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Real Estate Valuation: From Traditional Practices to Digital Technology.
Fundamentals of Real Estate Appraisal:
- Real estate appraisal is an estimation of a property’s value at a specific date, based on a comprehensive analysis of relevant data and information.
- Valuation is based on a defined value, such as Market Value, Insurance Value, or Liquidation Value.
- The purpose of the appraisal must be clearly defined, such as for mortgage financing, taxation, or litigation.
- The intended user of the appraisal must be identified, such as banks, insurance companies, or courts.
- The relationship between supply and demand significantly affects property values.
- A buyer should not pay more than they would for a similar property.
- A property must have utility for a potential buyer.
- The value of any component in a property depends on its contribution to the total value.
- Property value is affected by future expectations, such as potential developments in the area.
- Real estate is subject to constant change, whether in its physical condition or in the surrounding environment.
- Properties that conform to their surroundings tend to be more valuable.
- There must be a balance between the different components of the property to achieve maximum value.
- fee simpleโโ: The highest type of ownership, where the owner enjoys full rights.
- Life Estate: The right to use and benefit from the property for the duration of a person’s life.
- Leasehold Estate: The right to possess the property under a lease agreement for a specified period.
- Possessory Rights: The right to possess and use the property.
- Freehold Estates: Include Fee Simple and Life Estate.
- Leasehold Estates: The right to possess under a lease agreement.
- Easements: The right to use a portion of another property for a specific purpose.
- Liens: The right of a creditor to satisfy a debt from the value of the property.
Traditional Real Estate Appraisal Methods:
- Sales Comparison Approach:
- Compares the property being appraised with similar properties that have been recently sold in the same area.
- Adjustments are made to the sales prices of comparable properties to reflect differences between them and the property being appraised.
- Value of Property = Sale Price of Comparable ยฑ Adjustments
- Adjustments include differences in features such as square footage, number of bedrooms, lot size, location, condition, etc.
- If a comparable property sold for $500,000, and the property being appraised has a larger area (adjustment of +$20,000) and a better condition (+$10,000), the estimated value of the property being appraised would be $530,000.
- Cost Approach:
- Estimates the cost of replacing the property with a similar new building, then deducting accumulated depreciation.
- Value of Property = Replacement Cost - Accumulated Depreciation + Land Value
- Cost of Replacement includes direct costs (materials and labor) and indirect costs (fees, permits, insurance).
- Depreciation includes physical deterioration, functional obsolescence, and external obsolescence.
- If the cost of replacing a new building is $600,000, accumulated depreciation is $100,000, and the land value is $200,000, the estimated value of the property would be $700,000.
- Income Approach:
- Estimates the net income expected from the property, then divides it by the appropriate Capitalization Rate.
- Value of Property = net operating incomeโโ (NOI) / Capitalization Rate (Cap Rate)
- NOI = Gross Operating Income - Operating Expenses
- Cap Rate is derived from market data of similar properties.
- If the net operating income of the property is $50,000, and the capitalization rate is 10%, the estimated value of the property would be $500,000.
Digital Technology in Real Estate Appraisal:
- Field Data Collection Tools:
- Laser Measuring Devices: Provide accurate and fast measurements of spaces.
- Drones: Used for aerial photography of properties and surrounding areas, providing a comprehensive view.
- Mobile Apps: Used to collect data, record notes, capture photos, and scan barcodes.
- The appraiser uses his tablet to take pictures of the property from the front, back and street. He also uses a tape measure to measure the building.
- Real Estate Appraisal Software:
- Data Management Software: Helps organize and store real estate data, such as sales information, rental data, and tax information.
- Statistical Analysis Software: Used to analyze data, identify trends, and predict property values.
- Mapping Software: Used to create maps and illustrations of properties and surrounding areas.
- Report Writing Software: Helps create professional and organized appraisal reports.
- Online Data Sources:
- Sales Databases: Provide information on recent property sales, including prices and specifications.
- Listing Websites: Provide information on properties offered for sale or rent.
- Public Records: Provide information on ownership, taxes, and mortgages.
- The appraiser automatically uploads information from similar property websites to fill out the new form.
- AI & Machine Learning:
- Used to analyze large amounts of data and identify patterns and relationships that may not be obvious to the human appraiser.
