Real Estate Documentation and Mathematical Valuation Principles

Property Description

The legal description is crucial for identifying the property and establishing ownership. Real estate appraisers must be able to read and understand the legal description.

Several systems are used for property description:

• Metes and Bounds System: An older system using natural or artificial markers and measuring distances and angles between them. It starts at a Point of Beginning (POB) and describes the boundary path. Example: “Starting from the stone marker at the northeast corner of the land, then at a 90-degree angle westward for 100 meters, then at a 180-degree angle southward for 50 meters, then at a 270-degree angle eastward for 100 meters, then at a 0-degree angle northward for 50 meters back to the starting point.”
• Rectangular Survey System (U.S. Government Survey System): Uses a grid of reference lines, including a Baseline and Meridian, to divide land into Townships and Sections. A Township is a 6-mile x 6-mile square containing 36 Sections. A Section is a 1-mile x 1-mile square containing 640 acres. Example: “The northeast quarter of Section 10, Township 2 North, Range 3 West, from the principal meridian.”
• Lot, Block, and Tract System: Used in urban areas and residential developments. It divides land into Lots within blocks❓ in an approved Plat. Example: “Lot number 12, Block number 5, in Al-Rawda neighborhood plan, approved under number 1234 dated 1/1/2023.”
• Geodetic Survey System: Uses a global coordinate system to precisely locate points using technologies like GPS.

Appraisers should verify property description information through official sources:

• Property records in the real estate registry.
• Survey maps from relevant government agencies.
• Property documents like title deeds and building permits.

Appraisal Math

Basic mathematical knowledge is essential for accurate and reliable real estate appraisals. This includes understanding percentages, interest, the present and future value of money, and calculating areas and volumes.

• Area: A two-dimensional measurement of a surface. Area of a rectangle = length x width❓❓. Area of a triangle = 0.5 x Base x Height.
• Volume: A three-dimensional measurement of space. Volume of a cube = Length x Width x Height.
• Units of length: Meter, centimeter, foot, inch.
• Units of area: Square meter, acre (43,560 square feet).
• Units of volume: Cubic meter, liter.
• Appraisers must be able to convert units.

Percentages are widely used in real estate appraisal:

• Capitalization Rate: Measures the return on investment. Capitalization Rate = Net Operating Income❓❓ / Property Value.
• Occupancy Rate: Determines the percentage of occupied units in a property. Occupancy Rate = Number of Occupied Units / Total Number of Units.

• Expense Ratio: Determines the ratio of operating expenses to total revenue. Expense Ratio = Total Operating Expenses / Total Revenue.

• Simple Interest: Calculated only on the principal amount. Interest = Principal x Rate x Time.

• Compound Interest: Calculated on the principal and accumulated interest. Future Value (FV) = Present Value (PV) x (1 + rate)^number of periods.
• Present Value (PV): The value of a future sum of money today, considering a discount rate. Present Value = Future Value / (1 + discount rate)^number of periods.

Direct Capitalization is a core method for valuing income-producing properties. Market Value = Net Operating Income / Capitalization Rate.

• Present Value (PV) and Future Value (FV): Fundamental concepts in valuing future cash flows.
• Hoskold’s Formula (Sinking Fund Method): Used to estimate the value of depleting assets.
• Inwood’s Formula: Used to estimate the value of expected future cash flows.

Measures of Central Tendency:

• Mean: The sum of values divided by the number of values.
• Median: The value in the middle of an ordered dataset.
• Mode: The most frequently occurring value in a dataset.
• Standard Deviation: Measures the dispersion of data around the mean.

Practical Applications

• Metes and Bounds Example: Describing a piece of agricultural land referencing a cedar tree, utility❓ pole, and stream. Requires site visit.
• Area Calculation Example: Rectangular land 25 meters❓ long and 12 meters wide. Area = 25 meters x 12 meters = 300 square meters.
• Capitalization Rate Example: Commercial building with an annual net operating income of 100,000 riyals and an estimated market value of 1,000,000 riyals. Capitalization Rate = 100,000 riyals / 1,000,000 riyals = 0.1 or 10%.
• Present Value Example: Expected cash flow of 50,000 riyals after 5 years with a discount rate of 8%. Present Value = 50,000 riyals / (1 + 0.08)^5 = 34,029 riyals.