Appraisal 101: How an appraisal is done

It has been a normal scene for prospective client and practitioners to ask an appraiser for the value of a certain property. Some people also thought that after site inspection, an appraiser can render a value opinion already. So, there is a need to answer questions on how an appraisal is done? And why it is important to follow the process?

Appraisal may seem as a simple and fast process. An appraiser shows up at a property for a short time with a camera and tape measure and that’s it. However, the property inspections are only a part of a big process. A typical appraisal report requires 12 to 13 combined hours by appraiser and staff to complete.

Ordering an Appraisal
The process usually begins when a client call or visit the appraiser to order an appraisal. In the telephone or in-person conversation, the appraiser will asks data of the property such as title, building plan, tax declaration, as well as preliminary information of the client, and agree on the scope of work and professional fee. The most important is scheduling of the site inspection.

Identifying the Property
In preparation for the site inspection, the appraiser will study the documents provided by the client focusing on the location, shape and size of the lot, design of the house and decide on what valuation approach that he will use. Additional research will be done in different government offices for the identification of the property.

The Site Visit
Then the appraiser conducts a careful physical inspection of the property and the neighborhood. Take photographs and verify area measurements. Don’t worry about the kids, toys or household disorder. The appraiser is looking at the structure, condition and features of your home.

The appraiser will also roam the neighborhood to observe, estimate the distance between known landmarks in the area. Also, to look for any factors and characteristics that may affect the value of the property, and searching for comparable properties or “comps”. In the language of appraisal, ‘comps’ are sales and listings available in the market.

Pulling It All Together
Next, the appraiser performs in depth analysis of all of the available data. Returning to office is crucial part of the appraisal process. The appraiser will gather all the information about the properties and the financial aspects. Make phone calls to agents, government offices and other parties involved in the transactions to confirm observations or to gather more information. Examine the title and tax declaration for any encumbrance, annotation and non-compliance with the law. Often, property information from several sources is in conflict and it is the appraiser’s task to determine the true state of affairs by means of research, experience and good judgment.

Guided by the principles of appraisal, he will analyze the neighborhood, market, zoning, the predominant use of the area and determine the highest and best use of the property, as vacant and as improved.

In using market data approach, the appraiser will select at least three comps, but generally four or five are necessary to support the basis for the final appraised value. The appraiser makes adjustments to reflect differences in comp properties. Upgrades like painting, chandelier, air conditioners, recent redecorating, or home improvements may add value to a property.

There are other approaches or methods in valuing properties. Every approach is made to substantiate the appraiser’s opinion of market value.

Finalization of a Report
The last part is the preparation and printing of a detailed report, outlining the value of the property appraised and the approaches to value with several addenda including copies of title and neighborhood maps as well as photographs of the property.

The completed appraisal is packaged and transmitted to the client—the property owner, lawyer or company representative who ordered the appraisal.

Thus, appraisal is not a mere “opinion of value”, it follow process and guidelines set by authorities and international standards. Following thoughtful and thorough procedures will provide a complete and credible appraisal.

Bagging an appraisal contract

A big corporation contacted me for an appraisal work. They asked for my credentials and if I’m a bank accredited appraiser. Previously, they hired a research group to do the valuation, but not satisfied with the result.

I commended their effort to look for a licensed and experienced appraiser, and gave them my credentials. I explained to them the difference between an experienced bank appraiser and non-bank appraiser.

It pays to be able to discern between the two.

What are the difference?

Non-bank appraisal is a market niche, often best suited for appraisers who think outside the box. These assignments include appraisal reports performed for situations such as pre-listing, financial reporting, divorce settlement, other litigation related cases, and government agencies appraisal needs. Intended users need to find the most qualified and experienced appraisers. Well-vetted experts are most applicable when testimony is a possibility or when looking at unique properties.

Take lawyers, for example; They need someone who can report not only well enough to be reliable but also defensible in court and a communicator. It takes a good professional to write a report, but an even better one to be effective to withstand in court trials and argumentation with fellow commissioners and lawyers. An appraiser should know how to convince the commissioners in court of his valuation, and come up with a recommendation, thereby hastening the trial process.He must also be able to communicate complex valuation theory to assessors, lawyers and judge who may have no deeper understanding of valuation processes, approaches and adjustments. In other words, the appraiser must become an effective teacher in addition to being a good report writer.

