Valuation Scope: Property, Rights, and Value Standard

Defining the Appraisal Scope:

Defining the appraisal scope is the first and most important step in the real estate appraisal process. It involves understanding the property to be appraised, the associated real property rights, and the appropriate standard of value. This requires a comprehensive understanding of the property, its rights, the purpose of the appraisal, and any limitations to ensure an accurate and reliable appraisal.

First: determining❓ the Scope of the Appraisal

The real estate appraisal process begins by defining the appraisal problem. This involves answering the following basic questions:

1. What is to be appraised? (The property and real property rights)
2. When is the appraisal being conducted? (Date of valuation)
3. Why is the appraisal being conducted? (Purpose of the appraisal)
4. How is the appraisal being conducted? (Scope of work, assumptions, and specific conditions)

A. What is to be Appraised?

To determine what will be appraised, the appraiser must clearly define three things:

1. Identifying the Real Estate:
   * Legal Description: The most accurate way to identify the property. The report should include the legal description and may also include the building name or common address.

   • Types of Legal Descriptions:
     • Metes and Bounds System: Uses reference points and measurements to define property boundaries.
     • Rectangular or Government Survey System: Relies on lines of longitude and latitude to define properties.
     • Lot, Block, and Tract System: Uses recorded maps to identify properties within land divisions.
   • Example:
   • Building Name: Palm Tower
   • Common Address: King Fahd Road, Riyadh, Saudi Arabia
   • Legal Description: Plot No. 12 of Plan No. 456/A, located in Al-Olaya District, Riyadh City, as shown in the records of the Riyadh Land Registration Office.

2. Identifying Real Property Interests:

   • Refers to the bundle of rights that someone holds in the property. The appraiser must identify the real property rights being appraised, as they significantly affect the property’s value.
   • Types of Real Property Rights:
     • Fee Simple: Represents the highest degree of ownership rights, where the owner has the full right to use and dispose of the property.
     • Leasehold: Grants the lessee the right to use the property for a specified period under a lease agreement.
     • Easement: Grants another person the right to use a portion of the property for a specific purpose (such as right of way).
   • Restrictions on Real Property Rights:
     • Mortgage: A right of the creditor on the property as collateral for a debt.
     • Zoning Regulations: Determine the permitted uses of the property.
     • Property Taxes: Annual financial obligations on the property.
     • Easements: May limit certain uses or allow a third party to access the property.

3. The Standard of Value:

   • Refers to the type of value the client seeks. The standard of value must be clearly defined, as the appraisal depends on it.
   • Types of Value Standards:
     • Market Value: The most probable price that a property should bring in an open and competitive market, where both the seller and buyer are aware of all relevant facts and act freely and without duress.
       • Market Value Formula (Simplified):
         MV = P * Pr(Sale)
         Where:
         • MV = Market Value
         • P = Probable Price
         • Pr(Sale) = Probability of Sale
     • Investment Value: The value that a specific investor places on the property, based on their own investment goals and criteria.
     • Liquidation Value: The value that can be obtained from selling the property quickly, usually under unfavorable conditions.

B. When is the Appraisal Being Conducted?

1. Effective Date of the Appraisal/Valuation Date:

   • The date on which the appraisal reflects market conditions and the estimated value. This date must be clearly stated in the appraisal report.
   • Types of Appraisal Based on Valuation Date:
     • Value as of the Current Date: The value is estimated at the present time.
     • Appraisal of Past Values: The value is estimated at a previous date. Often used in litigation or taxation.
     • Appraisal of Future Value: The expected value in the future is estimated. Often used in planning and real estate development.

2. Date of Appraisal Report:

   • The date the appraisal report was issued. It may differ from the actual valuation date.

C. Why is the Appraisal Being Conducted?

1. The Intended Use of the Appraisal:
   • The purpose of the appraisal must be clearly defined, as it affects the scope of work and the methodology used.
   • Examples of Purposes:
     • Mortgage Lending
     • Sale and Purchase
     • Taxation
     • Litigation
     • Insurance

D. How is the Appraisal Being Conducted?

1. Scope of the Appraisal:

   • Determines the type and extent of work to be performed by the appraiser. This includes determining the required data, the analyses to be performed, and the methods used.
   • Example: Determining the number of comparable properties to be analyzed, and the type of data to be collected (market data, cost data, income data).

2. Assumptions:

   • Facts that the appraiser assumes to be true for the purpose of the appraisal. Assumptions must be clearly stated in the report.
   • Example: Assuming the property is free of hidden defects, or that the market will remain stable for a certain period.

3. Limiting Conditions:

   • Restrictions imposed on the appraisal, which may limit the appraiser’s ability to conduct a complete and accurate appraisal. Limiting conditions must be clearly stated in the report.
   • Example: Inability to inspect the interior of the building, or reliance on information provided by a third party.

Second: Identifying the Appraisal Problem in the Appraisal Report

The appraisal problem must be clearly identified in the appraisal report, including the property, rights, value standard, valuation date, the purpose of the appraisal, scope of work, assumptions, and limiting conditions.

Third: preliminary analysis❓❓

After defining the appraisal problem, the appraiser begins a preliminary analysis, including:

A. Identifying the Necessary Data: Determining the types of data required to conduct the appraisal (market data, cost data, income data, etc.).
B. Identifying the Sources of Data: Identifying reliable sources of data (land records, market databases, interviews with experts, etc.).
C. Preliminary Analysis: Conducting a preliminary analysis of available data to identify key trends and issues.
D. Creating a Plan: Developing a detailed work plan to conduct the appraisal.
E. Fee Proposal and Contract: Submitting a fee proposal to the client and signing the appraisal contract.

Fourth: Data Collection, Verification, and Analysis

After completing the preliminary analysis, the appraiser collects the necessary data, verifies its accuracy, and analyzes it.

Fifth: Highest and Best Use Analysis

This analysis determines the best possible use of the property, which will achieve its highest value.

Sixth: Valuing the Site

The site is valued separately from the existing buildings on it.

Reasons for Valuing the Site Separately:

• For tax purposes.
• For highest and best use analysis.
• For development feasibility analysis.

Seventh: Applying the Three Approaches to Value

The three valuation approaches are applied to estimate the value of the property:

A. Cost Approach: Based on estimating the cost of replacing the property with a similar one.
B. Sales Comparison Approach: Based on comparing the property being appraised to similar properties that have been sold recently.
C. Income Approach: Based on estimating the income that the property can generate.

Eighth: Reconciling the Value Indicators

The value indicators resulting from the three approaches are reconciled to arrive at a final value estimate.

Ninth: Reporting the Value Estimate

A comprehensive appraisal report is prepared, including all the information and analyses that have been conducted.

A. Basic Types of Appraisal Reports:

1. Narrative Report: A detailed and comprehensive report that includes all aspects of the appraisal.
2. Form Report: A standardized report that uses a specific form to present information.
3. Oral Report: A report that is presented orally.

B. Basic Elements of an Appraisal Report:

• Identification of the appraisal problem.
• Description of the property.
• Market analysis.
• Application of valuation methods.
• Reconciliation of value indicators.
• Final value estimate.
• Assumptions and limiting conditions.
• Appraiser’s certification.

Conclusion:

Defining the scope of the appraisal is the cornerstone of the real estate appraisal process. Understanding the elements of the appraisal scope (property, rights, standard of value) ensures an accurate and reliable appraisal that meets the client’s needs and is based on scientific and methodological foundations. By following the systematic steps outlined in this chapter, real estate appraisers can build a strong foundation for the appraisal process and provide high-quality professional services.