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Site Inspection Fundamentals: Property Attributes and Use Analysis
Site Inspection Fundamentals: Property Attributes & Use Analysis
Introduction
A crucial aspect of real estate valuation is the thorough site inspection. This process extends beyond a typical property inspection, which focuses on identifying structural defects. An appraiser’s site inspection aims to understand the property’s characteristics, its influence on market value, and its conformance to its surroundings. This chapter will delve into the fundamental principles of property attribute analysis and use analysis conducted during a site inspection.
1. The Purpose of a Site Inspection
A site inspection is not merely a visual walkthrough; it’s a systematic investigation aimed at:
- Gathering Primary Data: Direct observation of the site and improvements provides firsthand information on property characteristics, condition, and potential issues.
- Contextualizing the Property: Understanding the immediate surroundings, nearby improvements, and land uses is essential to assess the property’s place within the market.
- Facilitating Comparisons: Accurately comparing the subject property to comparable sales and income properties is critical for valuation, particularly in the sales comparison and income capitalization approaches.
- Informing Cost Estimation: In the cost approach, a precise inventory of building components and materials is necessary for accurate cost estimations.
- Identifying Value-Influencing Factors: Observing property attributes that enhance or detract from the value, allowing market-derived adjustments.
2. Property Attributes: A Scientific Approach
Analyzing property attributes requires a systematic and objective approach. It involves assessing various components and characteristics, including:
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Building Description: This encompasses the design, layout, and construction details of the improvements.
- Structural Components: Foundation, framing, roofing materials – assessing their integrity and remaining useful life. Understanding principles of structural engineering is helpful here.
- Materials: Identifying materials used in construction and finishes. Consider their quality, durability, and maintenance requirements. Material Science provides insights.
- Energy and Water Efficiency: Identifying features that promote energy and water conservation (e.g., insulation, efficient windows, water-saving fixtures).
- Mechanical Systems: Evaluating HVAC (heating, ventilation, and air conditioning), plumbing, and electrical systems. Understanding system types, capacity, and condition is crucial.
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Size and Dimensions: Accurately measuring the property’s size is vital. Different metrics are used depending on the property type:
- Gross Building Area (GBA): Total floor area measured from the exterior walls.
- Gross Living Area (GLA): (Residential) Finished, above-grade living space.
- Gross Leasable Area (GLA): (Commercial) Area designed for tenant occupancy.
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Net Rentable Area (NRA): (Office) Area available for rent, excluding common areas.
Example: Calculating GLA for a two-story residential building:
- First floor: Length = 50 ft, Width = 40 ft; Area1 = 50 ft * 40 ft = 2000 sq ft
- Second floor: Length = 50 ft, Width = 40 ft; Area2 = 50 ft * 40 ft = 2000 sq ft
- GLA = Area1 + Area2 = 2000 sq ft + 2000 sq ft = 4000 sq ft
- Important: Only finished, above-grade areas are included.
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Condition and Quality: Assessing the overall condition of the improvements is critical.
- Quality: The level of workmanship, materials, and design. Categories range from low to high.
- Condition: The state of repair and maintenance. Categories range from poor to excellent.
- A qualitative assessment of the physical characteristics compared to the norm.
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Special Features: Unique or specialized designs, materials, or construction features that may impact marketability (either positively or negatively).
3. Use Analysis: Determining Conformity and Potential
Use analysis involves determining the legal permissibility and marketability of the property’s current and potential uses.
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Zoning Regulations: Understanding the zoning designation of the property is paramount. Zoning dictates:
- Permitted uses
- Density restrictions (e.g., floor area ratio, lot coverage)
- Height limitations
- Setback requirements
Example: A property is zoned “R-1” (Single-Family Residential). The appraiser must verify that the existing use (a single-family home) conforms to the zoning regulations. If it doesn’t, the property has a nonconforming use, which can affect value.
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Building Codes and Ordinances: Compliance with building codes is essential for safety and legality.
- Building codes regulate construction methods, materials, and mechanical systems.
- They ensure structural integrity, fire safety, energy efficiency, and accessibility.
- Municipal ordinances can add further restrictions or conditions.
- Keep aware of changes of building codes over time.
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Highest and Best Use Analysis: Determining the most probable and legal use of the property that is physically possible, appropriately supported, financially feasible, and results in the highest value. This involves:
- Legally Permissible: The use must comply with zoning regulations and building codes.
- Physically Possible: The site must be suitable for the proposed use (e.g., adequate size, soil conditions).
- Financially Feasible: The use must generate sufficient income or returns to justify the investment. (Evaluate the feasibility with a DCF).
- Maximally Productive: Among all feasible uses, the one that generates the highest net return or value is the highest and best use.
