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Value, Use, and Beneficiaries: Real Estate Appraisal Criteria
This chapter focuses on three fundamental and interconnected concepts in real estate valuation: Standard of Value, Intended Use, and Intended Users.
Identifying the required type of value is essential, such as market value, insurance value, or tax value. This guides the appraiser’s work and determines appropriate tools and methods. Understanding the purpose of the valuation is also critical, whether for financing, expropriation compensation, or estate settlement. Knowing the purpose helps define the scope of work. Identifying the intended users (e.g., current owner, potential buyer, financial institution) helps tailor the report to their needs for informed decision-making. Neglecting these concepts leads to inaccurate or misleading valuations, potentially resulting in financial losses or legal disputes.
The chapter aims to provide trainees with the knowledge and skills to understand and apply real estate valuation standards related to value, use, and beneficiaries. Upon completion, trainees will be able to: identify different types of value used in real estate valuation; determine the intended uses of real estate valuation and explain how the purpose affects the valuation process; determine the intended beneficiaries of the real estate valuation and explain how their needs affect the content of the report; apply these standards in different practical scenarios; understand how determining these factors (value, use, and beneficiaries) affects the scope of work of the appraiser.
Standard of Value:
- Refers to the type of value information requested by the client, such as Market Value, Insurance Value, Tax Value, Value in Use, or Investment Value.
- Market Value = Price + (Incentives - Concessions), where Price is the agreed price, Incentives are incentives for the buyer, and Concessions are concessions by the seller.
- Insurance Value: The cost to replace or rebuild the property❓ if damaged or destroyed. It usually excludes land value.
- Tax Value: The value determined by tax authorities for property taxation.
- Value in Use: The value of the property to its current owner, based on their specific use.
- Investment Value: The value of the property to a specific investor, based on their investment goals.
- Determining the appropriate standard of value is crucial as it guides the assessment process and influences the choice of methods and data used.
Intended Use:
- Refers to the purpose for which the client will use the valuation, such as obtaining a loan, determining value for expropriation purposes, settling an estate, or determining the required amount for building insurance.
- Examples include: obtaining a mortgage, settling an estate, expropriation for public benefit, insuring the property, determining value for tax purposes, making investment decisions, settling legal disputes, determining the selling or buying price, land use planning, and evaluating the feasibility of real estate projects.
- The intended use affects the scope of work required from the appraiser.
Intended Users:
- Refers to the client(s) who will rely on the valuation information.
- Examples include: the direct client, the lender (bank or financial institution), the insurance company, the court or executor, government agencies, and potential investors.
- Identifying the intended users affects the level of research and development required, as well as the depth and complexity of the report.
Scope of Work:
- The answers to the questions related to the standard of value, intended use, and intended users indicate the level of research and development required in addition to the depth and complexity of the report.
Career Opportunities in Real Estate Appraisal:
- Staff Appraisers: Work for a company, government agency, or other institution.
- independent❓ Fee Appraisers: Work for themselves or for companies whose primary business is providing valuation services to others.
Entities that employ appraisers:
- Independent Fee Appraisal Companies.
- Federal, state, and local government agencies concerned with taxes, land use, property management, construction, or loan guarantees.
- Financial institutions.
- Insurance companies.
- Real estate developers.
- Large corporations with significant real estate assets.
- Real estate investment funds.
- Franchisors.
Chapter Summary
The chapter clarifies basic concepts of real estate appraisal❓: Standard of Value, Intended Use, and Intended Users. These elements are important in determining the Scope of Work.
Standard of Value refers to the type of value sought, such as market value, insurance value, tax value, use value, or investment value. Identifying the required value type is fundamental.
Intended Use clarifies the purpose for which the appraisal will be used, such as obtaining a loan, determining compensation for expropriation, settling inheritance, or determining the appropriate insurance amount.
Intended Users refers to the parties who will rely on the appraisal information, including the client, sellers, buyers, lenders, insurance companies, government agencies, and courts.
The answers to questions about Value, Use, and Users define the Scope of Work. A greater number of potential users and diverse intended uses increases the depth of research and development required, and increases the complexity of report preparation.
Knowing the required value, intended use, and identifying intended users ensures the accuracy and suitability of the appraisal. An appraisal prepared for a specific purpose and specific beneficiaries may not be suitable for other uses or other beneficiaries. The Scope of Work is crucial in determining the quality and reliability of the appraisal and is directly affected by Value, Use, and Users.
The appraiser must understand the client’s needs and purpose of the appraisal to determine the appropriate type of value and scope of work. The appraiser must clearly identify the intended users to avoid misunderstandings or unintended use of the information. These concepts aid in understanding appraisal applications for determining sale prices, evaluating loan collateral, insurance purposes, land use planning, and settling legal disputes.
“Real Estate” refers to a specific plot of land, including improvements like buildings and infrastructure. “Improvements” are permanent additions to the land. “Fixtures” were personal property❓❓ but became real property when permanently attached. Whether an item is a fixture is determined by method of attachment, adaptability, relationship of the parties, intention, and agreement. “Personal Property” is tangible property not classified as real estate.
Value, Use, and Users are fundamental standards in real estate appraisal. Understanding and applying these concepts ensures accurate and reliable appraisals that meet client needs and achieve desired goals.
