Ch 7: Valuation Using the Sales Comparison and Cost Approaches

Contrast self-contained appraisal reports, summary appraisal reports, and restricted appraisal reports.

-A self-contained appraisal report includes all the detail and information that were used by the appraiser to derive his or her estimate of market value or the other conclusions within the report. A summary appraisal reports simply summarizes the conclusions of the appraisal. The majority of the data and techniques used in the appraisal are kept in the appraiser's work file. A restricted appraisal reports provides a minimal discussion of the appraisal with many references to the appraiser's work file/international documentation..

What is an appraisal report?

-An appraisal report is the document prepared by the appraiser. This report contains the appraiser's final estimate of value, the data forming the foundation of this estimate, and the calculations supporting the estimate.

What is meant by functional obsolescence? Could a new building suffer from functional obsolescence?

-Functional obsolescence refers to a building's loss in value resulting from changes in tastes, technical innovations, or market standards. Typically, functional obsolescence is associated with a building's decline in utility through the passage of time, but it is possible for a newer building to suffer from functional obsolescence. For example, costumer preferences and demands may change soon after a relatively new building is completed.

The cost approach to market valuation does not work well in markets that are overbuilt.Explain.

-In an overbuilt market, the market value of an existing property is frequently less than the construction cost of the property. The estimated value calculated using reproduction cost of the property is likely significantly different from the value obtained from the sales comparison approach and the income approach.

Why is an estimate of the developer's fair market profit included in the costs estimate?

-In practice, developers and contractors frequently include their profit in the calculated cost amount because a fair and reasonable profit amount is considered a cost of the project.

What is the difference between market value and investment value?

-Market value is the most probable selling price; investment value is the value to a particular investor.

What main difficulty would you foresee in attempting to estimate the value of a 30-year old property by means of the cost approach?

-The cost approach assumes that the market value of a new building is similar to that of constructing the building today. Of the two methods available for estimating cost, appraisers normally use the reproduction cost of a building for appraisal purposes. A 30-year old building likely possesses many characteristics that render it obsolete. Therefore, calculating an accurate reproduction cost for an older building is difficult because outdated features, such as room arrangement, decorative features, and materials, are included in the reproduction costs.Estimating these costs can be problematic because reproducing the cost of a 30-year old building requires significant effort and assumptions of accrued deprecation.

What is the theoretical basis for the direct sales comparison approach to the market valuation?

-The direct sales comparison approach to the market valuation relies on value judgments made by willing buyers and sellers. Therefore, this method uses market-driven information. The sales comparison approach involves comparing a subject property with recently sold comparable properties.