R-2 zone allows one- or two-family residential usage. The zoning ordinance also will stipulate the minimum lot size for a particular zone. Usually there will be additional details such as minimum setback requirements. For example, a structure may not be built closer than 15 feet from a side property line and 20 feet from a rear property line. There also may be restrictions on the height of buildings. Zoning ordinances, like zoning maps, may also be purchased from municipal offices. More and more zoning ordinances are becoming available for free on the internet. Again, you ought to check out your particular locale.There are some companies that make certain zoning ordinances available to you for a fee. For example, go to www.ordinance.com and you'll find that they have land use and zoning information for over 3,000 municipalities available, if you subscribe to their service.

Planning Agencies

Their title tells it all - they are involved in planning! Some are on a regional level and some are on a county or local governmental basis. In a small town, members may be appointed to a planning board or planning commission. They may meet on a regular or irregular basis. The members may or may not be technically qualified for the position. Most are not architects, surveyors, contractors, or urban planners. They are serving the community on a volunteer basis and doing their best to make appropriate decisions. Larger planning agencies may have governmental support and consist of part-time or full-time professionally qualified members. They have to likewise plan for the future and the future good of the community.What kind of land use patterns do we want to see? How much will be residential and how much should be commercial? What kind of density is desired? What kind of environmental impact studies should be required? What can we do to promote affordable housing? Where this affordable housing should be built? How many people will be living here in five, 10, or 20 years? Will the existing infrastructure be adequate? If not, what changes will be needed? How soon? Many of their studies are available to the public on request. Much is reported in local newspapers and online news sites.

Land Residual Method Summary

Today we find the land residual method used primarily in highest and best use analysis. Techniques like allocation and extraction have superseded the land residual method because they rely on fewer variables subject to an appraiser's judgment. In the land residual method, judgments have to be made and market evidence studied to identify and separate a land cap rate and a building cap rate. Then we have to estimate the present value of the building, as well as the net operating income (NOI) of the whole property. This technique has fallen out of favor and is not generally used - even when the subject property is income producing. Nevertheless, it is a recognized method and still may have applicability in certain situations.

Building Styles and Construction

There are a number of different architectural styles found throughout the United States. Identifying and describing these myriad styles is beyond the scope of this course. You can start with a two-story type of house and make it a Colonial style, a contemporary style, or a Spanish style. These are all two-story houses - but they sure are different styles. Style can be influenced by: Type and texture of exterior finish Colors Roof style Roofing materials Window types Building shape Ornamental details Shutters Dormers Cupolas Corner boards In 2011, Fannie Mae and Freddie Mac created the Uniform Appraisal Dataset (UAD) which is a set of standardized reporting requirements used in residential mortgage lending appraisal reports. One of the UAD protocols is that the appraiser must identify the architectural style of the subject property and comparable sales. According to the UAD protocols, "Valid descriptions include, but are not limited to, 'Colonial,' 'Rambler,' 'Georgian,' Farmhouse'. Do not use descriptors such as 'brick,' '2 stories,' 'average,' 'conventional,' or 'typical' as these are not architectural styles. Design style names may vary by locality. The appraiser should report the name of the design style that is applicable within the local market area." Several resources I would recommend if you want to learn more about architectural styles are: Houses, Third Edition, Henry Harrison, Real Estate Education Company, Dearborn Publishing Company American Shelter, Lester Walker, The Overlook Press A Field Guide to American Houses, Virginia and Lee McAlester, Alfred A. Knopf, Inc. The American House, Mary Mix Foley, Harper and Row A Field Guide to American Architecture, Carole Rifkind, New American Library

Zoning Maps

There are still some areas of the country that do not have formal zoning ordinances; however, most incorporated municipalities do. Property zoning is part of the necessary research when obtaining specific data about a property. The first step is to locate the property on the map and see which particular zone it is in. The maps typically will have areas carrying designations such as B1 or R-2. Once you know which zone the property is in, then you can read the zoning ordinance to discover the requirements and restrictions in that particular zone. You may purchase copies of the zoning maps at the zoning office or assessor's office of the local municipality. Of course, these maps and ordinances are becoming more commonly available now on the internet. You will have to investigate the situation in your local area. Call the zoning office or do a search on the internet to see if the local maps are available online for free.

