The Nature and Purpose of Appraisals
A substantial portion of the private, corporate, and public wealth of the world consists of real estate. The very magnitude of this fundamental resource in our society creates a need for informed appraisals to support decisions pertaining to use and disposition of real estate and the rights inherent in ownership. Appraising these rights is the art of solving an identified problem by finding and assembling facts, analyzing the facts, and forming applicable conclusions.
An appraisal is the process and result of an attempt to answer one or more specific questions about a real estate parcels defined value, marketability, usefulness, or suitability. This definition permits application of the term to any such estimate whether it is an informed conclusion based on evidence or simply a personal opinion. As used here, the term appraisal implies that some level of professional expertise is employed in developing the appraisal estimate. The reliability of an appraisal depends on the basic competence and integrity of the appraiser, the availability of pertinent data, and the skill with which the data is processed. An appraisal is an opinion of one or more specifically defined economic factors relating to adequately described property as of a specified date supported by the analysis of relevant data.
A professional appraisal is a supportable opinion. It goes beyond any personal feeling of the appraiser. In some assignments it reflects market evidence and a conclusion of market value, derived by appropriate data analysis in conformity with standards of professional practice.
Estimations of market value have been the most frequent type of appraisal assignment, and the public perception of appraisal activity is probably limited to such assignments. However, because of their specialized training and experience, appraisers are called upon to provide a wide range of additional appraisal services from consultation to key roles in decision-making situations related to real estate.
To reflect the broad scope of appraisal activity and to distinguish between the specific field of market value estimation and the expanding area of other related assignments, a distinction is recognized between valuation and evaluation.
Valuation is the act or process of estimating the market value of one or more identified interests in a specific parcel of real estate as of a given time. Any other type of appraisal assignment is evaluation.
Evaluation is a broad term that is applied to studies of the nature, quality and utility of any parcel of real estate or any interest in, or aspect of, real property including value estimates other than market value. The purpose is to provide solutions to real estate problems that do not necessarily include market value. Land utilization studies, supply and demand studies, economic feasibility studies, highest and best use analyses, marketability or investment considerations for a proposed or existing development, and similar research-related studies are examples of evaluation assignments. They are generally of an economic nature and often involve some aspect of value.
Because confusion about the type of assignment can arise and because certain types, such as market value estimation, require special definitions and processes, the appraiser clearly identifies the nature of the assignment during the appraisal and in final reports. Standards of professional practice and codes of ethics also have been developed to guide the appraisers action.
The fundamental purpose of an appraisal assignment is to provide an estimate of value to be used in making reasoned real estate decisions. The value most commonly sought is market value. However, other concepts of value may be appropriate, depending on the use for which the client requires an appraisal.
The need for an appraisal of market value may arise from many situations:
| 1. | Transfer of Ownership |
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| 2. | Financing and Credit |
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| 3. | Just compensation in expropriation proceedings |
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| 4. | Realty decision-making |
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| 5. | A basis for taxation |
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| 6. | A basis for rental schedules and lease provisions |
| 7. | Feasibility in relation to a renovation program |
| 8. | A basis for corporations or third-party companies to purchase homes of transferred employees |
| 9. | Other situations in which a decision about real estate is necessary |
An appraisal may be required for a value other than market value:
| Insurable value | a concept of replacement cost to serve the needs of insured, insurer, and adjuster |
| Going concerns value | a concept of value that includes tangible assets plus intangibles such as goodwill or going business value. It may be used in corporate mergers, the issuance of stock, or revision of book value. |
| Liquidations value or price | a value or price for forced sale or auction proceedings. |
| Assessed value | a uniform schedule for tax rolls in an ad valorem taxation. This schedule may not conform to market value but usually bears some relation to a market value base. |
| Value in use | a concept reflecting the economic contribution of the real estate to the enterprise of which it is a part. This is particularly applicable to real estate for which no rental or sale market can be defined. |
Although this list does not include all the needs for appraisals, it indicates the broad scope of the professional appraisers activates and illustrates some of the values that may be important in real estate decisions.
Reprinted with permission of the AMERICAN INSTITUTE OF REAL ESTATE APPRAISERS