Preliminary Analysis: Data Identification, Sources, and Assessment Planning.

Chapter 3: Preliminary Analysis: Identifying Data, Sources, and Planning the Assessment Process

Introduction

Preliminary analysis is the second stage in the real estate appraisal process, directly following the definition of the appraisal problem. This analysis is considered the cornerstone of a successful appraisal process, as it identifies the type of data required and its sources, and establishes a detailed work plan to ensure the process proceeds efficiently and effectively.

Chapter Objectives

Upon completion of this chapter, the trainee will be able to:

1. Identify the types of data needed to accurately solve the appraisal problem.
2. Identify different data sources, both internal and external.
3. Identify available resources for the appraisal process.
4. Develop a detailed plan and timeline for the appraisal process.
5. Prepare a comprehensive fee proposal and appraisal contract.

1. Identifying Necessary Data

This step is crucial, as the accuracy of the appraisal depends significantly on the quality of the data used. Data can be classified into two main categories:

1.1. General Data

This data relates to the real estate market in general and includes:

• Broad Market Trend Data: This includes information on economic growth, interest rates, inflation, employment levels, and demographic changes. These macroeconomic indicators directly affect supply and demand in the real estate market. For example, higher interest rates (i) may lead to a decrease in consumer purchasing power, thus reducing demand for real estate. This effect can be simplified with the following equation:

  Demand = f(i, Inflation, GDP Growth, ...)
  Where:
  * Demand: Demand for real estate
  * i: Interest rate
  * Inflation: Inflation rate
  * GDP Growth: Gross Domestic Product Growth
  * Local Competitive Supply and Demand Data: This data focuses on a specific geographic area and includes information on the number of real estate units offered for sale or rent, vacancy rates, sale and rental prices, construction costs, and real estate development projects under construction. This data helps in understanding local market dynamics and identifying strengths and weaknesses. For example, the Absorption Rate for residential properties in a specific area can be calculated using the following formula:

  Absorption Rate = (Number of Units Sold per Month) / (Total Number of Units Available)

  A high absorption rate indicates strong demand in the market.

1.2. Specific Data

This data relates specifically to the property❓ being appraised and includes:

• Physical Characteristics: This includes land area, building area, number of rooms, architectural design, quality of finishes, condition of maintenance, and special features (such as swimming pools and gardens).
• Location: This includes the geographic location❓ of the property, proximity to services and facilities (such as schools, hospitals, and shops), ease of access, and the surrounding environment.
• Real Estate Rights: This defines the type of ownership (absolute ownership, usufruct, etc.) and any restrictions or easements associated with the property.
• Historical Data: This includes the property’s sale history, any improvements or modifications made to it, and the history of previous appraisals.

Practical Example:

To appraise a residential apartment, the appraiser needs general data such as the average prices of similar apartments in the area, interest rates on mortgage loans, and vacancy rates. In addition, they need data specific to the apartment, such as its area, number of rooms, quality of finishes, view, and general condition.

2. Identifying Data Sources

After identifying the types of data required, the sources of this data must be identified. Sources can be classified into two main categories:

2.1. Primary Data

This is data collected directly by the appraiser or by other experts consulted. It includes:

• Field Inspection: This involves visiting the property and inspecting it carefully, recording notes, and taking photos. A field inspection is necessary to assess the physical characteristics of the property and its general condition.
• Interviews: This involves conducting interviews with the owner, real estate agents, contractors, and local government officials. Interviews help in obtaining information about the property’s history, any problems or defects that may exist, and the circumstances surrounding the sale.
• Surveys: Surveys can be used to collect data from a large number of people, such as local residents or potential buyers.

2.2. Secondary Data

This is data obtained from published sources, such as:

• Government Records: This includes property records, real estate tax records, and construction permit records.
• Real Estate Databases: This includes listings of properties offered for sale or rent, sale and rental prices, and demographic data.
• Economic Reports: This includes reports from central banks, financial institutions, and research firms.
• Commercial Organizations: This includes real estate associations, chambers of commerce, and real estate development companies.