Trade Associations There are trade associations

There are trade associations that have helpful data as well. Some of it is only available to members as special benefits. Some is free to anyone. The National Association of Homebuilders (NAHB) does extensive research on current construction trends and figures. We will look at their website on the next page. The National Association of REALTORS is a trade association for real estate agents and brokers who subscribe to a code of ethics. They have timely information on governmental activities, technology, and consumer preferences. There are more than 10 professional appraisal organizations. These also cater primarily to their own members, but do offer some limited reports and information free on their websites. Of course, this information is intended strictly for the appraisal community. They offer guidance forappraisers. Shortly, we will look at the website for the Appraisal Institute, the largest of the professional appraisal organizations.

Price per Buildable Unit

This measure is usually employed with a parcel that is capable of a small subdivision. Most often, it is used with multi-unit properties. Thus, the typical measure of the price of a land parcel used by builders, especially in urban areas, is the price per buildable unit. Let's say Ben Builder is looking for a site on which to build two fourplexes. It would have to meet the usual criteria - be physically capable of supporting the two buildings and be legally allowable. Ben might think in terms of how much he can afford to pay for the site as part of the overall investment. It certainly will vary from area to area. It will be a function of land costs, development costs, construction costs, rents obtainable from the units, vacancy rates, supply and demand, etc. Perhaps in his market, Ben can afford to pay up to $30,000 per buildable unit for the site. He has built similar units over the last five years for investors and a few on his own account. He knows that the economics work if he can get the land for that price. Therefore, he would be willing to pay up to $240,000 ($30,000 x 8 units) for a suitable site. It really doesn't matter that much to him whether it is four acres or eight acres, as long as the site will support eight units.

Effective Date of the Value Opinion

Two dates are essential to an appraisal report. Standards Rules 2-2(a)(vi) and 2-2(b)(vi) and 8-2(a)(vi) and 8-2(b)(vi) require that each appraisal report specify the effective date of the appraisal and the date of the report. The date of the report indicates the perspective from which the appraiser is examining the market. The effective date of the appraisal establishes the context for the value opinion. Three categories of effective dates - retrospective, current, or prospective - may be used, according to the intended use of the appraisal assignment."1

Example 5

Value = Market value Income = Net operating income Rate = Capitalization rate Let's examine a property where the net operating income (NOI) is $100,000. In direct capitalization, we would divide the $100,000 by an appropriate rate to arrive at value. For simplicity's sake, let us assume a capitalization ("cap") rate of 10% or 0.10. $100,000 / .10 = $1,000,000 - a nice round one million dollars. However, in this example let us assume that through research and analysis we were able to determine that the appropriate cap rate to be applied to the building improvements only was 11%, and the building value is $800,000. Next we would multiply the $800,000 building value x .11 and see that $88,000 of the total income stream must be utilized to produce the appropriate return to the building. Well, what's left? $100,000 NOI - $88,000 = $12,000. That must be the portion of the income that is attributable to the land. It can't come from anything else; the presumption is that all there is that could produce income is the land and the improvements. In the last step, we go to the market and extract an appropriate cap rate for the land. Let's make another assumption; that our research isolated a land cap rate of 6%. That means someone investing in land would expect a 6% return on their investment. Well that was easy! Now all we have to do is divide the income stream attributable to the land ($12,000) by the land cap rate (.06) and the land value is indicated to be $200,000

Location Maps

Various kinds of maps will be helpful in analyzing the location of the subject property. Road maps will permit you to analyze the convenience and access of the property. It is common in appraisal reports to include a map that shows the location of the subject property and the comparable sales. You can photocopy a section from a highway map or utilize various internet-based mapping services. Most of the major appraisal software companies incorporate mapping services within their appraisal packages. In some cases, the locations of the subject property and the comparable sales are automatically plotted on the maps once the addresses are typed into the appraisal report form. Aerial maps can also be beneficial to show graphically what types of things surround the subjectproperty. Aerial maps are employed more commonly in commercial properties, but can also be beneficial in residential appraisals. Many residential appraisal clients and appraisal management companies (AMCs) are requiring aerial photographs be included as additional exhibits in residential appraisal reports.

Price per Lot

We addressed this earlier. In some cases the market may not recognize size differences between lots. As an example, Don Developer may carve up a parcel of 80 acres into 40 lots. Assume that the average density allowed by zoning is two acres per dwelling. There are some winding roads and cul-de-sacs in the development plan. Upon surveying all the lots, some are as little as 1.65 acres and some run as large as 2.78 acres. The ones on the end of a cul-de-sac usually have a smaller frontage but spread out wider and run back deeper than the average rectangular lot. Don may simply choose to price all the lots at $60,000 at the beginning, regardless of their individual size, and then increase the per unit price as time goes on. Therefore, if you were using lots in that subdivision for comparable sales, it would make sense to just see what they sold for per lot. In this scenario, a 2.15 acre building lot would sell for no more than a 1.85 acre lot in the same development, even though the 2.15 acre lot is approximately 16% larger.

