Property Rights, Restrictions, and Standard of Value

Chapter 3: Property Rights, Restrictions, and Standard of Value

A. Property Rights
1. Defining Real Property Rights
Real property rights represent the interests a person or entity has in land and its associated structures. These rights constitute a “bundle of rights,” which includes the right to possess, use, enjoy, and dispose of the property. Understanding the specific rights being appraised is crucial for accurate❓ valuation.
a. Fee Simple Ownership: This represents the most complete form of ownership, granting the owner unrestricted rights to use, possess, and dispose of the property, subject only to government restrictions and private encumbrances.

b. Leasehold Interest: This is the right to possess and use property for a specified period, as defined in a lease agreement. The value of a leasehold interest depends on factors such as the rent amount, lease term, and market rental rates.

c. Mineral or Subsurface Rights: These rights pertain to the ownership and exploitation of minerals and other resources found beneath the surface of the land. These rights can be severed from surface ownership, creating separate estates.

d. Water Rights: These rights govern the use of water resources associated with the property. Water rights vary significantly depending on the jurisdiction and the type of water source (e.g., riparian rights, appropriative rights).

e. Air Rights: These rights pertain to the space above the land. Air rights can be valuable in urban areas, where they can be used for development purposes.

f. Rights of Co-Owners: When property is owned by multiple parties (e.g., partners, spouses, co-tenants), each co-owner possesses certain rights and responsibilities. The specific rights of each co-owner are determined by the form of co-ownership (e.g., joint tenancy, tenancy in common).

g. Easement Rights: An easement grants a person or entity the right to use another person’s property for a specific purpose. Easements can be appurtenant (benefiting a specific property) or in gross (benefiting a specific individual or entity).

2. Appurtenant Rights and Their Impact on Value
   Appurtenant rights are those rights that benefit a particular parcel of land and are typically transferred with the property. These rights can significantly enhance the property’s value.
   a. Positive Easements: These easements allow the property owner to perform an act on another person’s property (e.g., access to a beach).

b. Negative Easements: These easements prevent the owner of another property from performing an act that would affect the subject property (e.g., preventing the obstruction of a view).
Example: A property with an appurtenant easement granting access to a private beach will generally have a higher value than a similar property without such access.

B. Restrictions
1. Types of Restrictions on Property Rights
Restrictions limit the full exercise of property rights. Appraisers must identify and analyze all restrictions that apply to the subject property, as they can significantly impact its value.
a. Zoning Ordinances: These are local laws that regulate land use, building height, and density. Zoning ordinances can restrict the types of activities that can be conducted on a property.

b. Public and Private Easements: These easements grant rights of use to third parties, such as utility companies or neighboring property owners.

c. Rights-of-Way: These are strips of land that are used for transportation purposes, such as roads or railways.

d. Private Deed Restrictions: These are covenants or conditions that are included in the deed to the property, limiting its use or development.

e. Property Taxes: Property taxes are a financial encumbrance on the property, representing a governmental claim against the property’s value. Higher property taxes can decrease a property’s value.

2. Impact of Restrictions on Value
   Restrictions can either enhance or detract from property value, depending on their nature and severity.
   Example: A property that is subject to strict zoning regulations may have a lower value than a similar property in an area with more flexible zoning.
   Case Study:
   Property A and Property B are similar in all respects, except that Property A is crossed by a public right-of-way. Because the right-of-way limits the use of Property A, it may have a lower value than Property B. This difference in value can be quantified using techniques such as paired sales analysis, which involves comparing the sales prices of similar properties with and without the restriction. The formula to quantify the impact of the right-of-way is:

Impact = SPB – SPA

Where:
SPA = Sales Price of Property A (with right-of-way)
SPB = Sales Price of Property B (without right-of-way)

3. Identifying Restrictions
   a. Deeds: The deed to the property is the primary source of information about rights and restrictions.

b. Title Abstract or title insurance❓ Policy: These documents provide a summary of the property’s title history, including any recorded easements, restrictions, or encumbrances.

c. Local Zoning or Planning Offices: These offices maintain records of zoning regulations and land use plans.

d. Local Tax Authorities: These authorities maintain records of property tax assessments and payment history.

C. The Standard of Value
1. Definition and Importance
The standard of value refers to the specific type of value that the appraiser is asked to estimate. It is critical to identify the appropriate standard of value at the outset of the appraisal assignment, as it will guide the data collection and analysis process.
Different standards of value exist, each with its own definition and application. Common standards of value include:
a. market value❓❓: This is the most probable price that a property should bring in a competitive and open market under all conditions requisite to a fair sale.

b. Investment Value: This is the value of a property to a particular investor, based on their individual investment criteria and expectations.

c. Insurable Value: This is the value of a property for insurance purposes, typically representing the cost to replace or rebuild the property in the event of a loss.

d. Value in Use: This is the value of a property to a specific user, based on its contribution to their business or operations.

