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Data Collection and Analysis: Towards Real Estate Valuation Reporting
Chapter: Data Collection and Analysis: Towards a Real Estate appraisal report❓
Introduction
Data collection and analysis are the cornerstone of the real estate appraisal process. Without accurate and comprehensive data, it becomes impossible to arrive at a fair and reliable estimate of the property’s value.
First: Defining the Appraisal Problem
This initial step is necessary to define the scope of the appraisal and guide the data collection process. This step should include:
- Property Identification: Precisely identifying the property, including its geographical location and legal description.
- Real Estate Right Identification: Determining the type of real estate right to be appraised (full ownership, lease, easement, etc.).
- Purpose of the Appraisal: Defining the reason for conducting the appraisal (sale, purchase, financing, insurance, litigation, etc.). This purpose affects the type of data required and the appraisal methodology used.
- Valuation Date: Determining the date on which the property’s value will be estimated. This date may differ from the date of report preparation.
- Value Standard: Defining the type of value to be estimated (market value, insurable value, liquidation value, etc.).
- Intended Users: Identifying the parties who will rely on the appraisal report.
Second: Preliminary Analysis
In this stage, the appraiser identifies the types of data necessary to complete the appraisal. Data can be divided into:
- General Data: Pertains to the real estate market in general, including:
- Economic Indicators: Interest rates, inflation, unemployment, economic growth.
- Real Estate Market Trends: Property prices, sales volume, property time on market, rental rates, vacancy rates.
- Legislation and Regulations: Real estate laws, building codes, taxes.
- Specific Data: Pertains to the property being appraised and comparable properties, including:
- Property Characteristics: Area, location, design, building condition, finishes, amenities.
- Comparable Sales Data: Sale prices, terms of sale, sale date, characteristics of comparable properties.
- Comparable Rental Data: Rental rates, lease terms, characteristics of comparable properties.
- Competitive Supply and Demand Data: Information about future supply and demand for comparable properties in the market.
- Primary Data❓❓: Collected directly by the appraiser through field inspection, interviews, and questionnaires.
- Secondary Data: Collected from published sources such as:
- Real Estate Records: Ownership records, maps, permits.
- Real Estate Marketing Agencies: Property listings, sales data.
- Government Agencies: Tax data, urban planning data.
- Research Institutions: Real estate market reports.
Comparability Standard: Comparable properties must be similar to the property being appraised in terms of:
- Physical Characteristics: Area, design, building condition.
- Buyer Appeal: Must attract the same type of buyers.
- Location: Must be located in the same market area.
- Sale Date: Sales must be relatively recent.
After identifying the required data, the appraiser prepares a timeline for completing the appraisal task.
Third: Data Collection
The accuracy of the data used in the appraisal is critical. Data accuracy must be verified either by personal inspection or by cross-checking between different sources. All data used must be relevant to the value of the property being appraised.
Fourth: Analyzing Highest and Best Use
The appraisal must consider the highest and best use of the property. For improved properties (built), the highest and best use of the property as is must be analyzed, as well as the highest and best use of the land as if vacant.
Fifth: Site Valuation
Site (land) valuation may be necessary for analyzing the highest and best use, applying certain appraisal approaches, or as required by the scope of the appraisal.
Sixth: Applying the Three Appraisal Approaches
- Sales Comparison Approach: Indicates value by analyzing sales of comparable properties. The more similar the comparable properties are to the property being appraised, the more reliable they are as indicators of value. The sale prices of comparable properties must be adjusted to compensate for any differences between the comparable properties and the property being appraised, including physical differences, changes in market conditions, and differences in the terms of sale.
- cost approach❓: Indicates value by estimating the value of the land separately, then adding the estimated (new) cost of the improvements (buildings), then deducting the depreciation suffered by the improvements. The older the improvements, the more difficult it becomes to estimate depreciation, and the less reliable the value indication given by the cost approach.
- Income Approach: Uses the Gross Rent Multiplier (GRM) for residential properties.
Related Mathematical Formulas:
- Gross Rent Multiplier (GRM):
GRM = Sale Price / Gross Annual Rent - Estimated Value using GRM:
Estimated Value = Gross Annual Rent of the Property being Appraised * GRM
Seventh: Reconciliation of Value Indicators
The appraiser must reconcile any differences between the values indicated by the three appraisal approaches. Reconciliation involves analyzing the reliability❓ of the value indicators and applying the appraiser’s judgment to the most reliable estimate of value.
