No two properties are alike

marketvaI have a client who asked me if I am using the same appraisal report format in my practice.  I quickly replied no. Why? Real estate properties have different appraised values depending on how you intend to use the appraisal. For instance, valuation for insurance may be very different than the value in the market, estate tax, property resale, or insurance. Other assigned uses include investment, liquidation, price confirmation, equitable distribution, loan collateral, retrospective value and many more.

Qualified and educated appraisers understand the many different types of values, assigned uses, and market condition in an specific area. He or she works with client to choose the proper type of value so that they can use the appraisal correctly and effectively.

Whenever there’s a question about the value of your property, there’s also a risk involved. It may be the risk of selling too low, or of paying too much: the risk of being under or over insured; the risk of not getting your fair share in a division of property; the risk of incurring tax penalties or being audited when calculating estate taxes.

A professional appraiser helps you manage these and other such risks by providing a written opinion of value upon which you can base your financial decisions. Rather than being just an “educated guess”, the professional appraiser’s value conclusions are based upon prescribed methods of valuation, research and report writing.

Bankers, investors, insurers, brokers, trustees, lawyers, judges, government agencies – ALL are dependent upon the knowledge and expertise of the appraisers, and so are you. Too often and too late, people find out that the appraisals they have are inaccurate or misleading, resulting not only in greater risk to themselves, but also a waste of millions out of their pocket.

No two properties are alike, no two appraisals are alike.

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.

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

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.

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.

Appraisal add credibility to listing price

Pricing a listing is one of the hardest— and perhaps most important — tasks in real estate. Sellers can get it wrong in either direction: If the asking price is too low, the sellers might end up leaving money on the table; if it’s too high, they won’t tap into the right target group, will lose a lot of time and may then end up selling for even less.

Can you rely on a “mata-mata” or guessing? The answer is “NO”. You cannot. Relying on a guess or the word of a non-certified person is inaccurate and will not estimate the true market value of a property. However, with the educated and experienced real estate appraiser, who apply the methodology of appraisal and employ the ethical guidelines for determining values, can be relied on as unbiased and independent. Appraisal will add credibility to your pricing.

In addition, appraisal analysis the market to determine the highest and best use of the property, thereby come up with a value that is credible and reliable.

Buyers, particularly foreign investor and businessmen, tend to buy property with confidence if it was appraised by a third party.

In our real estate profession where trust is the most important aspect, a real estate professional-broker and agents, should encourage in acquiring the services of a licensed appraiser. It is more beneficial to the clients having it appraised and help in fostering our relationship with them. In the long run, the confidence of the public on real estate practitioners.

Add credibility to your listing price, get the services of a real estate appraiser.

Why Do You Need a Real Estate Appraisal?

Anytime you buy or sell real estate, you need a property appraisal. The primary purpose is to find out exactly how much your property is worth. Banks and similar lending companies also require it, before a buyer can obtain a mortgage.

An appraisal develops an “educated and trained opinion” on the value of the property. It also, in some circumstances, may ascertain the best use of the property, garnering the best selling price. For example, a long-time residential property may be in an area that has been rezoned for limited commerce, which could potentially bring in a higher sales price than marketing the real estate to potential residential buyers.

An appraiser differs from an inspector, who is looking for things that need to be corrected, repaired or replaced — things that are required by law to be completed before the property can be sold or to enhance your sale price. Though an appraiser will look at these same things, he/she is only interested in developing the value of the property.

A real estate appraisal is based on the highest and best use of real property — what use of the property will produce the highest possible value? The final appraisal must be both profitable and probable.

The real estate appraisal includes a definition of the type of value that is being developed — whether it is a market value (what most sellers need), a condemnation value, quick sale value, and so on.

The Process
The appraiser looks at each property individually, beginning with an objective inspection of the interior and exterior of the home or building, as well as driving through the surrounding neighborhood. The appraiser looks for the assets, as well as the detriments, of the property. For homes, gross living space, quality of construction, location, layout, the number of bedrooms and bathrooms, the lot size, condition of the home and land, central air conditioning, landscaping, number of fireplaces or the lack thereof, decks, pool, fencing, recent renovations, amenities provided by the surrounding neighborhood, and crime statistics of the area are all considered by the real estate appraiser.

Living space is calculated by measuring the outside of the home. It does not include such areas as the garage, porches, sheds, and so on. Basements are generally calculated separately from the living space. The contributory value of basements is determined by the local market, government regulation, if it is finished or not (and the quality of the finish), and so on.

The real estate appraiser usually only considers permanent buildings within his/her appraisal. Fixtures that can be relocated, such as above ground pools and sheds, are not included in the appraisal.
If you are the real estate seller, you should point out any features, amenities or improvements of your home that are not readily discernable.

Next, the real estate appraiser analyzes the available market data for your area and the surrounding neighborhood, including current and historical comparable sales, current offers for comparable homes, pending sales, and proposed improvements. The appraiser gathers data from a variety of sources, as well as his/her own personal knowledge of the local market. The appraiser then compares your real estate to the broader market.
Each real estate appraiser has his/her own process of analyzing, collecting and reconciling the needed appraisal data. If you get five different appraisals for your real estate, you may receive five different appraisal opinions. They should, however, all be within a similar value range, if they are completed within the same timeframe and under the same conditions.

Though the real estate appraisal is not for public consumption, it may be shared with all parties concerned. For instance, a buyer has offered $150,000 for a home, but the buyer-side, commissioned appraisal value is only $146,000. Sharing this appraisal with the seller means that the owner can do needed improvements to bring the price up or offer the real estate to the buyer for the appraisal amount.

For the highest appraisal possible, property sellers should have an inspection and appraisal done before putting the property on the market. First, the inspection in order to make any needed repairs or renovations. Then, get the appraisal to ensure you are getting the most for your real property.

John Harris is an expert researcher and writer on real estate topics such as economics, credit improvement tips, home selling advice and home buying preparations.