REAL ESTATE APPRAISAL. Appraisal. This is also known as property or land valuation. It is the practice of developing an opinion of value over real property. Appraisal is important because of the heterogeneous/unique nature of real properties. Real estate appraisal is generally performed by a licensed or certified appraisal/land valuer/property valuer or valuation surveyor who is a professional mandated to value properties. TYPES OF VALUE. There are several types of value sought by real estate valuers/appraisers. The most common types include:- 1. Market value. This is the estimated amount for which a property should be exchanged on the date of valuation between a willing buyer and a willing seller in an arm’s length transaction. After proper marketing where each party acted knowledgeably, prudently and without compulsion/duress. 2. Value in use. This is a net present value of cash flows that an asset generates to a specific owner under specific use. This type of value can either be below or above the market value of the property. 3. Insurable value. This is the value of real estate property covered by the insurance policy and does not usually include site value. 4. Liquidation value. This is a value of real estate property or forced/ordered liquidation. This is whereby the seller is compelled to dispose of his real property after an exposure period which is usually less than the normal time frame to make a sale. This type of value in most cases is usually less than the market value. 5. Investment value. This is the value a particular investor attaches to a given property. Usually this value is higher than the market price of the property. 6. Plottage/ assemblage value. This is the incremental increase in value that results from the combination of two or more parcels of land to form one large parcel that has greater utility and hence greater market value than an individual parcel. DETERMINANTS OF VALUE. i. Demand. ii. Supply. iii. Property competitive edge. iv. Property transfer process. DEMAND. Demand refers to the need coupled with ability and willingness of individuals to buy or rent a given property. Demand is influenced by several factors such as:- - Availability of viable projects – should there be projects that would bring return on investment, this will invite demand or lack of it in real estate. - Tastes and preferences – different people have different tastes and preferences. Thus this influences demand of a particular real estate property. - Location – strategically located e.g. how near the real estate is closer to infrastructure, amenities, proximity to production variables and others will influence the demand of real estate. - Market price – this highly influences demand. - Security – how secure is the place that you want to rent or buy. - Prevailing economic conditions – this will affect people’s purchasing power. - Availability of mortgage loans and their terms. If favorable, the demand will be high and conversely if the demand is low. - Use of the property – is the use private, industrial, commercial. SUPPLY. It is the willingness of the seller to sell a particular real property at a prevailing market price. It is the availability of the real property in the market. Supply is affected by the following factors:- - Cost of raw materials. - Cost of land itself. - Government regulations/restrictions on land use. - Cultural considerations – if the land is communally owned, supply of the same to other private individuals could be constrained. - Availability of raw materials. - Technology – this can determine how construction is done. ESTIMATION OF SUPPLY OF REAL ESTATE. - Construction activities. - Vacancy rates – this is the number of empty units as a percentage of total units in the market. High vacancy rate implies excess supply while low vacancy rate imply undersupply. - Absorption rates – this is the time lapse between project completion and its eventual sale or lease. - Mortgage default and foreclosures – high levels of default and foreclosures create excess supply while a low level is consistent with adequate or sufficient supply. - Deed transfers – this involves the number of transactions carried out in relation to real properties. The higher the transaction the higher the supply. PROPERTY COMPETITIVE EDGE. To develop this competitive edge an investor should consider the following:- - Restrictions on use i.e. an investor should determine whether the property fits within applicable laws and other government regulations. - Location. A good location is determined by:- • Convenience; how accessible is it to amenities and to your target market places of work. • The environment; social, economic, legal and physical surroundings of the property. • Site; size of the property. • Improvements. These are additions in the property or buildings. PROPERTY TRANSFER PROCESS. This is how easy it is to transfer a real property from one person to another. Transferability creates value. Property transfer process is the process of promotion and negotiation of real estate which can significantly influence the cash flows it will earn. Promotion refers to the task of getting information about a property to its buyers. Negotiation is determining the agreeable price between a willing seller and a willing buyer. Unlike security market that are efficiently organized and centrally located and investors share similar objective, real estate are traded in generally illiquid market that are regional or local in nature and here transactions are aimed at achieving investors unique objectives. Thus availability of information will affect the value of real properties. ECONOMIC PRINCIPLES OF VALUE. 