English
Value by Date: Present, Past, and Future.
Value by Date: Current, Past, and Future
- Introduction: Determining the valuation date is essential in real estate appraisal because property value changes with economic and market conditions. This chapter explores the concept of value by date, focusing on current, past, and future values, and the importance of the appraisal report date.
A. Value as of the Current Date
- The current date is when the appraiser inspects the property and gathers data to estimate value, serving as a reference point for market value in current conditions.
- Importance: Reflects the present real estate market and its impact on property value.
- Applications: Used in buying and selling transactions, obtaining real estate financing, and other investment decisions.
- Theoretical Basis: Relies on the principles of supply and demand, competition, anticipation, and the highest and best use of the property.
B. Appraisal of Past Values
- Aims to determine the property’s value in the past based on data and conditions prevalent at that time.
- Challenges: Requires collecting accurate historical data❓❓ on comparable property prices, economic conditions, and market changes that prevailed in the past, which can be difficult.
- Applications:
- Legal Proceedings: Such as divorce settlements, real estate disputes, or inheritance cases.
- Tax Audits: Determining property value for tax purposes in previous periods.
- Revaluation of Assets: Determining the fair value of real estate assets in the past for accounting purposes.
- Theoretical Basis: Relies on reconstructing past market conditions using available data and applying appropriate valuation methods.
- Practical Example: Determining the value of a property on January 1, 2005, for property tax purposes for 2005, if sufficient data is available.
- Mathematical Models (If Possible): Historical property price indices can be used to adjust the current value of a property to a past value:
Value in Past = Current Value x (Past Property Price Index / Current Property Price Index)
C. Appraisal of Future Value
- Involves predicting future market and economic conditions.
- Speculative Nature: Requires reliance on assumptions and probabilistic analyses to estimate future value since future data is unavailable.
- Extraordinary Assumptions and Hypothetical Conditions: Often requires the use of extraordinary assumptions and hypothetical conditions.
- Extraordinary Assumption: An assumption related to a specific valuation assignment, which, if found to be false, could affect the appraiser’s opinion of value.
- Hypothetical Condition: A condition contrary to what already exists, but assumed for the purpose of a specific valuation assignment.
- Applications:
- Investment Decisions: Helping investors decide whether to invest in a specific real estate project.
- Feasibility Studies: Assessing the economic feasibility of future real estate projects.
- Strategic Planning: Determining the potential value of properties in the future for strategic planning purposes.
- Theoretical Basis: Relies on analyzing market trends, population growth, economic changes, and other factors that may affect property value in the future.
- Practical Example: An investor asks the appraiser to determine the value of a 100-unit apartment building five years from now. The apartment building has not yet been constructed, although plans and specifications exist, and the investor currently owns the land on which it will be built. In this case, the building is a hypothetical condition for the assignment (it does not yet exist). Analysis of future conditions, such as market conditions, demographic changes, and economic trends, relies on extraordinary assumptions.
- Mathematical Models (If Possible): Discounted Cash Flow (DCF) models can be used to estimate the future value of the property. These models rely on estimating the future revenues and expenses of the property, and then discounting these cash flows to their present value:
PV = Σ (CFi / (1 + r)^i)where:PV= Present Value (Estimated Value).CF= Cash Flow in yeari.r= Discount rate.i= Year.
- Documentation: The appraiser must document all extraordinary assumptions and hypothetical conditions clearly in the report.
D. Date of Appraisal Report
- The date the final report is issued by the appraiser. It does not directly affect the value estimate, but it is important for:
- Timing: The report should be available to the client in a timely manner for making appropriate decisions.
- Timeframe: The report date indicates whether the property was valued in the past, present, or future.
- Synchronization: The valuation date and report date do not necessarily have to be the same. The report date may be later than the valuation date due to the time required to analyze the data and prepare the report.
- Terminology:
- Valuation Date: The date on which the value is estimated, usually the date on which the appraiser inspects the property.
- Report Date: The date on which the appraiser completes and signs the report.
E. Purpose of the Appraisal
- The appraiser must know the purpose of the appraisal to assist the client’s decision-making. For example, lenders use appraisals to help determine whether to provide a loan for a specific amount; buyers and sellers use appraisals to help determine whether to buy or sell a property at a specific price.
- Minimizing Liability: To limit potential liability, the appraiser should clearly state that the value estimate is valid only for the intended use❓ by the client and is not valid for any other use or user.
