Data Collection & Analysis for Appraisal

Data Collection & Analysis for Appraisal

Chapter Description

This chapter delves into the scientific principles and practical techniques of data collection and analysis, essential for accurate and reliable property valuation in the “Mastering Property Valuation: Land & Residential Essentials” course. We will explore how data, related to the course description, influences the application of various appraisal approaches, including the sales comparison, cost, and income approaches. We will explore concepts and mathematical foundations to build a strong foundation for property valuation.

I. Introduction: The Scientific Foundation of Appraisal

Accurate property valuation relies heavily on rigorous data collection and analysis. It’s not merely about observing a property; it’s about quantifying its attributes and comparing them against market benchmarks within a defined scientific framework. This chapter bridges the gap between theoretical concepts and practical application, providing you with the tools necessary to support your appraisal conclusions with verifiable evidence.

II. Defining the Data Landscape: Categories and Relevance

Data collection is most efficient when guided by a well-defined framework. We categorize appraisal data to ensure comprehensive analysis and informed decision-making.

• A. General Data: Macro-level data affecting real estate values.

  • 1. Economic Indicators: GDP growth, inflation rates, unemployment rates, interest rates.
  • 2. Social Trends: Demographic shifts, lifestyle changes, population growth.
  • 3. Governmental Regulations: Zoning laws, building codes, environmental regulations, property taxes.

  Example: Rising interest rates (Economic Indicator) can lead to a decrease in housing affordability, thus reducing demand and potentially lowering property values. Zoning regulations (Governmental Regulations) dictate land use, influencing property value based on permitted development.

• B. Specific Data: Micro-level data pertaining to the subject property and comparable properties.

  • 1. Subject Property Data: Physical characteristics, site attributes, legal rights, encumbrances.
  • 2. Comparable Property Data: Sales prices, property characteristics, location, conditions of sale, financing terms.
    The Two Keys to effective sales Comparison Approach
    * identifying similar properties that are truly “comparable” to the subject property; and
    * making the proper adjustments to the sales prices of the comparable properties to
    account for any differences between the subject property and the comparables.
    Example: Square footage, number of bedrooms, lot size (Specific Data) are critical in determining the value of a residential property.

• C. Trend Data: Analysis of market shifts.
  What are the trends with population shifts?

• D. Supply and Demand Data: Market Dynamics.
  What is the competitive supply of new houses, vacant land?

III. The Appraisal Approaches and Data Requirements

The “Mastering Property Valuation” course emphasizes three core approaches to valuation. Each approach necessitates different types of data. We will relate the collection and the quality of data to all three approaches

• A. Sales Comparison Approach: Based on the principle of substitution, assuming a buyer will pay no more for a property than the cost of acquiring an equally desirable substitute.

  • 1. Data Needs: Recent sales of comparable properties, detailed information on their characteristics, financing terms, and conditions of sale.

  • 2. Scientific Principle: The Law of Supply and Demand. Market prices reflect the interaction of buyers and sellers. Identifying trends in comparable sales helps to infer market behavior and value.
    Sales prices of comparables must be adjusted to account for any differences between the comparables and the subject property, including physical differences, changes in market conditions, and differences in the terms of sale.

  • 3. Adjustment Process: Quantifying the differences between the subject and comparables. This requires statistical analysis to establish market-derived adjustment factors.

    • Formula: Subject Value = Comparable Sales Price +/- Adjustments

  • 4. Practical Application: Analyzing multiple sales of similar properties in a specific neighborhood (market) over a defined time period to determine a trend and an adjustment (in dollars) related to “time of sale.”

    • Case/Example: An appraiser identifies a comparable property that is similar to the subject property in all respects, except the subject property has only one bath, while the comparable has two. The comparable property sold recently for $145,000. Current market data indicates that an extra bath adds $5,000 to the values of homes similar to these. So the appraiser would subtract the value of the more desirable feature (the extra bath) from the price of the comparable, to arrive at an indicated value of $140,000 for the subject property.

• B. Cost Approach: Assumes that the value of a property can be determined by the cost of acquiring land and constructing a substitute building with similar utility.

  • 1. Data Needs: Land value (estimated separately), current construction costs (materials, labor, permits, overhead, profit), accrued depreciation (physical deterioration, functional obsolescence, external obsolescence).

  • 2. Scientific Principle: The principle of substitution in relation to new construction, combined with understanding the forces causing decline of value due to depreciation.

  • 3. Mathematical Formula: Property Value = Land Value + Replacement Cost - Depreciation

    • Depreciation: The cost approach assumes that the value of improved property is indicated by the value of the site, plus the cost (new) to construct the improvements, less any depreciation that the improvements have suffered. Depreciation is the difference in value between the cost (new) of the improvements and their current value, regardless of the reasons for the difference.

  • 4. Practical Application: Calculating the cost of a new residential construction project.
    *The Cost Approach requires a separate valuation of the site. The appraiser then estimates what it would cost to replace any existing structures, and adds this amount to the site value. The cost of replacing the structures is estimated as of the date of valuation.