Practical Example:

To obtain data on the prices of similar properties in a specific area, the appraiser can refer to real estate databases, contact local real estate agents, or search government records.

3. Identifying Available Resources

This step is necessary to ensure that the appraisal process can be completed on time and within the available budget. Resources include:

• Human Resources: This includes the appraiser’s experience, skills, and ability to access other experts (such as architects and surveyors).
• Financial Resources: This includes the budget available for data collection, research, and payment of expert fees.
• Technical Resources: This includes access to real estate databases, real estate appraisal software, and statistical analysis tools.
• Time: Time is one of the most important resources, and sufficient time must be allocated to each stage of the appraisal process.

4. Developing a Detailed Plan and Timeline

After identifying the required data, its sources, and available resources, a detailed work plan and timeline must be developed to complete the appraisal process. The plan should include:

• Task Identification: Dividing the appraisal process into actionable sub-tasks, such as collecting general data, collecting specific data, conducting the field inspection, analyzing data, and writing the report.
• Responsibility Assignment: Identifying who is responsible for executing each task.
• Time Estimation: Estimating the time required to complete each task.
• Deadline Setting: Setting deadlines for completing each task.
• Budget Allocation: Allocating the budget for each task.
• Contingency Planning: Developing a contingency plan in case of any unexpected delays or problems.

Practical Example:

A Gantt chart can be used to visualize the timeline of the appraisal process. A Gantt chart shows the tasks, the time required to complete each task, deadlines, and responsibilities.

5. Preparing a Comprehensive Fee Proposal and Appraisal Contract

After developing the detailed plan, a comprehensive fee proposal and appraisal contract must be prepared. The proposal should include:

• Scope of Work Description: A detailed description of the appraisal process, including the types of data to be collected, the methods to be used, and the expected results.
• Fees: Identifying the fees required for the appraisal process and how they are calculated (e.g., on an hourly basis or as a percentage of the property’s value).
• Payment Terms: Identifying the payment terms, including payment deadlines.
• Responsibilities: Defining the responsibilities of the appraiser and the client.
• Legal Conditions: Including standard legal conditions, such as confidentiality clauses, liability clauses, and contract termination clauses.

Important Notes Regarding the Appraiser’s Certification and Restrictions

According to the Uniform Standards of Professional Appraisal Practice (USPAP) and regulations related to Fannie Mae and Freddie Mac:

• Appraiser Responsibility: The appraiser bears full responsibility for the accuracy and objectivity of the appraisal. The appraiser must❓ supervise the work of any assistants or subcontractors and ensure they are qualified to perform their work.
• Fannie Mae/Freddie Mac Obligations: The appraiser must comply with all Fannie Mae and Freddie Mac requirements, including disclosure standards and protection of confidential information.
• Report Distribution: Report distribution is limited to the client (usually the lender). However, the client is allowed to disclose the report to other specified parties (such as the borrower, other lenders, and insurance companies).
• Borrower as Beneficiary: In some cases, the borrower may be considered an intended beneficiary of the report, imposing a fiduciary duty on the appraiser towards them.
• Electronic Signature: An electronic signature or fax is considered an original signature.
• Misrepresentation: Federal law prohibits any intentional or negligent misrepresentation in the appraisal.

Important Warnings: The appraiser should be aware of the potential risks related to breaching public trust, unauthorized disclosure of confidential borrower information, violation of non-disclosure laws, fiduciary duties to borrowers, and the free distribution of the appraiser’s intellectual capital.

Conclusion

Preliminary analysis is a vital stage in the real estate appraisal process. By identifying the necessary data and its sources, identifying available resources, and developing a detailed work plan, the appraiser can ensure that the appraisal process is completed efficiently and effectively. Adherence to professional and ethical standards and awareness of potential risks are necessary to ensure the credibility of the appraisal and protect the interests of all parties involved.