The Valuation Process

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

Valuation Process
Definition:
A systematic procedure employed to provide the answer to a clients
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

The Valuation Process

Definition of the Problem
Identification Identification
of real estate of property
rights to be
valued

Use of
appraisal

Definition of
Value

Date of
value
estimate

Description
of scope of
appraisal

Other
limiting
conditions

Preliminary Analysis and Data Selection and Collection

General
Specific
Region, City, Neighborhood Subject and Comparables

Competitive Supply and Demand

The Subject Market

Highest and Best Use Analysis

Land as though vacant

Property as improved

Land Value Estimate

Application of the Three Approaches
Cost

Sales Comparison

Income Capitalization

Reconciliation of Value Indications and Final Value Estimate

Report of Defined Value
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Procedure: Step One

Definition of the Problem
Identification of:
the Client and other Intended Users
the Intended Use of the Appraisers 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 Appraisers 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

Procedure:

Step One cont

Definition of the Problem, cont

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
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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 subjects market
Geographic, Property Type and category
Potential Users, Potential Buyers

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
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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

Land Value Estimate:

Sales Comparison Approach

ZONING:
INTENDED USE:
SALE DATE:
SALES PRICE:
LAND AREA (SF.):
PRICE/SF:

Subject
4122 S. Western

Data #1
2656 S. Western

Data #2
2105W. Jefferson

Data #3
2215 S.Vermont

Data #4
3401 S.Western

C2-1VL
Motel

C2-1
Church
12/18/2002
$525,000
24,700

C201
Retail
10/3/2002
$245,000
11,702

CM-1
Store
11/15/2001
$425,000
14,490

C2-2
Hold
2/6/2001
$600,000
10,963

33,830
N/A

$21.26

** ADJUSTMENTS% **
CASH EQUIVALENCY
MARKET CONDITIONS
SALES CONDITIONS

0%
0%
0%

ADJUSTED $/ SF

$21.26

IMPROVEMENTS
LOCATION
FRONTAGE/EXPOSURE
PHYSCIAL FEATURES
LOT SIZE:
TOTAL% ADJ.:
ADJUSTED $/SF:

$20.94

0%
0%
0%
$20.94

$29.33

$54.73

0%
0%
0%
$29.33

-20%
0%
0%
$43.78

0%
0%
5%
5%
0%

0%
10%
-5%
0%
0%

0%
-20%
0%
0%
0%

0%
-10%
-30%
0%
0%

10%

5%

-20%

-40%

$23.38

$21.98

$23.46

$26.27

LAND VALUATION:
SUBJECT (SF)
33,830

ESTIMATED
PRICE/ SF
$23.00

= VALUE

ROUNDED

$778,090

$780,000

Land Value Estimate:

Allocation Approach
Subject Area

Area 1

Lot Value:

No sales

$75,000

Total Value:

$200,000

$300,000

Pctg. Land:

25%

$200,000 x 25% = $50,000

10

Land Value Estimate:

Extraction Approach

Sales Price

$250,000

Less Improvement Value

Cost New:

$200,000

Less Depreciation:

$ 50,000

Depreciated Improvements:
Land Value

$150,000
$100,000
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Land Value Estimate:

Average Sales Price:

Subdivision Development
$351,017

10/1/02
Cash Flow from Sales:
Pre-Sale Open Escrows:
Total Monthly Sales Closings:
Unsold Units:
Monthly Gross Sales Revenue:

1/31/03

2/28/03

Monthly Expenses:
Real Estate Taxes:
Insurance:
Maintenance/HOA:
Sales & Marketing Costs:
Entrepreneurial Profit:
Total Estimated Costs:

$
$
$
$
$
$

Net Monthly Cash Flow:

Present Worth Monthly Factor

at End of Period - 10%:
Present Value of
Monthly Cash Flows:

Time Period (Monthly)

11/30/02
12/31/02

10/31/02

10
14
3,510,169 $

(4,811)
(700)
(2,100)
(280,814)
(351,017)
(639,441)

$
$
$
$
$
$

2,870,727 $

0.9917

2,800,107 $

4
10
1,404,068

(3,436)
(500)
(1,500)
(112,325)
(140,407)
(258,169)
1,145,899

$
$
$
$
$
$
$

0.9835

1,108,543

4
6
1,404,068 $

(2,062)
(300)
(900)
(112,325)
(140,407)
(255,994)

$
$
$
$
$
$

4
2
1,404,068 $

(687)
(100)
(300)
(112,325)
(140,407)
(253,819)

$
$
$
$
$
$

2
0
702,034

(56,163)
(70,203)
(126,366)

1,148,073 $

1,150,248 $

575,668

0.9754

0.9674

0.9594

1,119,831 $

1,112,750 $

552,296

Summation of Cash Flows, Phase II: $6,693,526

Conclusion (Rounded):$6,695,000

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Land Value Estimate:

Land Residual Technique

Net Operating Income

$100,000

Less Income to Improvements

Improvement Value:
Rate to Building (RB)
Income to Land
Land Value

$500,000
X

12%

$ 60,000
$ 40,000

$40,000 10% = $400,000

13

Land Value Estimate:

Ground Rent Capitalization

Income to the Land

Rate to the Land (RL)
Land Value

$ 100,000
10%
$1,000,000

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Procedure:

Step Five

Research which leads to the

Application of the Three Approaches

Cost Approach
Sales Comparison Approach
Income Capitalization Approach
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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)
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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

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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.

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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
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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

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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.

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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

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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

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So Thats

The Appraisal Process

Wayne Foss, MBA, MAI, CRE, Fullerton, CA USA

Phone: (714) 871-3585 Fax: (714) 871-8123
Email: wfoss@fossconsult.com
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