Meanwhile, many appraisers who work primarily with banks are confine within company scope of work. Banks often require appraisers to utilize comparable sales within a “price range” of an area, and not to exceed company guidelines when adjusting comparable sales and in using valuation approaches.

Clients and user of appraisal work should tread very carefully when selecting appraisers. Choosing an appraiser with limited experience could result in less than optimal results.

After the discussion with their top management, they decided to get my service. Another big corporation in my client list.

Challenges In Appraising Warehouse Properties

Appraisal of a warehouse can appear straightforward compared to other appraisal assignments. A warehouse appraisal involves comparing a building that is primarily an open shell to similar buildings. Some appraisers tend to assume that one “box” is pretty much the same as another. However, a number of warehouse characteristics can present challenges during the valuation process.

Some appraisers end in using Cost Approach method as a generic method in appraising buildings. But there are several critical differences appraisers need to keep in mind. First, knowing the remaining economic life of a structure is a big factor in determining what method should be used. Appraising old structures using the cost approach method may generate an incorrect result. Income approach is the reasonable method in this situation. Second, the importance of solving the question of the highest and best use of the property- as vacant and as improved, gains ground when the subject property is old and located in a neighborhood where other best use is possible and more feasible.

In appraising these warehouses using Income Approach, it is essential to carefully consider the following factors in selecting comparables:

• Excess land
• Truss height
• Percent of office space
• Loading facilities
• Truck maneuvering distance
• Floor thickness/loading capacity
• Power service
• Land-to-building ratio
• Size relative to typical building size

The most important, location-related factors can differentiate warehouses located within the same community. The value of a warehouse facility is tied to the ability to move goods efficiently in and out of the warehouse. Any inefficiency reduces profitability.

In a challenging profession, an appraiser should think “out of the box” in looking methods that will result in a reliable and unbiased opinion of value.

What they say on Appraiser Gus?

Let our clients and peers speak.

Gus Agosto has been perceptive enough to have realized the potential conflicts of interests with regards to meeting the sellers and has been able to navigate and maneuvered satisfactorily around it, and still come out with a justifiable figure that satisfies both parties.

Of course I would recommend him to others as he has performed what was expected of him and more.”

Richard Azares
Managing Broker
DiamondCrest Real Estate Services

“Gus Agosto is highly competent and much more knowing him in the high level of ethical standard and practice. He is knowledgeable and trustworthy in his assigned work.

We were doing the appraisal business together and yes Gus Agosto is commendable.”

Tom Academia
President
Magaca Appraisal & Konsult

“As a fellow appraiser, I can say that Gus is professional and considerate to his colleagues suggestions and opinions.
He is much updated with information and current events that could have an impact on the real estate industry especially the appraisal service.

Yes, I recommend him, because one does not only get an appraiser that can present you the technical aspect of the property but also a broker that knows the marketing conditions of a given location.”

Germaine Ouano
Managing Partner
Intech Property Appraisal, Inc.

“Gus is a new breed of appraiser that can be relied on the opinion of valuation. He is very active practicing appraiser/ someday a lecturer on the update of the Real Estate Profession and economic trend in the Philippines and ASEAN.”

Oscar Labrador
Founder
Cebu Appraisers

Appraising Appraisals

As 2014 come to a close, let me share some highlight of major career accomplishments in appraisal.

It was a great leap in my appraisal career. I served clients from different stratum of our society-property owners, lawyers, brokers, accountants, ambassador, company, cooperatives and foreign individuals. More and more assignments means more places visited. It was a year of valuable experiences.

After my stint with Intech Property Appraisal as its Managing Partner, series of assignments and appraisal orders came. My biggest clients were the CFI Multipurpose Cooperative and a subdivision developer. I appraised its properties ranging from vacant lot, residential, and commercial buildings and institutional. The most challenging assignment was a one-hectare residential lot. It was challenging because it has a variety of problems on its title, physical characteristics, occupants and expropriated portion. In addition to the most commonly used methods in appraisal (market data, cost and income approach) I have to use subdivision development method in appraising the said property to draw closer out with the most reliable and accurate value .

