Service Industries: A Geographical Appraisal
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Alvine and E. Browning, H. Daniels, P. Chase, Richard B. David, P. Google Scholar. Davis, Lance E. CrossRef Google Scholar. Deutsch, Karl W. Merrit and Anna J. Merrit, eds. Downs, G. K: Google Scholar. Field, Alexander J. Foote, N. Garn, Harvey A. Garn, Harvey, A. Plex, M. Springer and J. Gershuny, J. Gillespie, A. Gramlich, Edward M. Hirschman, A. Hirschhorn, L. Katouzian, M. Kutscher, R. Lakshmanan, T. Lancaster, Kelvin J.
Leff, Nathaniel H. Mark, Jerome A. Mensch, Gerhard O. Merrit, Richard L. Nelson, Richard R.
There can be differences between what the property is really worth market value and what it cost to buy it price. A price paid might not represent that property's market value. Sometimes, special considerations may have been present, such as a special relationship between the buyer and the seller where one party had control or significant influence over the other party. In other cases, the transaction may have been just one of several properties sold or traded between two parties. In such cases, the price paid for any particular piece is not its market "value" with the idea usually being, though, that all the pieces and prices add up to the market value of all the parts but rather its market "price".
At other times, a buyer may willingly pay a premium price, above the generally accepted market value, if his subjective valuation of the property its investment value for him was higher than the market value. One specific example of this is an owner of a neighboring property who, by combining his own property with the subject property, could obtain economies-of-scale. Similar situations sometimes happen in corporate finance.
For example, this can occur when a merger or acquisition happens at a price which is higher than the value represented by the price of the underlying stock. The usual explanation for these types of mergers and acquisitions is that "the sum is greater than its parts", since full ownership of a company provides full control of it.
This is something that purchasers will sometimes pay a high price for. This situation can happen in real estate purchases too. But the most common reason for value differing from price is that either the buyer or the seller is uninformed as to what a property's market value is but nevertheless agrees on a contract at a certain price which is either too expensive or too cheap.
This is unfortunate for one of the two parties. It is the obligation of a real property appraiser to estimate the true market value of a property and not its market price.
In the United States, appraisals are for a certain type of value e. The most commonly used definition of value is Market Value. A type of value, stated as an opinion, that presumes the transfer of a property i. Thus, the definition of value used in an appraisal or Current Market Analysis CMA analysis and report is a set of assumptions about the market in which the subject property may transact. It affects the choice of comparable data for use in the analysis.
It can also affect the method used to value the property. There are three traditional groups of methodologies for determining value. These are usually referred to as the "three approaches to value" which are generally independent of each other:. However, the recent trend of the business tends to be toward the use of a scientific methodology of appraisal which relies on the foundation of quantitative-data,  risk, and geographical based approaches.
As mentioned before, an appraiser can generally choose from three approaches to determine value. One or two of these approaches will usually be most applicable, with the other approach or approaches usually being less useful.
Service Industries: A Geographical Appraisal
The appraiser has to think about the "scope of work", the type of value, the property itself, and the quality and quantity of data available for each approach. No overarching statement can be made that one approach or another is always better than one of the other approaches.
The appraiser has to think about the way that most buyers usually buy a given type of property. What appraisal method do most buyers use for the type of property being valued? This generally guides the appraiser's thinking on the best valuation method, in conjunction with the available data. For instance, appraisals of properties that are typically purchased by investors e. Buyers interested in purchasing single family residential property would rather compare price, in this case, the Sales Comparison Approach market analysis approach would be more applicable.
The third and final approach to value is the Cost Approach to value. The Cost Approach to value is most useful in determining insurable value, and cost to construct a new structure or building. For example, single apartment buildings of a given quality tend to sell at a particular price per apartment. In many of those cases, the sales comparison approach may be more applicable. On the other hand, a multiple-building apartment complex would usually be valued by the income approach, as that would follow how most buyers would value it. As another example, single-family houses are most commonly valued with the greatest weighting to the sales comparison approach.
However, if a single-family dwelling is in a neighborhood where all or most of the dwellings are rental units, then some variant of the income approach may be more useful. So the choice of valuation method can change depending upon the circumstances, even if the property being valued does not change much. The sales comparison approach is based primarily on the principle of substitution. This approach assumes a prudent or rational individual will pay no more for a property than it would cost to purchase a comparable substitute property.
