English
Real Estate Valuation Principles: Practices and Professional Standards
Core of Real Estate Appraisal: Art and Science
Real estate appraisal is a blend of art and science, relying on experience and sound judgment, alongside theoretical knowledge and adherence to correct procedures. A good appraisal consists of:
- Honesty: Integrity and transparency.
- Experience: Knowledge gained through practice.
- Theory: Understanding of economic principles.
- Knowledge: Familiarity with local markets and regulations.
- Correct Procedures: Adherence to professional standards.
- Common Sense (Judgment): Informed decision-making.
- Analytical Ability: Systematic examination of data.
- Communication Skills: Clear explanation of results.
- Professionalism: Adherence to ethics.
- Continuous Updating: Keeping up with market changes.
Real Estate Appraisal Practices
Real estate appraisal practices include:
- Appraisal: Estimating property value.
- Appraisal Review: Examining the quality of another appraisal.
- Real Estate Consulting: Providing advice on real estate matters.
Appraisal is the process of estimating property value, while consulting deals with marketability, development analysis, land use, and investment analysis. Consulting may require value judgments but not necessarily for valuation or review purposes.
A consultant should not advocate for a client’s interest and must classify their work as consulting. A reviewer develops and communicates an opinion about the quality of another appraiser’s work.
History of Real Estate Appraisal
The modern appraisal industry in the U.S. traces back to the “Black Monday” of 1929.
- 1929: The Appraisal Division of the National Association of Real Estate Boards published the first nationally recognized standards for appraisal practice.
- 1932: The Appraisal Division became the American Institute of Real Estate Appraisers.
- 1990: The Society of Real Estate Appraisers merged with the American Institute of Real Estate Appraisers to form the Appraisal Institute.
The Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA) provides guidelines for regulating financial institutions, requiring state-level licensing and certification for appraisers and establishing nationwide competency standards.
The Appraisal Foundation
The Appraisal Foundation was established to set appraisal standards and appraiser qualifications for licensing and certification. Licensing and certification authority was granted to the states, overseen by The Appraisal Foundation under Title XI of FIRREA.
- The Appraisal Subcommittee monitors state regulatory agencies.
- States must comply with appraisal standards set by the Appraisal Foundation’s Appraiser Qualifications Board.
- The Appraisal Foundation’s standards apply to “federally related transactions.”
Federally related transactions involve a federal agency or regulatory or insured agency, including mortgage loans intended for sale in the secondary market.
Exemptions: Residential transactions of \$250,000 or less and non-residential transactions of \$1 million or less are exempt from licensed or certified appraiser requirements.
Purposes and Uses of Valuation
Potential land uses are affected by geographical, legal, social, and economic considerations.
- The appraisal standards board❓❓ of The Appraisal Foundation developed the Uniform Standards of Professional Appraisal Practice (USPAP).
- The Appraisal Foundation adopted statements integral to the standards, illustrating how to apply the requirements.
- Advisory Opinions indicate advice and opinions of the Appraisal Standards Board.
Impact of FinTech on Real Estate Appraisal
FinTech, especially mobile technology, has revolutionized real estate appraisal:
- Speed: Appraisals can be initiated before reaching the property.
- Accuracy: Forms are synced and filled online, reducing errors.
- Lower Cost: Appraisers save time, enabling more appraisals.
- Easy Payment: Invoicing can be done immediately using payment apps.
Value Appraisal Models
Methods for assessing real estate value include:
- Sales Comparison Approach: Comparing the subject property to similar properties recently sold in the same area, with adjustments made for differences.
- Cost Approach: Estimating the cost to build a new, similar property, then deducting depreciation to arrive at the property’s value.
- Income Approach: Estimating the income the property can generate and applying a capitalization rate to determine value.
Income Approach Equation:
Value = NOI / Cap Rate
Where:
- Value = Property Value
- NOI = net operating income❓❓
- Cap Rate = Capitalization Rate
Chapter Summary
The chapter discusses the fundamentals of real estate appraisal, focusing on professional practices and ethical standards. Appraisal is important for sound financial decisions. The history of appraisal and its evolution with modern technologies is covered.
Foundations of Real Estate Appraisal:
- Sound appraisal relies on integrity, experience, theoretical knowledge, correct procedures, and sound judgment.
- Appraisal practice includes valuation, review, and consulting services, which differ from other valuation services. These terms are not mutually exclusive; review may require an opinion of value.
- Consultants provide marketing, development, land use, and investment analysis, potentially including value opinions. Consultants must adhere to USPAP rules of conduct, record keeping, competency, and scope of work.
- A review develops and reports an opinion on the quality of another appraiser’s work.
History of Real Estate Appraisal:
- The modern appraisal industry in the U.S. originated during the great depression❓ of 1929. Appraisal was not considered an independent profession, and lacked standards and guidelines.
- In 1929, the first nationally recognized standards were published by the Appraisal Division of the National Association of Real Estate Boards.
- The Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA) set guidelines for regulating financial institutions, mandated appraiser licensing and certification, and established requirements for nationwide competency standards and USPAP.
The Appraisal Foundation:
- The Appraisal Foundation was established in response to FIRREA by major appraisal organizations to set appraisal standards and appraiser qualification criteria.
- Government regulatory agencies❓ are overseen by the Appraisal Subcommittee, which also monitors the Appraisal Foundation and federal financial institution regulatory agencies.
- States must comply with the appraisal standards set by the Appraiser Qualifications Board of the Appraisal Foundation.
- The Appraisal Foundation’s standards apply to “federally related transactions,” involving a federal agency, regulatory agency, or insured agency.
Purposes and Uses of Appraisal:
- Potential land uses are influenced by geographic, legal, social, and economic considerations. These considerations form the background for appraisal activities.
Appraisal Standards:
- The appraisal standards board❓ of the Appraisal Foundation developed the Uniform Standards of Professional Appraisal Practice (USPAP).
Modern Technologies (FinTech):
- Financial Technology (FinTech) has positively impacted the appraisal process, increasing speed and accuracy, reducing costs, and facilitating payments. Mobile devices have replaced traditional briefcases.