In these assignments, I learn a lot of lesson in practicing appraisal. My foundation as a researcher, as an economist and being a real estate broker helps a lot. In every appraisal assignment, I always bear in mind that I should come out with an unbiased and justifiable opinion of value.

The most challenging assignment was to be appointed by a regional trial court as member of the Commission that will study and report the fair market value of a property on trial. It is an assignment where an appraiser has to face the grilling of the judge, lawyers, assessors and other parties. It needs courage draws from experience and technical capability.

Appraisal assignments also mean travel to different places. I visited places and seen faces in different part of the country. Beautiful beaches of Camotes and Bohol, picturesque mountains in Negros and Agusan, scenic islands in Iloilo, native delicacy in Bayawan City- the baye-baye ( I keep looking for laki-laki), Marang in Cagayan de Oro, Binagol in Leyte and more.

It was a great year of raising the level of professional capabilities and experience.

Photos from the Field: The Church in Palo

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In the course of my appraisal work, I visited places like Palo Church.

Palo Church is a historical landmark in Palo which was built in 1596 by Fr. Alonso de Humanes, a Jesuit who came to the place when the sitio had only two houses, who spread the gospel of Christ, baptized natives, taught the children to read and write, pray the rosary, sing church hymns or play the flute.

Experience in Appraisal Matters

In real estate appraisal practice, there are challenges that an appraiser should strive to overcome and characteristics needed to acquire.

Valuing properties requires good judgment. An appraiser can use different methods in valuation, outlined in the international valuation standards. There are different approaches like market data, cost or income approach in valuation. He can also use other approaches like subdivision development approach, residual approach and many more.

But in choosing an appropriate valuation methodology is another thing. The appraiser considers not only the purpose of the appraisal laid out by its client, but the most important, the property’s highest and best use. This judgment emanates from the appraiser’s experience.

Good judgment is also required in analyzing comparables or “comps”. The appraiser identifies the “terms” of the sale – was it an arm’s length transaction in which both parties were equally motivated? Was it a relocation transaction where an owner was attempting to shorten the time on the market to find a buyer? Regardless, no one can tell the appraiser on what comparables to use. It is based on the appraiser’s judgment.

In whatever situation, an experienced appraiser has an edge. He always strive to look for other appraisal methodology and will cull more data on comparables with the sole purpose of rendering an opinion that will truly represents the true market value of the property.

Thus in real estate appraisal practice, experience and good judgment truly matters.

Life of a Real Estate Appraiser

What an appraiser does day to day ?

Real estate appraiser or valuer is someone who estimates the value of the land and the buildings. Most commonly, appraisers perform work for banks and companies, although many appraisers engage in a wide range of assignments, including for example, for sale, litigation, right of ways, divorce, valuation for financial reporting, estate planning and more. The appraisal work can vary greatly and can often be more complex than typical valuation assignments.

When carrying out appraisal work, appraisers’ main role is to provide an objective and unbiased opinion about the value of a property for their clients, who typically are owners, investors or lenders. Appraisers do this by gathering a series of facts,site inspections, interviews, statistics and other information, then analyzing the data to develop an opinion of value.

So what does an average day in the life of a typical appraiser normally look like?

Individuals who enjoy analytical thinking and problem solving generally have the makings of good appraisers, since each valuation assignment challenges the appraiser to put his/her analytical skills into practice, exercise good judgment and communicate effectively.

Although appraisers are typically based in an office, they spend a good deal of time at site visits. Most work full-time, during standard business hours, but appraisers often have the flexibility to customize their work schedules.

Depending on assignment, the appraisal site and specific tasks will vary. A licensed and certified appraiser is qualified to appraise all types of properties including lot, house and lot, condominiums, duplexes and apartments. An experienced appraiser is usually doing appraisal of all properties, but generally focuses on property used commercially, such as office buildings, stores and hotels.

Often times, an appraiser will conduct a fair amount of research up front before beginning work onsite, such as verifying legal descriptions of real estate properties in the assessors office or other public records.

