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Problem Identification: Primary Data Collection and Analysis
Problem Definition: Involves defining the scope and objectives of the real estate appraisal, including:
- Identifying the Real Estate:
- Legal Description: Using the legal description from real estate records to avoid ambiguity. It uses the Metes and Bounds System (describing boundaries with angles and distances from a reference point), The rectangular survey systemโโ (based on baselines and meridians dividing land into townships and sections), or the Lot, Block, and Tract System (used in detailed land division plans).
- Physical Address: Stating the physical address for easy access and visual identification.
- Real Property Interest:
- Identifying the type of real property interest being valued (e.g., Fee Simple, Leasehold Interest, Easement).
- Including a detailed description of the rights and restrictions related to the property.
- Purpose of the Appraisal:
- Stating the reason for the appraisal (e.g., sale, financing, insurance, taxes, litigation).
- The purpose affects the data required and the methods used.
- Effective Date of Appraisal:
- The date the appraisal reflects the property’s value. It can be current, past, or future.
- Accurate date is important as it impacts market data used.
- Standard of Value:
- Specifying the type of value being estimated (e.g., Market Value, Insurable Value, Liquidation Value).
- The value should be clearly defined.
- Assumptions and Limiting Conditions:
- Stating the assumptions on which the appraisal is based and the conditions that limit its scope.
- Examples of assumptions: property is free of hidden defects, information from other sources is correct.
- Examples of limiting conditions: appraiser is not responsible for future market changes or legal issues.
- Intended Use:
- Identifying the parties who can use the appraisal report and the purpose for which it can be used.
- The report should be used only for the specified purpose.
- Scope of Work:
- Describing the nature and extent of the work the appraiser will perform.
- Includes the type of data to be collected, the methods to be used, and the level of analysis to be performed.
Preliminary Analysis: After defining the problem, the appraiser should conduct a preliminary analysis to determine the data needed, including:
- Identifying Data Needs:
- General Data: Related to the real estate market, such as market trends, economic conditions, and demographic factors.
- Specific Data: Related to the subject property and comparable properties, such as property characteristics, location, and sales data.
- Supply and Demand Data: Related to the future supply and demand for similar properties.
- Identifying Data Sources:
- Primary Data: Collected directly by the appraiser, such as site inspection, interviews, and surveys.
- Secondary Data: Obtained from published sources, such as real estate records, government agencies, real estate data providers, and specialized publications.
- Work Schedule:
- Preparing a work schedule to organize the appraisal process, tasks, responsibilities, and deadlines.
Collecting the Data: After identifying data needs and sources, the appraiser should collect the data accurately and reliably, including:
- Verifying Data Accuracy:
- Verifying the accuracy of the data used through site inspection, cross-checking, and contacting original sources.
- Documenting all data sources.
- Ensuring Data Relevance:
- Ensuring the data is relevant to the property’s value.
- Excluding irrelevant data that may negatively affect the accuracy of the appraisal.
Analyzing Highest and Best Use: Determining the most profitable use of the property, which is:
- Legally Permissible
- Physically Possible
- Financially Feasible
- Maximally Productive
Analysis should be performed for the property “as improved” and “as vacant.”
Valuing the Site: The site (land) is valued separately from the improvements (buildings) for several reasons:
- Highest and Best Use Analysis
- Application of Certain Appraisal Techniques
- Requirements of the Appraisal
Mathematical Equations:
- Mean: (ฮผ = ฮฃxแตข / n) where xแตข is the value of each element and n is the number of elements.
- Standard Deviation: (ฯ = โ[ฮฃ(xแตข - ฮผ)ยฒ / (n - 1)]) for measuring the dispersion of data around the mean.
Chapter Summary
- The chapter addresses defining the problem and collecting/analyzing primary dataโ in real estate appraisal. Accurate problem definition is fundamental to a successful appraisal.
- Problem definition includes identifying the real estate, real property interest, use of the appraisal, standard of value, effective date of the appraisal, and any limiting conditions. Reports should include defined problem elements.
- Initial analysis involves identifying necessary data types: General data (market), Specific data (property), Competitive supply and demand data (future market), Primary data (collected directly), Secondary data (from published sources).
- Data is used to determine market trends, future supply and demand for competing properties, and characteristics of the subject and comparable properties.
- Comparable properties should be physically similar, attract the same buyers, be in the same market area, and be sold within a limited time of the appraisal’s effective date.
- The appraiser must identify data sources.
- The appraiser must prepare a timeline for the appraisal process.
- Data accuracy must be verified through personal inspection or cross-checking sources.
- All data should be relevant to the property’s value. All appraisals must consider the highest and best use of the property, whether improved or vacant land.
- Accurate problem definition and systematic data collection/analysis are the foundation of reliable real estate appraisal. The appraiser must identify relevant data, verify its accuracy, and analyze it to accurately determine property value.