Price per Square Foot

We could try to employ some statistical analysis. The mean of the prices per SF is $6.45 and the median is $6.41. However, we only have four sales, and that is not enough to give good credence to statistical analysis. Besides, statistical analysis only deals with the numbers and doesn't really account for the relative significance of the sales. We really should be looking at and analyzing the characteristics of the sales themselves. Which are the best comparables? Which are weakest? Which are most similar in size or location? If Sales 1 and 4 are the most similar, we should reconcile our value somewhere around $6.70 or $6.80 - perhaps $6.75 per square foot. If Sale 4 is by far my strongest sale, I wouldn't mind settling on $6.85 per square foot. If Sales 2 and 3 are my best comps, I would want to wind up on the lower end of the range - perhaps something like $6.40 per square foot. Let's assume I decided on $6.50 per square foot. Then I would look to my subject property. If it had 8,000 square feet, I would multiply 8,000 x $6.50 and my opinion of the value of the subject property (on a per-square-foot basis) would be $52,000.

Sales Comparison Method

We have discussed the sales comparison method of site valuation. We showed the analysis grid of the common Land Appraisal form. The idea was that if we can find three or more sales of similar properties, then we can put them on a grid and make quantitative adjustments for any differences between a sale and the subject property. Then we presented various kinds of adjustments you might make; such as for shape, topography, time of sale, etc. We discussed some of the ways to decide if adjustments were necessary or not, and suggested some data sources. That is fine, if you can find sales of properties that are sufficiently similar. If your subject site is five acres and you can find sales of properties from three to seven acres, then go ahead and grid them out. They probably are sufficiently similar that you can make one-on-one comparisons as you do when appraising residences. In residential appraisal, you may have a 2,400 square foot house that sold for $160,000, a 2,800 square foot house that sold for $170,000 and a 2,900 square foot house that sold for $180,000. Great, you can make adjustments of a few thousand here and there and reconcile to an appropriate value. But what if your subject site is five acres and the best, most proximate and recent sales you can find consist of a one-acre site, a 12-acre site and a 25-acre site. Then what?

Multiple Listing Services

We mentioned earlier that multiple listing services (MLS) can be valuable sources of general data. They can also be utilized to obtain specific data about a subject property or comparable sales. The data does come with a few caveats. Real estate agents have different procedures and priorities when gathering information and describing the property. Real estate agents often have different ways of measuring gross living area (GLA) than appraisers do. They usually try to include finished area below grade in the GLA calculation so as to maximize the reported size of the property improvements. The accuracy of the information may not be of the highest quality. Some sales agents are not skilled in construction detail and some misunderstand or misstate information concerningmechanical systems, energy efficiency, etc. The reporting of the condition of the property may be over-optimistic (at best) and misleading (at worst) in some cases. This is understandable; after all, the agent or broker who is filling out the MLS information sheet is trying to sell the property. Therefore he or she may minimize (or ignore entirely) negative features, while at the same time accentuating the positive. Conversely, an appraiser generally takes a more unbiased attitude when disclosing the subject property's physical and economic characteristics in an appraisal report. Despite its inherent weaknesses, the information obtainable through multiple listing services may be the best information available. If the information can be verified through a conversation with a listing agent or selling agent, its usefulness can be multiplied dramatically.

Other Data Sources

We previously mentioned that other sources of land value ratios (i.e., allocation ratios) might be your own observations of patterns in an area over time, or consultations with developers. One of the best sources of data should be your own files and information that you gather day by day. You should have access to land sales through the MLS, public data records, assessors, brokers, and other appraisers. As you accumulate this data, it will be possible to do some studies. You should be able to organize and analyze trends. What is land selling for per square foot or per acre in a particular market area? What did it sell for a year ago, or two years ago? What is the median sale price of homes in that market area? What is the ratio of the median land sale to the median sale price of improved properties? You may discover that in newer properties on the west side of town, the land values typically represent between 25% and 35% of total value. Whereas, in older houses on the east side, the typical ratio is between 35% and 45% of total value. If you keep your eye on such trends over a number of years, you may very well find that the ratios remain relatively constant. Land values may go up and improved property values may go up, but they may remain in lock step. For example, when homes in a particular market area were selling for $300,000, site values may have been $100,000. A few years later, homes are selling for $450,000 and site values are $150,000. Even though property values have increased significantly, site values remain at 33% of the total property value.