Appraisal On-site

While onsite, an appraiser will inspect both new and existing properties, noting unique characteristics of the property or surrounding area, such as the property’s condition, structure, interior, amenities and upgrades. The appraiser also will photograph the interior and exterior of the property to use when preparing the appraisal report.

An appraiser usually uses the three approaches to value- sales approach, cost and income approach. Using the sales approach, the appraiser examines comparable sales after the site visit, to help determine value. The appraiser will also consider location and condition of the property, neighboring properties, documents, records, previous appraisals, the view from the property and income potential.

Depending on the assignment, an appraiser may also use the income approach or cost approach to develop an opinion of value. Cost approach seeks to determine how much a property would cost to replace (meaning, rebuild) after subtracting accrued depreciation. While income approach is a method of arriving at the appraisal value of a property on the basis of its opportunity cost.

Analyzing all of the data gathered, the appraiser prepares the written report showing the opinion of value.

Real estate appraisal is an interesting, rewarding, and challenging profession.

Appraiser as an Expert Witness


Real Estate Appraisers
are often requested to provide an expert opinion as to the value of a property (an appraisal), for the purposes of determining just compensation. In an expropriation proceeding commissioners should at least be appointed to determine just compensation in accordance with the procedure in Section 5 of Rule 67 (Rules of Court). xxx the court shall appoint not more than three (3) competent and disinterested persons as commissioners to ascertain and report to the court the just compensation for the property sought to be taken.xxx

Additionally, appraisers are often requested to conduct an appraisal where the purpose is not explicitly described as being for litigation, but where litigation may result. Examples would be an appraisal completed for eviction cases, divorce proceedings, foreclosure or power of sale, or for civil forfeiture. Although appraiser’s reports are often entered into evidence for court, the appraiser is not necessarily called upon to provide expert witness testimony or to defend the report. However, it is prudent for the client ordering an appraisal to be sure the appraiser is aware of the duty of the expert witness and the court rules for report requirements, prior to engagement for an appraisal assignment.

“It is another area in our profession where we can lend services and specialize in” said Gus Agosto. Gus has been appointed by a lower court in Lapulapu City as a commissioner that will help the court in determining just compensation in expropriation case on trial. He also provided support to lawyers for litigation and court cases like eviction, judicial settlement and divorce.

The appraiser as experts may also provide retrospective appraisals, independent-appraisal analysis, appraisal review , expert witness testimony and litigation-support services in all real property valuation.

When selecting a real estate appraiser for litigation support, knowledge and experience matter. An appraiser should strive to be more knowledgeable and experienced property appraiser in providing litigation support and expert witness services.

Highest and Best Use

It Is important for a real estate practitioner to know not only the current market value of the land they are marketing or dealing with. It is also equally important to determine its highest and best use. The highest and best use of a specific parcel of land is not determined through subjective analysis by a property owner, developer, real estate agent, or appraiser; but rather, it is a use shaped by the competitive forces within the market where the property is located.

In a real sense, the definition of highest and best use encompasses four tests. It is …
• the most probable use of land or improved property that is legally possible, physically possible, financially feasible (and appropriately supportable) from the market, and which results in maximum profitability.

An attempted analysis of highest and best use involves two considerations: [1] the most likely and profitable use of the site “as if vacant” under the requirements set forth above and, [2] if a property is “already improved”, it is the use that should be made of the property to maximize value for non-income producing properties or, maximize net operating income on a long range basis for investment properties. In cases where capital expenditure is necessary to renovate or improve an income producing property, these costs must provide a sufficient rate of return (to the owner) for the total amount invested in the site and building improvements.

Basic highest and best use assumptions include:

• If the property is located in an area “zoned” for commercial use, the maximum productivity of the land as though vacant will likely be based on commercial use. If, however, the competitive level of demand is greater for say, residential or multi-family use, then the highest and best use of the property as improved would be for residential use. If market preference conflicts with zoning (and consequently violates the legal permissibility test), a developer will consider if there is sufficient profit incentive to justify the added legal costs, extended time frame, and potential neighborhood opposition before obtaining a zoning change and developing the site.

