S1/P1 The Valuation Process

Question 1

What are the first four steps of the “valuation process”.

Answer 1

1. Identification of the Problem
2. Scope of Work Determination
3. Data Collection and Property Description
4. Data Analysis

Question 2

Step 1:

Identification of the Problem

Includes

Answer 2

1. Identify the client and intended users
2. Identify the intended use
3. Identify the type and definition of value
4. Identify the effective date of the opinion
5. Identify the relevant characteristics of the property
6. Identify any assignment conditions

Question 3

Step 2:

Scope of Work

Includes but not limited to

Answer 3

1. How extensively the property is identified
2. The level and extent that the tangible property is inspected
3. The amount of research data required and what type of data
4. The type and extent of analyses applied
5. Type of assignment
6. Type of property

Question 4

Step 3:

Data Collection and Property Description

Includes

Answer 4

1. Market Area Data
2. Subject Property Data
3. Comparable Property Data

Question 5

Data needed by appraisers can be divided into ____________ data and ___________ data.

Answer 5

general data

and

specific data

Question 6

General Data is

Answer 6

Data that relates to the “four forces” that affect real property values:

1. Social
2. Economic
3. Governmental
4. Environmental

Question 7

Specific Data is

Answer 7

Details about the property being appraised, comparable sale and rental properties, and relevant local market characteristics.

Question 8

Market Area Data is

Answer 8

General characteristics of region, city and neighborhood.

“Market Area Data” falls into the category of “general data” and focuses on trends that are affected by the four forces that influence value.

Question 9

Trend is

Answer 9

A series of related changes brought about by a chain of causes and effects. Trends are forecast through economic base analysis, statistical analysis, market analysis, and analysis of economic indicatiors and surveys.

Question 10

Subject Property Data

Answer 10

1. Specific data focuses on relevant geographic and geologic characteristics of the land or site and characteristics of the improvements (such as type of building, physical components, legal components, and personal property).
2. Ownership history
3. Cost and depreciation data
4. Income and expense data.

Question 11

Comparable Property Data

Answer 11

Can be general data or specific data.

1. Physical and legal components.
2. Sales date and price, cost and depreciation data, income and expense data, capitalization rates.
3. Financing arrangements that could affect selling prices.
4. Supply and demand data pertaining to comparable properties.

Question 12

Supply and demand data pertaining to comparable properties

Answer 12

• Supply data includes: Inventories of existing and proposed competitive properties, vacancy rates, and absorption rates.
• Demand data includes: Population, income, and employment data pertaining to potential property users and the impact future demand might have on the present (or proposed) use of properties comparable to the subject property.

Question 13

Comparables is

Answer 13

A shortened term for similar property sales, rentals, or operating expenses used for comparison in the valuation process. In best usage, the thing being compared should be specified, e.g., comparable sales, comparable properties, comparable rentals.

Question 14

Step 4:

Data Analysis

Includes

Answer 14

• Market Analysis: Demand Studies, Supply Studies, Marketability Studies
• Highest and Best Use Analysis: Land as though vacant, Ideal improvement, Property as improved

Question 15

Market Analysis is

Answer 15

The study of the supply and demand in a specific area for a specific type of property.

1. Competitive supply and demand data is necessary to determine the present and future competitive position of the property in its market.
2. A description of prevalent market conditions helps the intended users of the appraisal to understand the motivations of participants in the market for the subject property.
3. The data and conclusions generated through market analysis are essential components to the other steps of the valuation process.

Question 16

Highest and Best Use is

Answer 16

The reasonably probable use of property that results in the highest value.

The four criteria that the highest and best use must meet:

1. Legal permissibility
2. Physical possibility
3. Financial feasibility
4. Maximum productivity

Alternatively, the probable use of land or improved property-specific with respect to user and timing of the use that is adequately supported and results in the highest present value.

Question 17

Highest and Best Use analysis of “Land as though vacant”

Answer 17

a. Aids the appraiser in identifying comparable properties.

• The subject property should be compared (whenever possible) with similar properties that have sold recently in the same market.
• Comparable properties that do not have the same highest and best use as the subject property are usually eliminated from further analysis.

b. Necessary to deriving an opinion of land value.
c. Identifies the ideal improvement and use that maximizes the land income.

Question 18

Ideal improvement should meet the following criteria:

Answer 18

a. Take maximum advantage of the land’s potential to satisfy market demand.
b. Conform to current market standards and the character of the area.
c. Contain the most suitably priced components

Question 19

Highest and best use analysis of “Property as Improved”

Answer 19

a. Aids the appraiser in identifying comparable properties (the same as when vacant).
b. Aids the appraiser in deciding which of the following options should be pursued for the property:

• Maintain the improvements as is.
• Modify the improvements (for example, renovate, modernize, or convert to an alternative use).
• Demolish the improvements.

Question 20

Review of the decision process for Highest and Best Use:

“Land as though vacant”

Options

Answer 20

Options:

• Improve
• Leave vacant

Question 21

Review of the decision process for Highest and Best Use:

“Property as Improved”

Options

Answer 21

Options:

• Leave as is
• Alter
• Demolish

Question 22

Highest and Best use conclusions should specify the following criteria:

Answer 22

a. Use(s)
b. Timing for the use(s)
c. Typical market participants for the use

Question 23

Valuation process

Answer 23

A systematic set of procedures an appraiser follows to provide answers to a client’s questions about real property value

Question 24

Client

Answer 24

The party or parties (i.e., individual, group, or entity) who engage an appraiser by employment or contract in a specific assignment, whether directly or through an agent.

Question 25

Intended User

Answer 25

The client and any other party as identified, by name or type, as users of the appraisal or appraisal review report by the appraiser, based on communication with the client at the time of the assignment.

Question 26

Intended Use

Answer 26

The use(s) of an appraiser’s reported appraisal or appraisal review assignment result, as identified by the appraiser based on communication with the client at the time of the assignment.

Question 27

Purpose of an assignment

Answer 27

The objective of an assignment -e.g., in an appraisal assignment, to develope an opinion of the defined value of a specified interest in real estate.

Question 28

Relevant characteristics

Answer 28

Features that may affect a property’s value or marketability such as legal, economic, or physical characteristics.

Question 29

Physical characteristics

Answer 29

Attributes of a property that are observable or measurable as a matter of fact, as distinguished from opinions and conclusions, which are the result of some level of analysis or judgment.

Question 30

Scope of Work

Answer 30

The type and extent of research and analyses in an appraisal or appraisal review assignment.

Question 31

Extraordinary/Special Assumption

Answer 31

?

Question 32

Hypothetical Condition

Answer 32

?