STEP 2 & STEP 3 OF THE APPRAISAL PROCESS

STEP 2: SCOPE OF WORK DETERMINATION

-The scope of work refers to the amount and type of information researched and the analysis applied in the valuation assignment.

-Scope includes, but is not limited to, the extent of:

• Identification and inspection of the subject property

• Research into physical and economic factors that could affect the property

• Data research, verification and inspection of comparables

• The type and extent of analysis applied

-The scope of work applied must be sufficient to result in opinions and conclusions that are credible in the context of the intended use of the appraisal.

-may be reflected in the outcome of the report, because the degree of due diligence demanded by the client may impact the value conclusions.

-inked directly to the legal responsibilities and standard of care concepts expected for professional work

-defines both the degree of due diligence needed to develop a credible value conclusion and the appropriate means to report this.

STEP 3: DATA COLLECTION

-identifying and gathering the information needed to appraise the subject’s value.

-Data collection and property description involves collecting and analyzing data on the subject property and comparable properties

- two types of data to be collected when carrying out appraisals:

• General data is information on the country, province, municipality, and neighbourhood categorized under social, economic, political, and physical factors

• Specific data that relates to the property and its rights

-The market environment, in which the subject property would trade if it were listed, is affected by national and international factors of supply and demand.

-Their influence on property value may be direct or indirect and their effects are often (although not always) felt in the long run

-An appraisal report should contain a section on the background analysis that analyzes developments and trends in social, government, legal, political, and economic matters at the appropriate geographic levels.

• Provide the user of the report with an understanding of the social and economic climate within which the market forces of supply and demand are operating

• Indicate the current status of the subject property relative to the market trends

• Establish that the comparative sales data used in the appraisal report have been selected from a market where the conditions are similar to those surrounding the subject property

General Economic Factors

• Inflation

• Unemployment

• Interest rates

• Exchange rates

• Government policies

• Political stability

-These factors create an overall economic climate and influence the intermediate to long-term expectations of market participants.

-tend to change more slowly and are less important to the appraiser than the factors affecting supply and demand within a particular real estate market.

-Appraisals are usually prepared based on a very short time horizon (e.g., a few weeks) and the market sales evidence is very recent.

-Therefore, most general economic factors can be ignored since they will remain the same over a period of a few weeks.

-The long-term analysis should consider the basic economic health of the nation and the likely major changes that will influence real estate markets.

-The ultimate purpose of these considerations is to describe the position of real estate investments in comparison with other investments.

-A trend is defined as a series of related changes brought about by a chain of cause and effect.

-Most lenders, buyers, and sellers are concerned about trends that affect values from the immediate past to the immediate future; longer term trends are generally less influential.

Regional Analysis

-If a region undergoes changes relative to other regions, local real estate values may change

-Regional analysis may be particularly important in Canada where regional differences in employment, economic base, and income levels are significant.

-An analysis of regional considerations usually deals with natural resources, population migration, climate, topography, location of markets, income levels and trends, transportation systems, and tax levels.

-The real value of an economic base study to an appraiser lies in a description of the level and changes of the region’s sources of employment and income.

-The social structure of a region is described in terms of population characteristics, age structure, types of employment, income levels, and racial, ethnic, and religious characteristics.

Neighbourhood Analysis

-A neighbourhood is defined as a geographic area of relatively similar residences and physical surroundings.

-the characteristics of a neighbourhood usually have the greatest impact on the subject property since the neighbourhood constitutes a property’s immediate environment.

-The value of the subject property is highly related to trends and developments in the neighbourhood.

-The neighbourhood boundaries should be shown on a map in the appraisal report.

-The area should be relatively homogeneous with respect to a number of variables, such as the social background and income levels of the residents and the quality, price range, age, and size of the structures.

- In defining a neighbourhood, the key characteristic is the degree of homogeneity of an area relative to other possible areas of larger and smaller size.

-Most neighbourhoods have rather distinct boundaries that include the following:

• Natural barriers, such as hills, streams, lakes, and swamps

• Man-made barriers, such as railroad tracks, streets, highways, and utility rights-of-way

• Legal boundaries, such as subdivision lines, zone boundaries, school district boundaries, city limits, and provincial lines

-The street pattern, similarity of structural design, general property maintenance and appearance, the drainage in the area, and the amount of open space are additional important considerations in judging relative homogeneity

- It is the appraiser’s job to judge the value-enhancing and value-detracting aspects

-Wealth and income levels of the neighbourhood’s residents, together with price and value trends,

-Stability of incomes should be considered

-The residents’ economic characteristics

-educational levels, occupations, and age of the residents

-should consider whether the community’s zoning, building, housing, fire, electrical, and plumbing codes are adequate for the neighbourhood.

-The manner in which the codes are administered and applied to the neighbourhood

-Services provided to the neighbourhood are important aspects of the local government

-the level of real property taxes needs to be compared to similar neighbourhoods.

-accessibility: the level ease with which customers can reach the property

Subject and Comparable Property Data

-An appraisal normally requires thoroughly inspecting the property inside and outside.

-The site analysis should consider the following factors:

• Physical factors

• Location factors

• Legal – governmental factors

• Economic factors

• Environmental factors

-Improvements to the site should also be inspected

-property inspection records should be kept for reference at a later date.

-Measurements should be carefully recorded;

-Items that are important to the participants in the market should be noted

Transactional Elements

appraisers must watch for elements in a transaction that may have influenced the sale price. Potential transactional influences might include the following:

• Time allowed for the sale: Real estate is a commodity that cannot be sold quickly. The length of time allowed for the sale to take place will affect the eventual sale price realized; The relationship between time and the sale price of a property is not necessarily linear

• Amount of advertising: If a property is sold without advertising, its sale price will normally be lower than if it is adequately advertised. This occurs because fewer potential buyers are aware the property is on the market.

• Relationship between the parties to the sale: in some cases there may be some relationship between the buyer and seller that results in voluntary concessions being made; A relationship may also exist where one party exerts undue influence over the other.

• Terms of financing involved: The terms of the financing involved in any particular sale may also affect the sale price, e.g. vendor taking back a mortgage, purchaser assumes a low-interest mortgage

• Special purchasers: Buyers and sellers are influenced by available substitute properties. However, a special purchaser may have a ceiling price that is much higher than that of other potential buyers. Their presence in a transaction will greatly extend the range of possible bids. The price paid by a special purchaser is seldom, if ever, useful evidence of the value of other similar properties.