1. Principle of supply and demand. It states that as supply of a particular type of real property increases, relative to demand the market value will decrease and vice versa. The interplay of demand and supply determines market value. 2. The principle of change. It says that the forces of change affect specific properties, neighborhoods, cities and nations. The want and needs of buyers and sellers in the market place also change and this affects supply and demand and therefore value. 3. Principle of substitution. Properties that provide similar utility are considered substitutes. Among the available substitutes, consumers will generally choose one with the lowest price. 4. Principle of conformity. This principle states that the highest value realized in property that show a reasonable degree of sociological, economic and architectural similarity. 5. Principle of highest and best use. The principle says that property is most profitable if used in a way to which it is best adopted and for which the demand is greatest. 6. Principle of balance. It says that maximum value is created and maintained when the four agents of production are in balance. (I.e. labour, land, capital and entrepreneurship.). 7. Principle of contribution or marginal productivity. It says that the value of any one of the agents of production or any item of production is directly related to its contribution. I.e. the net income or the present value of the property. 8. Principle of increasing and decreasing returns. Incremental increases in capital or any one of the other factors of production will produce corresponding greater increase in value up to a point. Once maximum value is developed, any additional incremental increase in capital will produce a lesser corresponding increase in value. 9. Principle of competition. It states that when a property generates an income sufficient to satisfy the four factors of production, any excess is considered profit. A property that generates heavy profit attracts competition. If this competition is excess, it results in a situation where none of the competitors make adequate profits. 10. Principle of anticipation. It says that value is created by the anticipated future benefits of ownership which may be very different from those of the past. Therefore a realistic projection of future projection of future benefit is important when carrying out an appraisal. THE APPRAISAL PROCESS. This is the systematic procedure followed by an appraiser to ensure efficient and effective use of appraisal resources. The following are the steps involved:- 1. Physical and legal identification. At this stage, the physical location of the property is identified; this involves:- - Identifying the physical attributes and amenities around the property. - The legal status of the property is also identified including the owner, if the property has been used as collateral, is it under mortgage, is it a foreclosure e.t.c. 2. Identify the property rights to be valued. At this stage the appraiser is concerned with which rights of the property are to be valued e.g. ownership rights, rental rights, lease rights, mineral rights. This is important because different rights influence the value of real property differently. 3. Specify the purpose of the appraisal. At this stage the reason for appraising the property is specified. The various reasons may include:- - To be used as collateral. - Accounting purposes. - For sale. - For insurance. 4. Specify the effective date of the value estimate. Real estate value changes over time and a value estimate is valid only at that time that valuation is done. 5. Gather and analyze market data. At this stage the valuer/appraiser collects data on factors that affect the value of the real property. There are two types of market data:- - Macro market data. Macro market data includes factors such as population trend, employment levels, neighborhood factors e.g. transport facilities, price range of housing within the area, recreational facilities, nuisances, general appeal and availability of public utilities. - Micro market data. This relates to the forces within the property itself that may create or destroy value. This includes specific site, improvements on the property, quality of construction e.t.c. The information gathered should be analyzed in order to identify the impact on the property value. 6. Apply the appropriate valuation technique in order to estimate the value. At this stage the appraiser selects the appropriate appraisal technique and values the property. There are various methods that can be used in valuation e.g. - The cost approach to value method. - Income approach method. - Profit method. E.t.c. 7. Analysis and reconciliation. The value estimates obtained from various methods are reconciled so as to arrive at a final estimate of value. 8. Appraisal report. This is writing an opinion of value in a written report to the client so that he can use it for whatever reason valuation was done.
Posted on: Wed, 03 Dec 2014 12:14:53 +0000
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