Purpose and Use of Appraisals
Appraisal — Appraisal is defined as the act or process of estimating value.
Consulting — Consulting is the act or process of providing information, analysis of real estate data, and recommendations or conclusions on diversified problems in real estate, other than estimating value.
Appraisers perform analyses and render opinions or conclusions relating to the nature, quality, value, or utility of specified interests in, or aspect of, identified real estate. Real estate appraisal involves selective research into appropriate market areas; the assemblage of pertinent data; the use of appropriate analytical techniques; and the application of knowledge, experience, and professional judgment to develop an appropriate solution to an appraisal problem.
The value estimated may be market value, insurable value, investment value, or some other properly defined value of an identified interest in real estate as of a given date. Valuation assignments may produce market value estimates of fee simple estates, leasehold estates, preservation easements, and many other interests.
In an appraisal assignment, the appraiser provides the client with an estimate of real property value which reflects all pertinent market evidence.
Consulting assignments include land utilization studies, supply and demand studies, economic feasibility studies, highest and best use analyses, and marketability or investment considerations that relate to proposed or existing developments.
In a consulting assignment, current market activity and evidence are studied to form a conclusion which may not focus on a specific value indication.
To avoid misunderstandings, it is important that the client and the appraiser determine at the outset whether the assignment is an appraisal or a consulting assignment.
Characteristics of Real Estate Appraising
A real estate appraisal is a supportable and defensible estimate of the value of specified property rights as of a given valuation date. Every real estate appraisal and appraisal report must state clearly the rights appraised and the valuation date. Therefore, while the objective of any appraisal is to estimate value, the particular value to be estimated must be specified. By far the most common and usual objective of real estate appraisal is to estimate market value. The type of value to be estimated in any appraisal dictates the data to be gathered and used in the appraisal, as well as the analytical valuation techniques to be employed.
Role of Appraisals and Appraisers
Appraisals are made because a client or employer has a decision to make, a question to answer, a choice to make, or a course of action to choose. An appraisal does not recommend or tell you what to do. It merely provides you with a supportable and defensible opinion of value. The nature of the question or decision determines what value is to be estimated and, therefore, the objective of the appraisal. The appraisal report should be a complete self-contained document that can stand alone on its own merits.
Purpose and Use of an Appraisal
The purpose of an appraisal is the stated reason and scope of an appraisal assignment, i.e., to estimate a defined value of any real property interest or to conduct an analysis or consulting assignment to real property decisions.
The purpose of an appraisal is established by the client. It points to the information that the client needs to answer specific questions pertaining to real property. When an estimate of value is required in an appraisal, the type of value sought must be defined at the outset. The defined value may be market value, insurable value, assessed value, use value, investment value, or another type of value. Because an appraisal provides a basis for a decision concerning real property, the use of an appraisal depends on the decision the client wishes to make.
An appraisal may be requested in a number of situations such as:
- Transfer of ownership
- To help prospective buyers set offering prices.
- To help prospective sellers determine acceptable selling prices
- To establish a basis in real property
- To establish a basis for real property exchanges
- To establish a basis for reorganizing or merging the ownership of multiple properties
- To determine the terms of a sale price for a proposed transaction
- Financing and credit
- To estimate the market value of a property as a whole (i.e., before a taking)
- To estimate the market value of the remainder after a taking
- To estimate the damages to a property created by a taking
- To estimate the market value of a property in contract disputes
- To estimate the market value of real estate as part of a portfolio
- To estimate the market value of partnership interests
- To estimate damages created by environmental violations
- To estimate damages created by environmental accidents
- Tax matters
- To estimate assessed value
- To separate assets into depreciable (or capital recapture) items such as buildings and non-depreciable items such as land
- To estimate the value of the real estate component of an estate plan which represents the foundation for future capital gains and inheritance taxes
- To determine inheritance and gift taxes Investment counseling and decision making