Defining the Appraisal Problem: Scope and Fundamentals

Chapter 3: Defining the appraisal problem❓: Scope and Fundamentals

This chapter provides a detailed examination of the initial step in the appraisal process: defining the appraisal problem. This crucial step sets the foundation for a credible and reliable valuation. We will delve into the key❓ considerations involved in understanding the client’s needs, the terms of the assignment, and the overarching framework within which the appraisal will be conducted. This chapter will cover how to identify the real estate, real property interest, and the specific standard of value required.

I. The Appraisal Process: A Scientific Framework

The appraisal process, as outlined in USPAP Standard 1, is not merely a set of guidelines, but a structured methodology akin to a scientific investigation. It demands a rigorous approach, emphasizing the importance of:

• Objective Observation: Gathering factual data about the property and its market❓.
• Hypothesis Formulation: Developing preliminary assumptions about value.
• Systematic Analysis: Employing recognized methods and techniques to test these assumptions.
• Evidence-Based Conclusion: Reaching a final value estimate supported by credible evidence.

The steps of the appraisal process, while presented sequentially, are often iterative and overlapping. As demonstrated in Figure 3-1, data collection and analysis can occur throughout the process, informing and refining the appraiser’s understanding of the problem and the appropriate scope of work.

II. Step 1: Defining the Appraisal Problem

This is the bedrock of a sound appraisal. It involves a clear understanding of why the appraisal is being conducted and how it should be carried out. Defining the appraisal problem requires answering four fundamental questions:

1. What is to be appraised?
2. When is it to be appraised?
3. Why is it to be appraised?
4. How is it to be appraised?

A. WHAT is to be appraised?

This encompasses three critical elements:

1. Identification of the Real Estate: Accurately and unambiguously defining the physical property that is the subject of the appraisal.
2. Identification of the Real Property Interest: Specifying the precise bundle of rights being valued (e.g., fee simple, leasehold, life estate).
3. Identification of the Standard of Value: Clearly defining the type of value being sought (e.g., market value, investment value, insurable value).

1. Identification of the Real Estate

• legal description❓s: The Gold Standard

  While a street address and building name can be useful for preliminary identification, the legal description is the definitive identifier. It minimizes ambiguity and allows for precise determination of the property boundaries.
  * Legal Descriptions - Types and Examples

  • Metes and Bounds System: Describes property boundaries by specifying distances (metes) and directions (bounds) from a known starting point (point of beginning, POB). This system is common in older areas and regions with irregular land patterns. Example: “Beginning at the iron pin at the intersection of Main Street and Oak Avenue; thence North 89° 30’ East, a distance of 200 feet; thence South 00° 30’ East, a distance of 100 feet; thence South 89° 30’ West, a distance of 200 feet; thence North 00° 30’ West, a distance of 100 feet to the point of beginning.”
  • Rectangular (Government) Survey System: Divides land into a grid system of townships, ranges, and sections. Townships are 6-mile squares, and sections are 1-mile squares (containing 640 acres). This system is prevalent in the Western United States. Example: “The Northwest Quarter of Section 10, Township 2 South, Range 3 East, Willamette Meridian.”
  • Lot, Block, and Tract System: Identifies property by its lot number within a recorded subdivision plat. This system is common in urban and suburban areas. Example: “Lot 12, Block B, of Sunny Acres Subdivision, as recorded in Plat Book 25, Page 42, at the County Recorder’s Office.”
  • Verifying Legal Descriptions

  While the client typically provides The legal description❓, the appraiser should make reasonable efforts to verify its accuracy. Sources include:

  • Property deed
  • Title insurance policy
  • County records office

  Disclaimer: The appraiser should explicitly state in the report that they are not responsible for the accuracy of the legal description unless otherwise agreed upon with the client.

2. Identification of the Real Property Interest

• Defining Property Rights

  The appraisal must clearly state the specific bundle of rights being valued. This is crucial because different property rights have different values.

• Common Real Property Interests

  • Fee Simple: The most complete form of ownership, granting the owner all possible rights to the property.
  • Leasehold: The right to use and occupy property for a specified period under the terms of a lease agreement. The value of a leasehold interest depends on factors such as the lease term, rental rate, and any options to renew.
  • Life Estate: Ownership limited to the duration of a person’s life. Upon the death of the life tenant, ownership reverts to another party (the remainderman). The value of a life estate depends on the life tenant’s age and life expectancy.
  • Easement: The right to use another person’s property for a specific purpose (e.g., access, utilities).

3. Identification of the Standard of Value

• Defining Value

  Value is not an intrinsic characteristic of a property but rather an economic concept reflecting its worth to a particular market or individual.

• Common Standards of Value

  • Market Value: The most probable price a property should bring in a competitive and open market, assuming the buyer and seller are acting prudently and knowledgeably, and sufficient time is allowed for exposure in the open market. This definition incorporates several key assumptions:
    • Open and Competitive Market: The property is exposed to a reasonable number of potential buyers.
    • Informed Parties: Both buyer and seller are well-informed about the property and the market.
    • Prudent Action: Both parties are acting rationally and in their own best interest.
    • Reasonable Exposure Time: The property is allowed sufficient time to be marketed effectively.
  • Investment Value: The value of a property to a specific investor, based on their individual investment criteria and expectations. This may differ from market value due to factors such as tax considerations, financing terms, and risk tolerance.
  • Insurable Value: The cost to replace or repair a property after a loss, often excluding land value.
  • Liquidation Value: The price that could be obtained for a property sold quickly, often under duress. This is typically lower than market value.

Understanding the appropriate standard of value is paramount. The appraiser must carefully consider the client’s needs and the intended use of the appraisal to determine the most relevant definition.