Real Estate Financing & Investment

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Since we started today on the topic of property appraisers, I though a little more about it. Here are some useful questions you may want answers to.

Name one of the methods of estimating cost. What are some strengths and weaknesses of this method?

The sales comparison approach is one method in estimating cost. Certain strengths and weaknesses (in parentheses) include:

  • Comparable Sales: past sales (not current information), currently listed for sale (yet to sell), under contract (may not be getting full exposure)
  • Condition of Property: photos (can appear better), description (may not be correct), property right (advantages/disadvantages not disclosed)
  • Probable Range of Value: (nothing concrete and relied on as per above – SUBJECTIVE and MARKET DEPENDENT – requires what a willing buyer would be willing to pay etc (provides an average but needs a lot of information externally) relies on patterns in the market place etc (can’t always be properly identified and quantified).

Name one way the Income Approach can provide tools for the Cost Approach.

The income approach provides tools for the cost approach. Based on the monthly rent amount you can determine a numeric value in reference to an item of interest (ie. 150 × $200 per month = $30,000.) This is important information, and it provides the appraiser with factual market data in putting a dollar amount in valuing the combined loss with respect to land and building.

How does the appraiser measure the contribution of an element such as a fireplace? Is this a subjective process?

A fireplace in a property is a great asset to have. Not only is it operating as a functional tool, it is aesthetically pleasing. For this post I will assume that if a fireplace is present, it is one which the buyer would be seeking (wood/gas, etc) in the given circumstance. With that said, the question of an appraiser measuring the contribution of any element, or specifically a fireplace, always includes a subjective process. In valuation, even if using the most stringent of approaches (cost), being subjective (actual value of element) is essential in determining property values. Utilizing the expertise of the appraiser, and if required a team of other professionals, ensures a true value assessment can take place and that the current market can be best described.

There are many ways for an appraiser to measure the contribution of an element such as a fireplace. If applied properly, all of the approaches may be used although it is sales comparison approach that highlights the true market value of these independent elements. This is important to understand because each element acts independent from each other. When appraisers have assignments with these questions, big ticket items (outside of # bed, # washroom etc), come into play. The first question in any assessment is what does the subject property have and not have after which the best value approach is determined (outside of assignment goals of clients). Once this occurs its requires the appraiser to determine the true market value, not simply the cost, of a fireplace. Market evidence will provide insight although if compared against more than one property discrepancies will become apparent. It is these differences (market conditions, comparable and actual cost of the element, etc) that will require a subjective opinion at which point the contribution of an element is measured and documented.

Does an appraiser only appraise value?

An appraiser only assess value; based on the intentions of the assignment or client. The reason for this is that in any appraisal value is always at core. An appraiser is evaluating (in number, percentage, etc) the worth of items of interest. In each approach a fixed though process take place to determine an opinion of value – this can only be determined if a valuation takes place at all levels.

Can an appraiser expand their practice to include feasibility analyses?

Yes. In fact feasibility analyses could commonly be associated with highest and best use. Although this analysis is in more details in relation to the property a client may request a different use ‘outside’ of highest and best use. These feasibility analysis are very important in cases such as this because a desired use from the client needs to be assessed. Although it may not be the best suited option available (highest return) this analyses can demonstrate and provide factual information on such ‘other’ intended use

How important would such an expanded service be to a client?

I feel it would be dependent on the client’s requirements. As it was mentioned in the discussion, overload is overkill and sometimes certain assessments are simply not necessary. As I am the type who seeks a deeper understand if it is financial feasible I would assume the assessment I would do is 360 degrees. The issues here would be what I call as ‘time turnaround’ – the last thing I need would be waiting for a report when I know it’s a good deal and it be purchased by someone else.

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