Assessment Purpose: Valuation, Users, and Intended Uses.

Purpose of Appraisal: Determining Value, Users, and Intended Uses

This chapter aims to clarify the importance of defining the purpose of a real estate appraisal by identifying the type of value required, the intended users of the appraisal report, and the uses for which the appraisal will be used.

First: Determining the Standard of Value

In real estate appraisal practice, the terms “purpose” and “use” of the appraisal were used. With the development of the profession, the term “purpose” was replaced by the term “Standard of Value.”

“Standard of Value” refers to the type of value information the client requests from the appraiser. Is the client looking for Market Value, Insurance Value, Tax Value, Value in Use, or Investment Value?

Examples of Different Standards of Value:

• Market Value: The most probable estimate of the amount for which the property should exchange on the valuation date between a willing buyer and a willing seller in an arm’s length transaction after proper marketing, where the parties acted knowledgeably, wisely, and without coercion.

  • Market Value Equation:
    MV = P(willing buyer, willing seller, arm’s length) @ Effective Date
    Where:
    • MV = Market Value
    • P = Probable Price
    • P(…) = A function specifying the terms of the transaction.

• Insurance Value: The value on which the insurance amount for the property is calculated, usually based on the cost of replacing the building or part of it in case of damage.

• Tax Value: The value determined by the tax authorities for the purpose of calculating taxes on the property.
• Value in Use: The value of the property to its current owner, based on the specific use the owner practices. Value in Use may differ from Market Value if the owner derives exceptional profits❓ from the property due to special factors.
• Investment Value: The value of the property to a specific investor, based on the investor’s investment goals and financial circumstances.

Second: Intended Uses

“Intended Use” refers to what the client plans to do with the appraisal. The appraiser must clearly understand the purpose of the appraisal, as it affects the required scope of work and the methodologies to be used.

Examples of Intended Uses of Appraisal:

1. Loan Application: Financial institutions use appraisal to assess real estate collateral before approving loans.
2. Determining Value for Expropriation (Eminent Domain) Purposes: Governments use appraisal to determine fair compensation❓ when expropriating real estate for public benefit.
3. Determining the Value of Property for Estate Settlement: Appraisal is used to determine the value of real estate for distribution to heirs.
4. Determining the Insurance Amount for a Building: Appraisal is used to determine the replacement value of the building in order to determine the appropriate insurance amount.
5. Determining the Value of Property for Sale: Appraisal is used to help sellers determine the asking price and evaluate offers.
6. Determining the Value of Property for Purchase: Appraisal is used to help buyers determine the offer price.

Third: Intended Users

“Intended Users” refers to the client or clients based on communication with the client(s) at the time of the assignment. Are there multiple readers of the report? Will others, other than just the client, rely on the information provided in the report?

Examples of Intended Users of Appraisal:

• The Client (who requested the appraisal)
• Lenders (in the case of appraisal for mortgage purposes)
• Courts (in the case of legal disputes)
• Tax Agencies
• potential❓ Investors
• Partners in Companies

Importance of Defining Intended Users and Uses:

Defining the Intended Users and Uses significantly affects:

• Scope of Work: Determines the extent of research and analysis required to complete the appraisal.
• Level of Detail in the Report: Determines the depth and complexity of the report to be prepared.
• Reliability: Ensures that the appraisal is relevant and reliable for the Intended Users.
• Legal Liability: Helps to determine the parties to whom the appraiser is liable.

Examples of Practical Applications and Relevant Experiences:

1. Appraisal of a property for mortgage purposes: In this case, the Intended User is the bank or financial institution providing the loan. The Intended Use is to determine the value of the property as collateral for the loan. The appraisal should focus on the Market Value of the property and consider the potential risks that may affect its value.
2. Appraisal of a property for the purpose of dividing the estate: In this case, the Intended Users are the heirs and the court. The Intended Use is to determine the value of the property for fair distribution among the heirs. The appraisal should focus on the Market Value of the property and consider any factors that may affect its value for the heirs.
3. Appraisal of a property for the purpose of determining taxes: In this case, the Intended User is the tax authority. The Intended Use is to determine the Tax Value of the property. The appraisal should follow the applicable tax rules and regulations.

Conclusion

Accurately defining the purpose of the appraisal – by identifying the type of value and the Intended Users and Uses – is a crucial step in the real estate appraisal process. Understanding these elements ensures that the appraisal is relevant, reliable, and useful to all parties involved, and helps protect their interests. It also contributes to promoting transparency and integrity in the real estate market.