- Used to develop predictive models for property prices.
- Payment Applications:
- Facilitate the collection of appraisal fees from customers directly using payment applications on smartphones.
- The appraiser collects the appraisal fees from the doctor using a payment application on his smartphone.
Challenges and Ethical Considerations:
- Appraisers must be aware of potential biases in the data used in the appraisal, such as racial or gender biases.
- Appraisers must protect the personal data of their clients and take the necessary precautions to prevent cyber breaches.
- Appraisers must be transparent and ethical in all aspects of the appraisal process.
- Appraisers must keep up with the latest developments in real estate appraisal and digital technology through ongoing training and professional development.
Future of Real Estate Appraisal:
- Real estate appraisal will become more reliant on digital technology, such as AI, machine learning, and blockchain.
- Automated Valuation Models (AVMs) will become more accurate and reliable, and may replace human appraisal in some cases.
- The valuation of green and sustainable properties will become more important.
- The appraiser is an expert in green buildings and is LEED certified.
- The role of the real estate appraiser will expand to include advising clients on real estate investment strategies and risk management.
Chapter Summary
The chapter provides an overview of real estate appraisal, focusing on the shift from traditional methods to modern digital technology.
- Real Estate Appraisal Definition: An estimate of a propertyโ’s value at a \data\\โ\\-bs-toggle="modal" data-bs-target="#questionModal-280604" role="button" aria-label="Open Question" class="keyword-wrapper question-trigger">specific date basedโ on the appraiser’s expertise and professional judgment, using market data and property analysis.
- Importance of Appraisal: Vital in real estate transactions like buying, selling, financing, and insurance, and assists in making informed investment decisions.
- Government Regulation: Emphasizes the importance of government regulation of the appraisal profession, including licensing, certifications, and standardized professional practice standards to ensure credibility and transparency.
- Types of Values: Appraisal is linked to a specific value, defining terms like “standard of value,” which determines the type of value for the client, “intended use,” which refers to the client’s plans, and “intended user,” which refers to who relies on the appraisal information.
- Types of Appraisers: Differentiates between “staff appraisers” providing valuation services for employers and “fee appraisers” providing services to others on a contractual basis.
- Types of Property: Covers the types of propertiesโ appraised, including real property (land and improvements) and personal property (movable). Real property includes land and fixed buildings, while personal property is movable. Determining whether an item is real or personal property considers the method of attachment, adaptability to the real property, relationship of the parties, intentions of the parties involved, and agreement of the parties.
- Real Property Rights: Real estate consists of a bundle of rights which can be divided, leading to different types of real estate interests.
- Possessory Interests (Estates): Have the exclusive right to use and occupy real property, either now or at some point in the future.
- Includes fee simpleโ estates (the most complete form of real property interest) and life estates.
- Leasehold estates grant the right to possession but not ownership, created by lease agreements, with common types being estate for years (fixed-term lease) and periodic tenancy (periodic lease).
- Non-Possessory Interests: Referred to as encumbrances, may be financial or non-financial.
- Financial encumbrances (liens or security interests) grant the right to sell the property to repay a debt, with the sale occurring through foreclosure. Liens may be general or specific, voluntary or involuntary.
- Easements grant a non-exclusive right to use someone else’s property for a specific purpose. Easements that benefit a parcel of land are appurtenant to that land, while easements that do not benefit land are easements in gross.
- Possessory Interests (Estates): Have the exclusive right to use and occupy real property, either now or at some point in the future.
- Digital Technology: Explores how mobile financial technology (FinTech) has changed the way appraisal data is collected and accurate valuations are provided, with an example of an appraiser using a tablet to capture photos, measure buildings, and create diagrams, as well as using apps for payments.
- Practical Example: An appraiser (Andy) uses tablet technology for on-site photos and measurements, completing multiple appraisals in a day and receiving electronic payments.
- Future Opportunities: Appraisers who adapted to technological changes have thrived, and there is always a need for real estate appraisers despite technological advancements.
Conclusions:
- Digital technology has revolutionized the real estate appraisal process, making it faster, more efficient, and more accurate.
- Adapting to modern technology is essential for real estate appraisers to remain competitive and achieve success.
- Despite technological advancements, professional judgment and human expertise of real estate appraisers remain necessary for providing accurate and reliable valuations.
