1. The Valuation Process & Appraisal Reports Wayne Foss, MBA, MAI, CRE Foss Consulting Group Email: wfoss@fossconsult.com

2. 2 Valuation Process  Definition: –A systematic procedure employed to provide the answer to a client’s questions about the value of real property  Process has many uses –provides a framework for estimating market value (or other types of value) –provides a model for performing market research analysis of data applying appraisal techniques –provides a checklist for appraisers and users of appraisal services –complies with the Uniform Standards of Professional Appraisal Practice

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4. 4 Procedure: Step One  Definition of the Problem –Identification of: the Client and other Intended Users the Intended Use of the Appraiser’s Opinions and conclusions the Purpose of the Assignment  type and definition of value  definition of the question to be answered for the client  limiting conditions and/or special assumptions the Effective Date of the Appraiser’s Opinion and Conclusion  Sets the basis of market conditions on the as-of date  As-is or Subject to (remodeling, repair, physical changes)  Current  Retrospective  Prospective  Statement of dates  Two dates for each report: date of the opinion and date of the report

5. 5 Procedure: Step One con’t  Definition of the Problem, con’t –Identification of: the basic characteristics of the property  The Real Estate - physical entity; “dirt + box”  Location  Real Property Interest to be Valued  Bundle of Sticks; which rights are to be included in the valuation  Fee Simple, Leased Fee or Leasehold  Whole Interest  Partial or Fractional Interest  Any personal property, trade fixtures or intangible items  Easements, Restrictions, Encumbrances, Leases etc. Scope of Work Necessary to Complete the Assignment Any Extraordinary Assumptions Any Hypothetical Conditions Other Limiting Conditions

6. 6 Procedure: Step Two  Preliminary Analysis and Data Selection and Collection –Plan the Work Schedule –Selection and Collection of Data General Data  Economic, Governmental and Environmental forces Specific Data  Subject property: Land and Improvements  Comparable Data:  Land & Improved Sales  Rental and Capitalization Rate Data –Competitive Supply and Demand Data Identification of the subject’s market  Geographic, Property Type and category  Potential Users, Potential Buyers

7. 7 Procedure: Step Three  Highest and Best Use Analysis  A Four Step Process –Legal Use –Physically Possible –Financially Feasible –Maximally Productive  Conclusions Developed for –Land as Though Vacant –Property As Improved  Conclusion stated in terms of: –Use (Which legal use produces the highest value) –Timing for the Use –Typical Market Participants for the Use

8. 8 Procedure: Step Four  Land Value Estimate –Needed for The Cost Approach Income Capitalization Residual Techniques Property Tax Assessments Condemnation  Six Procedures to estimate Land Value –Sales Comparison –Allocation –Extraction –Subdivision Development –Land Residual Technique –Ground Rent Capitalization

9. 9 Land Value Estimate: Sales Comparison Approach

10. 10 Land Value Estimate: Allocation Approach

11. 11 Land Value Estimate: Extraction Approach

12. 12 Land Value Estimate: Subdivision Development

13. 13 Land Value Estimate: Land Residual Technique

14. 14 Land Value Estimate: Ground Rent Capitalization

15. 15 Procedure: Step Five  Research which leads to the Application of the Three Approaches –Cost Approach –Sales Comparison Approach –Income Capitalization Approach

16. 16 Cost Approach  Land and Buildings  Value is the sum total of cost to buy or create component parts  Summation concept  Physical Concept  Current Costs used  ‘adjusted’ to recognize depreciation and obsolescence –Physical depreciation (immediate and/or deferred) –Functional Obsolescence (curable or incurable) –External (always incurable)

17. 17 Sales Comparison Approach  Premise: Current Value is best indicated by recent sales prices of highly similar (comparable) property  Value in Exchange  Closed Sales are primary  Listings and Offers are secondary  Buyer and Seller - meeting of the minds  Considers the subject as a hypothetical sale

18. 18 Income Approach  Value is the present worth of anticipated benefits  What it cost to create makes no difference.  Estimate anticipated benefits; may be qualitative or quantitative  Estimate “capitalization” rate from market information  Value = Income ÷ Rate. So we apply the Rate to expected Income benefits to find the present worth or value of the property now.

19. 19 Procedure: Step Six  Reconciliation of Value Indications and Final Estimate of Value –Result in 3 different value indications –Which one is right? –Appraiser needs 1 value estimate  All Approaches to Value: –Consider market information –Rely on judgement and careful analysis –Simulate market participant behavior –Result in a slightly different answer because market information is not perfect and our ability to analyze it is not perfect These differences must be reconciled to a final single value estimate amount

20. 20 Procedure: Step Seven  Report of Defined Value –Uniform Standards of Professional Appraisal Practice –Three Types of Report Formats Self-Contained Summary Restricted  Supplemental Standards –Code of Professional Ethics & Standards of Professional Appraisal Practice of the Appraisal Institute –Other Appraisal Organizations American Society of Appraisers American Society of Farm Managers & Rural Appraisers International Association of Assessing Officers International Right of Way Association National Association of Independent Fee Appraisers National Association of master Appraisers

21. 21 Reporting  USPAP Standards Rule 2-1 –Each written or oral real property appraisal report must Clearly and accurately set forth the appraisal in a manner that will not be misleading; Contain sufficient information to enable the intended users of the appraisal to understand the report properly; and Clearly and accurately disclose all assumptions, extraordinary assumptions, hypothetical conditions, and limiting conditions used in the assignment.

22. 22 Report Content  USPAP Standards Rule 2-2 –State the identity of the client and any intended users, by name or type –State the intended use of the appraisal –Describe information sufficient to identify the real estate involved in the appraisal, including the physical and economic property characteristics relevant to the assignment –State the real property interest appraised –State the type and definition of value and city the source of the definition –State the effective date of the appraisal and the date of the report –Describe the scope of work used to develop the appraisal –Describe the information analyzed, the appraisal methods and techniques employed, and the reasoning that supports the analyses, opinions, and conclusions; exclusion of the sales comparison approach, cost approach, or income approach must be explained; –State the use of the real estate existing as of the date of value and the use of the real estate reflected in the appraisal; and, when an opinion of highest and best use was developed by the appraiser, describe the support and retionale for that opinion; –Clearly and conspicuously: State all extraordinary assumptions and hypothetical conditions; and State that their use might have affected the assignment results; and –Include a signed certification in accordance with Standards Rule 2-3

23. 23 Appraisal Myths  You can look up property value in a table or book  An appraisal valuation amount is good for several years  Good appraisals rely on formulas  Techniques and principles used on one location can not be used in another location

24. 24 So That’s The Appraisal Process Wayne Foss, MBA, MAI, CRE, Fullerton, CA USA Phone: (714) 871-3585 Fax: (714) 871-8123 Email: wfoss@fossconsult.com