The approach recognizes that a typical buyer will compare asking prices and seek to purchase the property that meets his or her wants and needs for the lowest cost. In developing the sales comparison approach, the appraiser attempts to interpret and measure the actions of parties involved in the marketplace, including buyers, sellers, and investors. Data is collected on recent sales of properties similar to the subject being valued, called "comparables". Only SOLD properties may be used in an appraisal and determination of a property's value, as they represent amounts actually paid or agreed upon for properties.
Important details of each comparable sale are described in the appraisal report. Since comparable sales are not identical to the subject property, adjustments may be made for date of sale, location, style, amenities, square footage, site size, etc. The main idea is to simulate the price that would have been paid if each comparable sale were identical to the subject property. If the comparable is superior to the subject in a factor or aspect, then a downward adjustment is needed for that factor. From the analysis of the group of adjusted sales prices of the comparable sales, the appraiser selects an indicator of value that is representative of the subject property.
It is possible for various appraisers to choose a different indicator of value which ultimately will provide different property value. The cost approach was once called the summation approach. The theory is that the value of a property can be estimated by summing the land value and the depreciated value of any improvements.
Reproduction refers to reproducing an exact replica; replacement cost refers to the cost of building a house or other improvement which has the same utility , but using modern design, workmanship and materials. In practice, appraisers almost always use replacement cost and then deduct a factor for any functional dis-utility associated with the age of the subject property. An exception to the general rule of using the replacement cost is for some insurance value appraisals.
In those cases, reproduction of the exact asset after a destructive event like a fire is the goal. In most instances when the cost approach is involved, the overall methodology is a hybrid of the cost and sales comparison approaches representing both the suppliers' costs and the prices that customers are seeking. For example, the replacement cost to construct a building can be determined by adding the labor, material, and other costs.
On the other hand, land values and depreciation must be derived from an analysis of comparable sales data. The cost approach is considered most reliable when used on newer structures, but the method tends to become less reliable for older properties.
Service Industries: A Geographical Appraisal - Peter W. Daniels - Google книги
The cost approach is often the only reliable approach when dealing with special use properties e. The income capitalization Approach often referred to simply as the "income approach" is used to value commercial and investment properties. Because it is intended to directly reflect or model the expectations and behaviors of typical market participants, this approach is generally considered the most applicable valuation technique for income-producing properties, where sufficient market data exists.
In a commercial income-producing property this approach capitalizes an income stream into a value indication. Usually, an NOI has been stabilized so as not to place too much weight on a very recent event. An example of this is an unleased building which, technically, has no NOI.
A stabilized NOI would assume that the building is leased at a normal rate, and to usual occupancy levels. Alternatively, multiple years of net operating income can be valued by a discounted cash flow analysis DCF model. The DCF model is widely used to value larger and more expensive income-producing properties, such as large office towers or major shopping centres.
This technique applies market-supported yields or discount rates to projected future cash flows such as annual income figures and typically a lump reversion from the eventual sale of the property to arrive at a present value indication. When homes are purchased for personal use the buyer can validate the asking price by using the income approach in the opposite direction. An expected rate of return can be estimated by comparing net expected costs to the asking price.
This return can be compared to the home owner's other investing opportunities. In the United Kingdom , valuation methodology has traditionally been classified into five methods: . Comparative method. Used for most types of property where there is good evidence of previous sales. This is analogous to the sales comparison approach outlined above. Investment method , also known as hardcore. Used for most commercial and residential property that is producing future cash flows through the letting of the property.
This method compares the estimated rental value ERV , or "top slice" to the current "passing" income, or "bottom slice", to give an indication of whether the future value of the property should rise or fall based on income. If a property's income is higher than the ERV this is sometimes known as "froth", which may be confused with the US use of "froth" describing the period before a real estate bubble. The cash flows can be compared to the market-determined equivalent yield, and the property value can be determined by means of a simple model.
Note that this method is really a comparison method, since the main variables are determined in the market. In standard U. Residual method. Used for properties ripe for development or redevelopment or for bare land only. Profit method. Used for trading properties where evidence of rates is slight, such as hotels, restaurants and old-age homes.
