English
Intended Use, Users, and Value Proposition
1. Intended Use:
The intended use refers to the purpose for which the client needs the appraisal❓. Knowing the intended use is critical as it determines the type of value required, the scope of the research, and the level of detail needed in the report. Examples include obtaining a loan, settling an estate, insurance, expropriation procedures, and settling marital disputes.
For a loan, the focus is on market value, considering comparable sales and market conditions. For insurance, the focus is on the replacement cost of the building.
2. Intended Users:
Intended users are the parties who will rely on the appraisal to make decisions. This includes the client who requested the appraisal, and any other parties the appraiser knows will use the appraisal. Examples include the client, lender, court, insurance company❓, and government agencies.
The appraiser has a responsibility to the intended users to provide an accurate and reliable appraisal, exercise due diligence in data collection and analysis, and present the findings in a clear and understandable manner. The appraiser must also disclose any potential biases or limitations that may affect the credibility of the appraisal.
3. Standard of Value:
The standard of value refers to the type of value the client requires. It defines the basis upon which the valuation will be based. Common types include:
- Market Value: The estimated amount for which a property❓ should exchange on the valuation date between a willing buyer and a willing seller in an arm’s-length transaction, after proper marketing, wherein the parties had each acted knowledgeably, prudently, and without compulsion.
- insurance value❓❓: The cost of replacing the building in case of damage or destruction.
- Tax Value: The value used by tax authorities to assess property taxes.
- Value in Use: The value the property represents to a specific user, which may differ from market value.
- Investment Value: The value the property represents to a specific investor, based on expectations of future cash flows.
The appraiser must choose the appropriate standard of value based on the intended use of the appraisal and the client’s requirements. For a loan, market value is used. For insurance, insurance value is used.
The Discounted Cash Flow (DCF) method can be used to estimate investment value:
PV = Σ (CFt / (1 + r)^t)
Where:
* PV = Present Value
* CFt = Cash Flow in period t
* r = Discount Rate❓❓
* t = Time Period
4. Scope of Work:
The scope of work defines the procedures the appraiser will take to complete the assignment, including the scope of research and analysis, and the level of detail in the report. It is influenced by the intended use, intended users, and standard of value. The appraiser must define the scope of work carefully to ensure that the appraisal meets the client’s needs and the requirements of the assignment, and disclose any limitations on the scope of work.
5. Practical Applications and Related Experiences:
- Case Study: A real estate development company planning to build a residential complex requests an appraisal to determine the value of the land before starting the project. In this case, the intended use is to assess the feasibility of the project, the intended users are the company and potential investors, and the standard of value is the market value of the land.
- Experience: The appraiser is conducting an appraisal of a residential property for the purpose of obtaining a loan. The appraiser discovers that the property is located in an area prone to flooding and must disclose this information in the report and its potential impact on the value of the property.
Chapter Summary
The chapter addresses the concepts of intended use, intended users, and standard of value in real estate appraisal.
Standard of Value: Represents the type of value information❓ the client❓ needs (e.g., market value, insurance value, tax value, use value, investment value). It is the first and most important step in the appraisal process.
Intended Use: Refers to the purpose for which the client plans to use the appraisal (e.g., obtaining a loan, determining❓ value for government acquisition, settling an inheritance, determining insurance amount). Understanding the intended use affects the selection of appraisal methods and necessary data.
Intended Users: Refers to the client(s) who will rely on the appraisal. Identifying intended users determines the required level of research and the complexity of the final report.
These three❓ concepts (standard of value, intended use, intended users) integrate to define the scope of work for the real estate appraiser. More complex intended uses and multiple users require deeper research and more detailed analysis.
The chapter lists potential uses of appraisals, such as determining sale prices, purchase prices, loan collateral, insurance amounts, project feasibility, fair compensation for expropriation, taxes, investment opportunities, legal evidence, and property division in divorce. An appraisal designed for one use and user may not be suitable for another.
Implications:
- Scope of Work: These concepts help accurately define the scope of work.
- Appraisal Methods: The standard of value and intended use influence the selection of appropriate appraisal methods and data.
- Trust in Appraisal: Clearly defining intended users ensures the appraisal is reliable and relevant to all concerned parties.
- Reduced Legal Risks: Understanding intended use and intended users helps reduce legal risks.
Understanding intended use, intended users, and standard of value is critical for appraisers to provide accurate and reliable appraisals that meet the needs of clients and intended users. These concepts define the required scope of work and influence the selection of appropriate appraisal methods, ultimately leading to high-quality appraisals.