Eighth: Preparing the Appraisal Report
The appraisal report is the final document that presents the results of the appraisal. The report can be a narrative report❓❓ or a Form Report. The report must include all the elements required under USPAP (Uniform Standards of Professional Appraisal Practice).
- Narrative Report: Is the most detailed type of appraisal report. It identifies the data on which the appraiser relied and explains the data analysis and logic that led to the appraiser’s final estimate of value.
- Form Report: Includes much of the data that supports the appraiser’s conclusion, but may not include complete explanations of the appraiser’s logic. Form reports are used by many lenders, insurance companies, and government agencies.
Practical Examples
- Example of Data Collection: When appraising a residential home, the appraiser collects data on the home’s area, number of rooms, condition of finishes, construction date, and location of the home. They also collect data on sales of comparable homes in the area.
- Example of Data Analysis: The appraiser analyzes comparable sales data to determine the factors that affect the value of homes in the area. For example, they may find that homes located near good schools sell for higher prices.
- Example of Reconciliation of Value Indicators: If the sales comparison approach indicates a value of $300,000, the cost approach indicates a value of $280,000, and the income approach indicates a value of $320,000, the appraiser must analyze the reliability of each approach and determine the most reliable estimate of value.
Key Terms
- General Data
- Specific Data
- Primary Data
- Secondary Data
- Physical Characteristics
- Sales Comparison Approach
- Cost Approach
- Income Approach
- Gross Rent Multiplier (GRM)
- Highest and Best Use
Conclusion
Data collection and analysis is a complex process that requires specialized skills and knowledge. By following the steps mentioned in this chapter, you can collect and analyze data effectively and prepare professional real estate appraisal reports. Remember that accuracy and reliability are the foundation of a good real estate appraisal.
Chapter Summary
The chapter summarizes the critical processes of data collection and analysis in real estate appraisal to achieve an accurate and reliable property❓ valuation, which is crucial for a comprehensive and credible appraisal report❓.
Key points:
- Problem Definition: Clearly define the appraisal problem, including property identification, property rights, intended use of the appraisal, and value standard.
- Preliminary Analysis: Determine necessary data:
- General data: pertaining to the overall market.
- Specific data: related to a particular property.
- Competitive supply and demand data: information on future supply and demand of competing properties.
- Primary data: collected directly by the appraiser.
- Secondary data: gathered from published sources.
Data is used to identify❓ market trends, potential supply and demand for competing properties, and characteristics of the subject property❓ and comparable properties.
- Data Collection: Verify the accuracy of data through personal inspection or cross-referencing. All data must be relevant to the value of the subject property.
- Highest and Best Use Analysis: All appraisals must address highest and best use, whether the property is improved or vacant land.
- Site Valuation: Site valuation may be necessary for highest and best use analysis, certain valuation techniques, or by appraisal scope.
- Application of the Three Valuation Approaches:
- Sales Comparison Approach (Market Data): Indicates value through analysis of comparable property sales. The more similar the comparable properties are, the more reliable. Adjustments must be made for differences between comparable sales and the subject property, including physical differences, market condition changes, and sales terms.
- Cost Approach: Indicates value by estimating land value separately, adding the estimated (new) cost of improvements, and subtracting depreciation. The older the improvements, the more difficult to estimate depreciation, and the less reliable the value indication.
- Income Approach: Uses a gross rent multiplier for residential properties.
- Reconciliation of Value Indicators: The appraiser must reconcile any differences in value indicated by the three approaches. Reconciliation involves analyzing the reliability❓ of value indicators and applying the appraiser’s judgment to determine the most reliable value estimate.
- Appraisal Report Preparation: The narrative report❓ (most detailed) should include data relied upon, explain data analysis, and the reasoning leading to the final value estimate. Report templates may include much of the data, but lack complete explanations of the appraiser’s reasoning. The appraisal report must contain elements required by the Uniform Standards of Professional Appraisal Practice (USPAP), regardless of format.
Conclusions:
- Data collection and analysis are central to real estate appraisal, and the foundation for a reliable and accurate valuation.
- Appraisers should adhere to a scientific methodology based on comprehensive data collection and analysis, considering all factors affecting value.
- Appraisal reports should be comprehensive, transparent, and provide detailed explanations of the data used, analytical methods, and logical justification for the final value estimate.