A three-year average of operating income derived from the profit and loss or income statement is capitalized using an appropriate yield. Note that since the variables used are inherent to the property and are not market-derived, therefore unless appropriate adjustments are made, the resulting value will be value-in-use or investment value, not market value. Cost method. Used for land and buildings of special character for which profit figures cannot be obtained or land and buildings for which there is no market because of their public service or heritage characteristics.
Both the residual method and the cost method would be grouped in the United States under the cost approach see above. While the Uniform Standards of Professional Appraisal Practice USPAP has always required appraisers to identify the scope of work needed to produce credible results, it became clear in recent years [ when?
In formulating the scope of work for a credible appraisal, the concept of a limited versus complete appraisal and the use of the Departure Rule caused confusion to clients, appraisers, and appraisal reviewers. In this, appraisers were to identify six key parts of the appraisal problem at the beginning of each assignment:. Based on these factors, the appraiser must identify the scope of work needed, including the methodologies to be used, the extent of the investigation, and the applicable approaches to value. Currently, minimum standards for scope of work are:. The scope of work is the first step in any appraisal process.
Without a strictly defined scope of work, an appraisal's conclusions may not be viable. By defining the scope of work, an appraiser can properly develop a value for a given property for the intended user, and for the intended use of the appraisal. The whole idea of "scope of work" is to provide clear expectations and guidelines for all parties as to what the appraisal report does, and does not, cover; and how much work has gone into it.
Service Industries : A Geographical Appraisal
The type of real estate "interest" that is being valued, must also be known and stated in the report. Usually, for most sales, or mortgage financings, the fee simple interest is being valued. The fee simple interest is the most complete bundle of rights available. However, in many situations, and in many societies which do not follow English Common Law or the Napoleonic Code , some other interest may be more common. While there are many different possible interests in real estate, the three most common are:. If a home inspection is performed prior to the appraisal and that report is provided to the appraiser, a more useful appraisal can result.
This is because the appraiser, who is not an expert home inspector, will be told if there are substantial construction defects or major repairs required. This information can cause the appraiser to arrive at a different, probably lower, opinion of value. This information may be particularly helpful if one or both of the parties requesting the appraisal may end up in possession of the property.
This is sometimes the case with property in a divorce settlement or a legal judgment.
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Automated valuation models AVMs are growing in acceptance. These rely on statistical models such as multiple regression analysis , machine learning algorithms or geographic information system s GIS. Computer-assisted mass appraisal , "CAMA" for short, is a generic term for any software package used by government agencies to help establish real estate appraisals for property tax calculations. A CAMA is a system of appraising property, usually only certain types of real property , that incorporates computer-supported statistical analyses such as multiple regression analysis and adaptive estimation procedure to assist the appraiser in estimating value.
The various U. This will facilitate global real estate appraisal standards, a much-needed adjunct to real estate investment portfolios which cross national boundaries. Some appraisal groups are already international organizations and thus, to some extent, already incorporate some level of global standards.
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In Germany , real estate appraisal is known as real estate valuation Immobilienbewertung. However, this formerly very important title has lost a lot of its importance over the past years, but still is of some value in court procedures. The title is not generally required for appraisals. Real estate appraisal in Germany is partly codified by law. The federal Baugesetzbuch abbr.
BauGB, "German statutory code on building and construction'" contains guidelines on governing authorities, defines the term market value and refers to continuative rules chapter 3, articles ff. Each municipality city or administrative district must form a Gutachterausschuss appraisal committee , consisting of a chairman and honorary members. Most committees publish an official real estate market report every two years, in which besides other information on comparables the land value is determined.
The committees also perform appraisals on behalf of public authorities. The BauGB defines the Verkehrswert or Marktwert market value, both terms with identical meaning as follows: "The market value is determined by the price that can be realized at the date of valuation, in an arm's length transaction, with due regard to the legal situation and the effective characteristics, the nature and lay of the premises or any other subject of the valuation"  non-official translation. The intention, as in other countries, is to include all objective influences and to exclude all influences resulting from the subjective circumstances of the involved parties.
This federal law is supported by the Wertermittlungsverordnung abbr.
WertV, "regulation on the determination of value". German codified valuation approaches other approaches such as DCF or residual approach are also permitted, but not codified are the:. WertV's general regulations are further supported by the Wertermittlungsrichtlinie abbr. WertR, "directive on the determination of value". In most regards Generally Accepted German Valuation Principles is consistent with international practice.
The investment market weighs the income approach most heavily.