2. Market Value Definition and Requisites
   Market value is most often the standard of value requested by the client. FHLMC/FNMA define market value as “the most probable price which a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller, each acting prudently, knowledgeably, and assuming the price is NOT affected by undue stimulus.” Relationship, terms, and conditions must be identified by the appraiser. This definition incorporates several key elements:
   a. Most Probable Price: This reflects the fact that value is an opinion, not a precise measurement.

b. Competitive and Open Market: This assumes that the property is exposed to a reasonable number of potential buyers.

c. Conditions Requisite to a Fair Sale: This includes factors such as adequate marketing time, informed buyers and sellers, and no undue pressure or coercion.

3. Determining the Appropriate Standard of Value
   The appraiser must communicate with the client to determine the appropriate standard of value for the appraisal assignment. This determination should be based on the intended use of the appraisal and the client’s needs.

Example: A lender hires an appraiser to determine the value of a property, because the lender wishes to know whether or not it should approve a borrower’s loan for the purchase of the property. In this case the Standard of Value would be market value. The intended use would be for an approved loan and the intended user(s) would be the lender and those to whom the lender might assign the loan (FHLMC, FNMA, VA, and FHA).

B. When is it to be Appraised?
1. Effective Date of the Appraisal (Valuation Date)
Value estimates are always made as of a specific date, which is called the EFFECTIVE DATE OF THE APPRAISAL. This is because value typically changes over time. Market conditions, as well as the physical condition of the property, are subject to constant change, and both of these factors affect value.
Value as of the Current Date
In most cases, the client will want to know the value as of the current date. Occasionally, the appraiser may be asked to estimate value as of a past or future date.

Appraisal of Past Values
Appraisals of past values are possible if adequate data (comparable sales, etc.) exist for the period of time in question. Such data are, in fact, often available, provided the valuation date is not too far in the past, so the process of estimating past value is normally not much different than the appraisal of current value.
“Appraisals of past value” are most often required in connection with legal proceedings, such as divorce settlements or tax audits.
Case/Example: The 2005 property taxes for a particular property are based on the assessed value of the property as of January 1, 2005. The property owner is informed of the assessed value in August, 2005. In order to challenge the assessment, the owner may need to obtain an appraisal of the property as of January 1, 2005, the date of the assessment. An appraiser may make such a past value estimate, provided that adequate data are available for the time in question.

Appraisal of future value❓
Unlike appraisals of past value, appraisals of future value are always speculative
(theoretical) because it is impossible to predict future market conditions.
Data for the future does not exist and must be assumed. An appraisal of this type often requires the appraiser to rely on Extraordinary Assumptions and Hypothetical Conditions.
An EXTRAORDINARY ASSUMPTION is an assumption that is related to a specific assignment. If it is found to be false it would alter the value opinion of the appraiser. A HYPOTHETICAL CONDITION is one that is contrary to what actually exists but is supposed for the purpose of the individual assignment.
Case/Example: An investor asks an appraiser to determine what the value five years from now of a hundred unit apartment building will be. The apartment building has not yet been built although plans and specifications for it exist and the investor currently owns the land on which it will be built. In this case, the building is a hypothetical condition of the assignment (it doesn’t actually exist). The analysis of future conditions, such as market conditions, demographic changes, and economic trends, are based on extraordinary assumptions.
The appraiser must clearly document all extraordinary assumptions and hypothetical conditions in the report.

2. Date of Appraisal Report
   The appraisal report date, as opposed to the valuation date, does not directly effect the value estimate. It is simply the date on which the appraisal report is issued.
   In defining an appraisal problem, the report date is important for two reasons. First, the client needs to know that the appraisal will be issued in time to be of some use in the client’s decision making process, and the appraiser needs to feel confident that the appraisal can be competently prepared within that time frame. Second, the report date shows whether the property is being valued as of the past, present, or future.
   Even in the case of an appraisal for current value, the valuation date and report date will NOT necessarily be identical.

C. Why is it to be Appraised?
To proceed with the appraisal assignment, the appraiser must know why the client wants the appraisal; that is, what the appraisal will be used for. This is important because appraisals are used to help the client make a particular decision. For example, lenders use appraisals to help decide whether to make a loan for a given amount; buyers and sellers use appraisals to help decide whether to buy or sell a property for a given price.
If a client or other person makes a decision based on an appraisal and that decision turns out to be a costly mistake, the injured person may try to hold the appraiser liable for the damage caused by the decision.
To limit potential❓ liability, the appraiser should clearly specify that the value estimate is valid only for its intended use by the client, and is not valid for any other use or any other user.
Case/Example: In an appraisal for property tax assessment purpos