• As long as the value of the property “as improved” is greater than the value of the site as “if vacant”, the highest and best use is usually the “improved” property. Once the value of the vacant land exceeds the value of the improved property (including demolition costs), highest and best use will usually dictate that improvements be demolished.

The following are examples of narratives from appraisal reports outlining the primary criteria in estimating highest and best use…

LEGALLY PERMISSIBLE USE
• The present zoning classification of Highway Business encourages the use of the subject property for retail —clearly a definition consonant with the present use of the subject property and surrounding properties. Environmental conditions and urban infrastructure are adequate to support the present use and it’s current use appears to legally conform with the current zoning ordinance.

• The present lack of zoning would allow for a wide variety of residential and/or commercial/industrial uses. As vacant, the proposed improvements would be legally permissible subject to the same land use regulations that apply to all property types such as erosion control measures, environmental safety, watershed implementation, and government agencies compliance. There were no apparent adverse easements or encroachments which would adversely impact subject and there are no known private deed restrictions which would prohibit full utilization of the site.

• Lack of zoning in the county and no known restrictions concerning the property would permit virtually any use. Even though new zoning regulations may be imminent in the near future, it is probable that current use patterns (retail and offices – a supermarket, insurance office, restaurant, bank branch, convenience store, and so forth) would entail similar zoning.

PHYSICALLY POSSIBLE USE

• The vacant site is near level, highly visible from the highway, and is considered suitable for “low rise” improvements. Although no soil report has been reviewed, it is the appraiser’s opinion that the soil has sufficient load bearing capacity to support construction. All public utilities are available at the street and capacity for utilities does not appear to be a limitation.

• If vacant, the site appears to be of sufficient size to accommodate many types of commercial buildings and parking requirements for those buildings. Likely uses would include office or retail. As improved, the existing retail building adapts well, still has significant remaining economic life, and therefore should not be demolished. On the other hand, the roof should be replaced and exterior painted to sustain the condition of the building.

• The subject site is mildly sloping at its most visible/usable portion. Improvements are possible but construction would be limited by the size, shape, and topography of the site as well as the ability of the vacant site to accommodate on-site well and septic placements. In January, 2002 hopes for a new sewer line to the area were diminished after local officials decided against building a sewer line through the valley. Instead, they elected to spend Php 1,500,000 for a small treatment sewage plant. Further, the recent construction of a nearby Food Lion Center in this rural location required construction of an on-site waste treatment facility that cost in excess of Php 500,000 and required the acquisition of four additional acres. These examples, and the prices paid for raw land, are reflective of the difficulty, additional development risk, and increased costs necessary to develop marginal sites for commercial use.

FEASIBLE AND MARKETABLE USES

• The current market value of the subject is driven by its current use. A general shortage of developable sites in this mountainous region has sustained land prices, encouraged development of marginal sites, and demolition of those buildings that no longer produce economic return. Case in point, rapid development along the Highway corridor. The advent of growth along the corridor has driven prices out of reach for most uses except those catering to brand name retailers, fast food/restaurant chains, and/or strip centers. Outdated buildings are being acquired and demolished to make way for more modern structures that can produce greater economic return.

• For the subject, it is fairly new and the cost to demolish would appear to make this property too costly as raw land. The location has high traffic volume – a requirement for retail use, but it has only marginal visibility (due to it’s elevation above the highway) and limited access – also requirements for retail. It’s present use as retail is constrained by the following: a lack of road frontage, excessive above-the-road elevation, small site size, and poor access – factors that would likely discourage brand retailers from acquiring the site if vacant. Although access may be cured at some cost, the elevation of the site, limited visibility, and blocked signage cannot be financially overcome. Market data suggests office and “secondary” retail pricing are competitive. Given these limitations, probable uses would include: [1] the continued retail use or, conversion to office use if conversion costs can be sufficiently amortized.

• The property is presently improved with a one-story 2000 sq. m. branch bank facility. The structure is reasonably well designed and in good condition however, it does not have the modern appearance of more recently constructed facilities. On the other hand, there are no other branch bank facilities in this section of the City and the present use as a branch bank is felt to command a competitive advantage due to the lack of competition of other banks in the market. Further, it is the appraiser’s opinion that use of this location for this purpose may command a premium in the market.