Types of Adjustments

When utilizing sales comparison, adjustments to the comparable sales may be made either on a quantitative or qualitative basis. Quantitative adjustments are usually made on a percentage or dollar basis. As in all appraising we walk a fine line between art and science. We walk a tightrope between being too exact and too vague with our estimates. Clients expect a certain amount of precision from us and we are used to dealing in finite dollar amounts. However, sometimes we think in terms of percentages when comparing one property to another. The most common situations when we use percentages in appraising sites are when we are comparing locations and market conditions.

Regional and County Level

You may have quasi-governmental agencies in your area. For example, I used to live in New York State, and there were several Mid-Hudson planning agencies and resources for the Mid-Hudson area, which consisted of six counties along the Hudson River, north of New York City. Further north, there were Capital District agencies around Albany. Further north was the Adirondack Park Agency, which had jurisdiction over seven million acres. County administrations typically include functions such as planning, economic development, and environmental resources. They do research and most of it is available to the public. You may also find county health and building regulations. Cities, towns and villages may also be resources. Drop by their offices or go on their websites to see what can be found there.

Price per Animal Unit

You will encounter this in ranch or farm land. For example, in the West and Southwest there are extensive land areas that are devoted to raising cattle, sheep or horses. Given the arid nature of the area, it is easy to overgraze the land. Land values are often measured by their productivity. In some areas you may need one acre per head of cattle and in other areas you will need five acres. Rosie Rancher may be interested in expanding her operation and needs to buy some land nearby that will be sufficient to support 1,200 head of cattle. Assume she would be willing to pay up to $1,000 per head for the land. This might entail 1,200 acres or 3,000 acres. To Rosie, the important determinant of value is how many animals the land will support. The same ratio method is utilized in finding land for dairy cattle in the East or Northeast. How many head of cattle will a parcel support would be the crucial valuation factor. That may include lands for hay as well as grazing. A similar philosophy is employed many times in crop-bearing lands. Land may be judged, or valued, on the basis of its productivity. How many bushels of wheat, or corn, or soy will a given parcel of land produce? Fran Farmer may be willing to pay up to "X" dollars per acre based on how much crop the land can produce in a year.

In developing a real property appraisal, an appraiser must

a) identify the client and other intended users; (b) identify the intended use of the appraiser's opinions and conclusions... (c) identify the type and definition of value... (d) identify the effective date of the appraiser's opinions and conclusions ... (e) identify, from sources the appraiser reasonably believes to be reliable, the characteristics of the property that are relevant to the type and definition of value and intended use of the appraisal:... (f) identify any extraordinary assumptions necessary in the assignment... (g) identify any hypothetical conditions necessary in the assignment... (h) determine the scope of work necessary to produce credible assignment results in accordance with the SCOPE OF WORK RULE....1

Extraordinary Assumption

an assignment-specific assumption, as of the effective date, which, if found to be false, could alter the appraiser's opinions or conclusions. Comment: Uncertain information might include physical, legal, or economic characteristics of the subject property; or conditions external to the property, such as market conditions or trends; or the integrity of data used in an analysis."1 An example would be when an appraiser encounters an underground storage tank on the subject property. If there is no evidence of any observable leaks, the appraiser could indicate a value opinion based on the extraordinary assumption that the tank is indeed not leaking. If it turns out otherwise, the appraiser would retain the right to revise the value.

"INTENDED USER:

he client and any other party as identified, by name or type, as users of the appraisal or appraisal review report by the appraiser, based on communication with the client at the time of the assignment."2

Fedstats

https://nces.ed.gov/FCSM/index.asp This is also a portal that can take you to information provided by over 100 federal agencies. On the next two pages are some of the neat statistics I was able to generate with two mouse clicks, concerning my home county in Colorado. Try your home state and see what you get.

USPAP - Market Value

identify the type and definition of value and, if the value opinion to be developed is market value, ascertain whether the value is to be the most probable price: (i) in terms of cash; or (ii) in terms of financial arrangements equivalent to cash; or (iii) in other precisely defined terms; and (iv) if the opinion of value is to be based on non-market financing or financing with unusual conditions or incentives, the terms of such financing must be clearly identified and the appraiser's opinion of their contributions to or negative influence on value must be developed by analysis of relevant market data;"1

Verify

o prove the truth of by the presentation of evidence or testimony; substantiate. 2. To determine or test the truth or accuracy of, as by comparison, investigation or reference."1 So to verify is prove the truth or accuracy in some way. In the Basic Appraisal Principles course we discussed that market value presumes an arms-length transaction with no undue duress. Those are some of the things we have to verify, especially when considering the comparable sales used in the sales comparison approach. In valuation practice, the process of validating or establishing the truth about information from another source, which is critical to credible assignment results. A valuer or reviewer may confirm information directly with a party knowledgeable about the property or the transaction involving the property or with another credible source to determine the reliability of that information for use in the assignment."