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Use Classification: Categorizing the property’s use based on market norms. Common classifications include:
- Residential
- Office
- Retail
- Industrial
- Mixed-Use
- Agricultural
- Other Specialized Uses
4. Green and High-Performance Buildings
The growing importance of sustainability necessitates a specialized approach to analyzing green and high-performance buildings.
- Green Building Certification: Identifying certifications like LEED (Leadership in Energy and Environmental Design) or Energy Star.
- Energy Performance: Evaluating energy consumption using benchmarking data and energy reports.
- Water Efficiency: Assessing water-saving fixtures and landscaping techniques.
- Special Incentives: Determining any tax advantages or incentives associated with green building features.
- Market Perceptions: Understanding how the market values green features in the specific location.
5. Addressing Uncertainty
Appraisers may encounter situations where they lack the expertise to fully assess specialized equipment or atypical building materials. In these cases:
- Reliance on Experts: Consult with qualified professionals (e.g., engineers, contractors) to obtain specialized information.
- Extraordinary Assumptions: If the condition of the property on the effective date of valuation is uncertain, an extraordinary assumption may be required, stating that the property condition was as described in the report.
6. Practical Applications and Experiments
- Comparative Analysis: Conduct a comparative analysis of two similar properties – one conforming to current building codes and another with outdated systems. Quantify the impact of the building code updates to value.
- Benchmarking Study: Analyze the energy consumption of a building and compare it to similar buildings using available benchmarking databases. Calculate the potential cost savings from energy-efficient upgrades.
- Zoning Variance Experiment: Research the possibility of obtaining a zoning variance for a property with a nonconforming use. Evaluate the impact of a successful variance on property value.
7. Conclusion
A comprehensive site inspection, incorporating both property attribute analysis and use analysis, is essential for accurate real estate valuation. By applying scientific principles, understanding market dynamics, and leveraging expert knowledge, appraisers can develop credible opinions of value that reflect the true potential of the property.
Chapter Summary
Site Inspection Fundamentals: Property Attributes and Use Analysis - Scientific Summary
This chapter addresses the critical role of site inspections in real estate valuation, differentiating them from general property inspections. While property inspectors focus on structural defects, appraisers analyze property attributes to determine their influence on market value. A site visit is crucial for collecting primary data by observing the property and its surroundings to understand its context and compare it to comparable properties, which is essential for the sales comparison and income capitalization approaches. Accurate building cost estimation in the cost approach relies on detailed inventory of building components.
The summary highlights the importance of understanding the condition of improvements, even if they have been demolished, necessitating extraordinary assumptions if the appraiser lacks certainty. For specialized properties, appraisers may need to rely on the expertise of other professionals and blueprints. Identification of new building components like energy-efficient upgrades is also vital.
The chapter emphasizes a detailed building description encompassing design, layout, construction details, structural components, materials, energy/water efficiency, and mechanical systems. The function, condition, and serviceability of each building element are evaluated. A key aspect is differentiating between real property and personal property, especially fixtures, and assessing their impact on functionality and marketability. The building description provides a basis for comparing the subject property with market standards and the highest and best use.
Understanding building construction processes and essential systems is necessary to assess quality and condition, along with awareness of how market trends influence perception and valuation. The chapter specifically addresses the challenges posed by “green” or high-performance buildings, highlighting potential lower operating costs, tax advantages, and improved marketability, and noting that the income capitalization and cost approaches may be more credible than the sales comparison approach if there is a limited number of sales of these types of properties in the given market.
The summary also covers the classification of land uses (residential, office, retail, industrial, mixed-use, agricultural, and specialized), emphasizing the importance of aligning with market-specific definitions. Zoning regulations and building codes are examined as constraints on existing and potential land uses. The integration of green and high-performance features into newer building codes, addressing energy/water use and resilience, is highlighted. The use of benchmarking to compare a building’s energy performance against similar buildings or reference standards is discussed, especially in the context of the availability of public energy benchmarking databases.
The importance of accurate building size calculation is stressed, acknowledging variations in measurement techniques across regions and property types and the influence of those biases on value opinions. Key distinctions between gross building area, gross living area, usable area, and rentable/leasable area are clarified. Measurement standards from federal agencies and organizations like BOMA are referenced. Appraisers should not accept statements about the size of a subject or comparable property without knowing the basis for the calculation, to avoid erroneous or misleading value opinions.
Finally, the chapter provides a framework for a comprehensive building description, including exterior, interior, equipment, and mechanical systems details. The details of any green certifications are described, and their impact analyzed. Addenda such as the Residential Green and Energy Efficient Addendum and the Commercial Green and Energy Efficient Addendum are presented as tools to use when inspecting those special buildings.