• C. Income Approach: Based on the principle that the value of a property is directly related to the income it can generate. Primarily applicable to income-producing properties (less common in residential appraisal, but relevant for rental properties).

  • 1. Data Needs: Gross rental income, vacancy rates, operating expenses, capitalization rates.

  • 2. Scientific Principle: Time Value of Money. Future income streams are discounted to their present worth based on an investor’s required rate of return.

  • 3. Capitalization Formula: Value = Net Operating Income / Capitalization Rate

  Gross Rent Multiplier Formula:
  Gross Rent Multiplier = Monthly Income / Sales Price
  Apply Gross Rent Multiplier to property to determine approximate value:
  Value = Subject Monthly Rent * Gross Rent Multiplier

  • 4. Practical Application: Estimating the value of a single-family rental property by using Gross Rent Multipliers (GRM) derived from comparable properties.
    Case/Example: 132, 133, 135, 135, 135, 140
    From the above example, we can see that 135 is the most likely multiplier. Thus:
    $1,525 Subject Monthly Rent x 135 = $206,000 (rounded) Value by Income Approach.

IV. Site Valuation: The Foundation of Appraisal Accuracy

In line with the course’s emphasis on land valuation techniques, site valuation forms the bedrock of many appraisal approaches, particularly the cost approach.

• A. Data Collection for Site Valuation:

  • 1. Legal Description: Metes and bounds, rectangular survey system, or lot and block system.
  • 2. Zoning Regulations: Permitted uses, setback requirements, height restrictions.

  • 3. Physical Characteristics: Size, shape, topography, soil conditions, access, utilities.

  • 4. Environmental Considerations: Flood zone status, presence of hazardous materials.
    FEMA Flood Map?

• B. Land Valuation Methods:

  • 1. Sales Comparison: Direct comparison to sales of similar vacant lots. Adjustments are crucial to account for differences in location, size, zoning, and site characteristics.

  • 2. Allocation: Determining land value based on a typical ratio of land value to total property value in the area. (Less accurate, use with caution).
    This assumes that a certain percentage of a property’s value is attributable to its improvements and the remaining percentage is attributable to the land. In other words, it assumes that similar properties will have similar ratios of land value to building value

  • 3. Extraction: Subtracting the depreciated cost of improvements from the total sale price of a comparable property.
    By extraction, the appraiser estimates the value of the land component of the comparable sale, and then uses this data to estimate the land value of the subject property.

V. Practical Data Gathering and Technology Tools

Data collection efficiency is crucial.

• A. Primary Data: Direct observation, property inspection, interviews with owners, builders, and local experts.

• B. Secondary Data: Government agencies (census data, zoning maps), real estate databases (MLS, CoreLogic, FNC), appraisal reports, market studies.

• C. Technology Tools:

  • 1. Mobile Appraisal Apps: Streamline data collection, sketch creation, photo documentation.

  • 2. Online Databases: Access comparable sales data, property records, zoning information.
    Government sites, Chambers of Commerce Boards of REALTORS® and MLS sites can be “followed” on social networking sites like Twitter®, Facebook®, LinkedIn®, ActiveRain®, etc.
    Online access through providers such as FNC, Inc. and CoreLogic provides comparable data for all but 17 counties within the United States.

  • 3. GIS Software: Analyze spatial data, map neighborhood boundaries, assess proximity to amenities and disamenities.

VI. The Appraisal Report: Presenting Data Scientifically

The appraisal report is the scientific communication of your findings. It should clearly and logically present the data collected, the analytical methods used, and the conclusions reached.

• A. Data Presentation: Use tables, charts, and graphs to effectively summarize and visualize data.

• B. Justification of Adjustments: Provide clear and concise explanations for all adjustments made in the sales comparison approach, supported by market data.

• C. Documentation of Assumptions: State all assumptions and limiting conditions that affect the appraisal.

• D. Adherence to USPAP: Ensure compliance with the Uniform Standards of Professional Appraisal Practice, which govern ethical and professional conduct in appraisal practice.

VII. Conclusion: Building a Data-Driven Appraisal Practice

Mastering property valuation hinges on your ability to collect, analyze, and interpret data objectively. By understanding the scientific principles underlying appraisal methodologies and leveraging modern technology, you can build a data-driven appraisal practice that delivers accurate, reliable, and defensible value opinions.

VIII. Practical Exercises (Related Experiments)

1. Sales Comparison Adjustment Analysis: Given a set of comparable sales with varying characteristics, calculate appropriate adjustments and estimate the value of the subject property.
2. Cost Approach Depreciation Estimation: Research construction costs, estimate replacement cost new, and calculate accrued depreciation using various methods (age-life, market extraction).
3. Site Valuation using Sales Comparison: Analyze sales of vacant lots in a specific area to estimate the value of the subject property.
4. Highest and Best Use Determination: Analyze a property and determine its highest and best use based on zoning regulations, physical characteristics, market demand, and financial feasibility.

These exercises will allow you to apply the concepts learned in this chapter to real-world scenarios, enhancing your practical understanding of data collection and analysis for appraisal.