Enter the complicated world of real estates


Real estate appraisal

A real estate appraisal is a servicethe parties had engaged. Another possibility
performed, by an appraiser, that develops anis that a specific buyer would be willing to
opinion of value based upon the highest andpay a price higher than the market value.
best use of real property. The highest andSuch situations often arise in corporate
best use is that use which produces thefinance, as per example when a merger or
highest possible value for the property. Thisacquisition is concluded at a price which is
use must be profitable and probable. Also ofhigher than the value represented by the
importance is the definition of the type ofprice of the underlying stock. The usual
value being developed and this must berationale for these valuations is that the
included in the appraisal, ie market value,'sum is greater than its parts', since full
condemnation value, quick sale value, etc.ownership of a company entails special
For improved residential property, this valueprivileges for the buyer for which he is
is most often reported on a standardizedwilling to pay. Such situations arise in real
form, the Uniform Residential Appraisalestate/property markets as well (see
Report.value-in-use). It is the task of the real
estate appraiser/property valuer to judge
In the USA appraisal standards are thewhether a certain price obtained under a
province of the Appraisal Foundation which iscertain transaction is indicative of market
chartered by Congress and periodocallyvalue.
publishes the Uniform Standard of
Professional Appraisal Practice (USPAP). TheMarket  value  definitions  in  the  US
USPAP state the minimum standards an
appraiser/appraisal report must meet. StateIn the US, "Fair Market Value" and "Fair
licensing was established in the early 1990sValue" are commonly used as accounting terms.
in the wake of the Savings and Loan "crisis".The equivalent appraisal term is "Market
Licensure and enforcement are stateValue." (USPAP Advisory Opinion 8.) USPAP
functions. In addition, there are appraisaldefines Market Value as "a type of value,
organizations, private not-for-profits, somestated as an opinion, that presumes the
of which date back to the Great Depression oftransfer of a property (i.e., a right of
the 1930s, such as the American Society ofownership or a bundle of such rights), as of
Farm Managers and Rural Appraisers, foundeda certain date, under specific conditions set
in 1929. Others were founded as needed andforth in the definition of the term
opportunity arose in specialized fields, suchidentified by the appraiser as applicable in
as the Appraisal Institute and the Americanan  appraisal".
Society of Appraisers (founded in the 1930s)
and the International Right of WayForming an opinion of market value is the
Association and the National Association ofpurpose of many real property appraisal
Realtors (after World War II). Theseassignments, particularly when the
organizations all existed to establish andclient’s intended use includes more
enforce standards, but their influence hasthan one intended user. The conditions
waned as the government increases appraisalincluded in market value definitions
regulation.establish market perspectives for development
of the opinion. These conditions may vary
In the UK, real estate appraisal is known asfrom definition to definition but generally
property valuation and a real estatefall  into  three  categories:
appraiser is a land valuer or property valuer
(usually a chartered surveyor who specialises1) The relationship, knowledge, and
in property valuation). Property valuation inmotivation of the parties (i.e., seller and
the UK is regulated by the Royal Institutionbuyer);
of Chartered Surveyors (RICS), a professional
body encompassing all of the building and2) The terms of sale (e.g., cash, cash
property-related professions. The RICSequivalent,  or  other  terms);  and
professional guidelines for valuers are
published  in  the  Red  Book.3) The conditions of sale (e.g., exposure in
a competitive market for a reasonable time
The reader should be aware that differencesprior  to  sale).
in nomenclature exist between the different
countries. Although the overall concepts are(Definitions:  USPAP  2005.)
very similar, the reader should be careful to
ascertain that the proper nomenclature isIn the US, a typical definition of market
being  used  for  their  particular  area.value can be found on the FNMA residential
appraisal forms, as the FNMA 1025, which
Types  of  valuestates  the  following:
There are several types and definitions ofDEFINITION OF MARKET VALUE: The most probable
value sought by a real estate appraisal. Someprice which a property should bring in a
of  the  most  common  are  listed:competitive and open market under all
conditions requisite to a fair sale, the
Market Value – The price at which anbuyer and seller, each acting prudently,
asset would trade in a competitive Walrasianknowledgeably and assuming the price is not
auction setting. Market value is usuallyaffected by undue stimulus. Implicit in this
interchangeable with fair market value ordefinition is the consummation of a sale as
fair value. However, the word "fair" is noof a specified date and the passing of title
longer in use when describing market value.from seller to buyer under conditions
The legal definition of market value iswhereby: (1) buyer and seller are typically
usually given by some variant of themotivated; (2) both parties are well informed
following: "The most probable price at whichor well advised, and each acting in what he
a property would trade in an arms-lengthor she considers his or her own best
transaction in a competitive and open market,interest; (3) a reasonable time is allowed
in which the buyer and seller each actfor exposure in the open market; (4) payment
prudently and knowledgeably and in which theis made in terms of cash in U. S. dollars or
price is not affected by any specialin terms of financial arrangements comparable
relationship  between  them".thereto; and (5) the price represents the
normal consideration for the property sold
Value-in-use – The net present valueunaffected by special or creative financing
(NPV) of a cash flow that an asset generatesor sales concessions* granted by anyone
for a specific owner under a specific use.associated  with  the  sale.
Value-in-use is the value to one particular
user, which may be above or below the fair'*'Adjustments to the comparables must be
market  value  of  a  property.made for special or creative financing or
sales concessions. No adjustments are
Investment value - is the value to onenecessary for those costs which are normally
particular investor, which may be above orpaid by sellers as a result of tradition or
below  the  fair market value of a property.law in a market area; these costs are readily
identifiable since the seller pays these
Insurable value - is the value of realcosts in virtually all sales transactions.
property covered by an insurance policy.Special or creative financing adjustments can
Generally it does not include the site value.be made to the comparable property by
comparisons to financing terms offered by a
third party institutional lender that is not
It is important to distinguish between marketalready involved in the property or
value and price. A price obtained for atransaction. Any adjustment should not be
specific property under a specificcalculated on a mechanical dollar for dollar
transaction may or may not represent thatcost of the financing or concession but the
property's market value: specialdollar amount of any adjustment should
considerations may have been present, such asapproximate the market’s reaction to
a family relationship between the buyer andthe financing or concessions based on the
seller, or else the transaction may have beenappraiser’s judgment.(FNMA form 1025,
part of a larger set of transactions in whichMarch 2005.)



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