F. How is it Being Valued?
- The appraiser and client must agree on the scope of the appraisal and other assumptions and limiting conditions that apply to it.
- Scope of the Appraisal: The amount of research and report development required to produce a credible and easy-to-understand valuation result for the intended users. The scope of work is determined by the required value standard, the intended use of the valuation, and the number of intended users.
- Assumptions: Facts that the appraiser assumes to be true but does not independently verify.
- Limiting Conditions: Similar to assumptions. In fact, assumptions can simply be considered one type❓❓ of limiting condition.
Conclusion
- Accurately determining the valuation date is a crucial step in the real estate appraisal process. The appraiser must be aware of the different types of values (current, past, and future) and choose appropriate methods and techniques for estimating each type. The appraiser must document all extraordinary assumptions and hypothetical conditions clearly in the report, and specify the purpose and scope of the valuation, to limit liability and ensure that the valuation meets the client’s needs.
Chapter Summary
This chapter addresses the concept of real estate value in relation to time, focusing on present, past, and future value❓s.
Present Value:
- The value at the time of property inspection is the basis for most real estate appraisals.
- Clients primarily focus on the current value for decision-making.
- The current value serves as a starting point for estimating past and future values.
Past Value:
- Past real estate values can be estimated if sufficient data❓ (comparable sales, etc.) is available.
- Estimating past value is similar to estimating present value if data is sufficient.
- “Retrospective valuations” are often required in legal proceedings like divorce settlements or tax audits.
- Example: A property owner may need a valuation of the property’s value at a previous date (such as the date of a tax assessment) to challenge the assessment.
Future Value:
- Future value appraisals are always speculative because❓ predicting future market conditions is impossible.
- No data exists for the future, and assumptions must be made, often requiring extraordinary assumptions and hypothetical conditions.
- Extraordinary Assumption: An assumption related to a specific assignment that, if found to be false, could alter the appraiser’s opinions or conclusions.
- Hypothetical Condition: A condition contrary to what exists but is supposed for the purpose of the individual assignment.
- The appraiser must clearly document all extraordinary assumptions and hypothetical conditions in the report.
- Future value appraisal is typically used in a business context to help someone decide whether to make a certain investment or embark on a particular project or development.
Valuation Report Date:
- The valuation report date (unlike the valuation date) does not directly affect the value estimate. It is simply the date the report is issued.
- The report date is important for two reasons: the client needs to know the valuation will be issued in time to be useful in their decision-making process, and the appraiser needs to be confident that the valuation can be prepared efficiently within that timeframe. Also, the report date clarifies whether the property is being valued as of the past, present, or future.
- Even for present value, the valuation date and report date will not necessarily be identical.
- Valuation Date: The date on which the value is estimated, usually the date the appraiser inspects the subject property.
- Report Date: The date on which the appraiser completes and signs the report.
Purpose of the Valuation:
- The appraiser must know why the client wants the valuation; i.e., what the valuation will be used for.
- The appraiser must clearly state that the value estimate is only valid for the intended use❓ by the client and not for any other use or user.
- The intended use of the valuation affects the valuation process.
How the Valuation is Done:
- The appraiser and client must agree on the scope of the valuation and any other assumptions and limiting conditions that apply.
- Scope of the Valuation: The amount of research and report development required to produce a credible valuation result that is easily understood by the intended users.
- The appraiser’s determination of the scope of work is based on the standard of value, the intended use, and the intended users.
- Assumptions: Facts the appraiser assumes to be true but does not independently verify.
- Limiting Conditions: Similar to assumptions.
- The valuation report must include a section on assumptions and other limiting conditions.
Conclusions and Implications:
- Understanding the relationship between real estate value and time is critical for the real estate appraiser.
- The appraiser must clearly identify and justify the specific date for which the value is being estimated.
- The appraiser must exercise extreme caution when estimating past and future values, emphasizing the importance of available data, assumptions, and limiting conditions.
- The appraiser must clearly define the purpose of the valuation to ensure the valuation is appropriate for the intended use and avoid potential liability.
- The appraiser must clearly define the scope of the valuation, assumptions, and limiting conditions to ensure the valuation is reliable and easily understood by the intended users.
- Accuracy and transparency in the valuation process, considering the time dimension of value, contribute to informed decision-making in the real estate market.