Workfile Contents

the name of the client and the identity, by name or type, of any other intended users; true copies of all written reports, documented on any type of media (A true copy is a replica of the report transmitted to the client. A photocopy or an electronic copy of the entire report transmitted to the client satisfies the requirement of a true copy.); summaries of any oral reports or testimony, or a transcript of testimony, including the appraiser's signed and dated certification; and all other data, information, and documentation necessary to support the appraiser's opinions and conclusions and to show compliance with USPAP, or references to the location(s) of such other data, information and documentation. A workfile in support of a Restricted Appraisal Report or an oral appraisal report must be sufficient for the appraiser to produce an Appraisal Report. A workfile in support of an oral appraisal review report must be sufficient for the appraiser to produce an Appraisal Review How long do you have to keep your workfile? "An appraiser must retain the workfile for a period of at least five years after preparation or at least two years after final disposition of any judicial proceeding in which the appraiser provided testimony related to the assignment, whichever period expires last."2 What does the RECORD KEEPING RULE say about workfile custody, access and retrieval? "An appraiser must have custody of his or her workfile, or make appropriate workfile retention, access, and retrieval arrangements with the party having custody of the workfile. This includes ensuring that a workfile is stored in a medium that is retrievable by the appraiser throughout the prescribed record retention period. An appraiser having custody of a workfile must allow other appraisers with workfile obligations related to an assignment appropriate access and retrieval for the purpose of: submission to state appraiser regulatory agencies; compliance with due process of law; submission to a duly authorized professional peer review committee; or compliance with retrieval arrangements. Comment: A workfile must be made available by the appraiser when required by a state appraiser regulatory agency or due process of law."3

Appraisal Institute

www.appraisalinstitute.org Access to much of this site is restricted to members of the organization. However, at the top header, there are tabs titled "News" and "Advocacy" which contains news releases about legislative activity and other topics. Also, you can click on the tab "Publications" at the top center of the page for a listing of books and other references for sale; including Appraiser News Online, The Appraisal Journal, and Valuation magazine.

Flood Insights

www.floodinsights.com Here is a sample report from Flood Insights, a commercial service. You can check out the details on their website.

HUD

www.hud.gov This is also an enormous site. You should go exploring! Notice the link on the left that says "I want to" and then underneath it is a list of resources such as "buy a home" and "avoid foreclosure". There is also a section titled "Featured News" and a link to a blog titled "The HUDdle".

Mapquest

www.mapquest.com Most of you are familiar with Mapquest and utilize their service when planning a trip. You want to know how to get from here to there.

National Association of Homebuilders

www.nahb.org The National Association of Homebuilders is a great resource for information concerning construction trends. They keep track of building starts in all areas. They do a lot of research into consumer preferences and topics such as remodeling. Click on some links and see what you find. They are constantly updating the information and coming out with new reports. Some of the information is only for members or available by subscription. But a lot of it is free. When you get to the NAHB's website at the link above, hover over the "Research" tab near the top center of the page.A drop-down menu will appear that brings up other topics you can click on, such as: Housing economics Construction statistics NAHB also has an independent subsidiary called Home Innovation Research Labs. You can visit their website by clicking anywhere on this sentence. They do research and provide lots of information on cutting-edge building materials, including sustainable (i.e., "green") building materials and methods.

Realtor.org

www.realtor.org The new topics change daily, but click on the tab at the top that says "Research and Statistics." In that area, you may find topics such as: Housing statistics Research reports Commercial research

Topozone

www.trails.com Here is where we can get topographic maps of any location in all 50 states. Click on "Topo Maps". You may need to subscribe to their site, or take advantage of a free trial. (Just so you know, McKissock does not receive or accept compensation from website owners, and is not responsible for changes in the website or its content. The same goes for all websites we direct you to in any of our courses.)

USA.gov

www.usa.gov This site is the portal to more than 200 federal agencies. If you want information but you're not sure where to find it - this is a good starting point. For example, you could enter the phrase "inflation" in the search box at the top and be directed to the appropriate federal government web sites that would have information on that topic.