Which of the approaches to appraisal compares the subject property to similar properties in order to arrive at a value quizlet?

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Reconciliation may also be required when different units of comparison are used.

This occurs most often in the sales comparison approach.

Example:
In appraising an apartment building, an appraiser used the sales comparison approach to derive the following value indicators for the subject property.

•Price per square foot of gross building area: $43.50
•Price per dwelling unit: $52,000
•Price per square foot of net leasable area: $49.00

The subject property has 11,000 square feet of gross building area, 10 units, and a net leasable area of 10,000 square feet, resulting in 3 different indications of value.

•Value indicator based on gross building area:
$43.50 x 11,000 = $478,500

•Value indicator based on number of units:
$52,000 x 10 = $520,000

•Value indicator based on net leasable area:
$49.00 x 10,000 = $490,000

The appraiser must reconcile the values indicated by the 3 different units of comparison to reach a single indicator of subject property value.

In the 1st step in the reconciliation process, the appraiser reviews all of the data, calculations, and reasoning that led to the various value indicators.

This review helps to ensure that no mistakes were made.

Each mathematical calculation is double-checked for accuracy, preferably by someone other than the appraiser who made the original calculations.

Having a second person check the math can help turn up mistakes that would otherwise be overlooked.

The appraiser makes sure that all appraisal techniques have been applied consistently and that any assumptions were used consistently.

The appraiser also check to see that:

1. All value indicators were derived on the basis of the same definition of value

2. All properties were evaluated on the basis of the same highest and best use

3. All properties were evaluated on the basis of the same real property interest

4. The characteristics of the subject property were defined consistently in the various approaches and techniques.

Example.
In the sales comparison approach, differences between the age and condition of the subject property's improvements and those of a comparable property require an adjustment to the comparable's sales price. In the cost approach, the effective age of the subject property's improvements is a factor in calculating straight-line depreciation. For the purposes of both appraisal methods, the age and condition of the subject property's improvements should be the same.

Another purpose of reviewing the appraisal is to assess the relative reliability of the different value indicators.

Reliability is a crucial factor in judging the significance of a given value indicator.

The more reliable a particular indicator, the more weight it will be given in the reconciliation process.

The appraiser must also check to see that the information used to arrive at the value indicators is thorough and complete.

To reach a credible value estimate, all relevant data must be considered, and all pertinent appraisal techniques must be applied.

Finally, the appraiser must also check to see that the information used to arrive at the value indicators have been derived in accordance with the term of the appraisal assignment, including the definition of value, the purpose and use of the appraisal, and any other terms that may affect the value estimate.

The appraiser's job is to answer the client's specific question concerning the value of a property.

The data selected for the appraisal, and the appraisal techniques employed, should all be suited to answering the client's question, as defined by the terms of the appraisal assignment.

Example:
Appraisals for mortgage loan underwriting purposes are often subject to tules from a secondary market agency such as the Federal National Mortgage Association (Fannie Mae) of the Federal Home Loan Mortgage Corporation (Freddie Mac). In that case, the appraiser must be sure that the data and techniques used conform to the agency's guidelines.

All other things being equal, a value indicator is considered more reliable when it is supported by more data.

In the sales comparison approach to value, a value indicator supported by data from sales of twenty comparable properties is more reliable than a value indicator that is based on only 3 comparables.

In this case, the greater amount of data represents a larger slice of "sampling" of the market.

According to statistical theory, a larger sampling results in a lower margin of error; it is more reliable.

The amount of data supporting the value indicators is relevant on 3 levels.

First, value indicators are more reliable when they are supported by data tat represent a larger sampling of the market.

Second, a value indicator's reliability depends on the level of detail of the data supporting it.

Example:
In the cost approach to value, a building cost estimate derived by the unit-in-place method is generally considered more reliable than an estimate based on cost per square foot of building area, due to the relatively higher level of detail required by the unit-in-place method. A more detailed cost estimate using the quantity survey method would be considered even more reliable.

Finally, a value indicator is considered more reliable when it is supported by several different independent sources, as compared to an indicator derived from a single source.

Example:
An appraiser who has estimated the value of a site by the sales comparison approach may also employ allocation or extraction to obtain a second, independent indicator of site value.

If the two separate value indicators are reasonably similar, the reliability of the site value estimate is enhanced.

The reliability of a value indicator also depends on its accuracy.

In assessing the level of accuracy, the appraiser must consider both:

1. The accuracy of the original data

2. The accuracy of the resulting value indicator

The accuracy of the original data used in an appraisal is critical.

If the data are inaccurate, the value conclusions drawn from them cannot possibly be reliable, regardless of the amount of data or the techniques used by the appraiser.

This fundamental principle is summarized neatly by the phrase, "GARBAGE IN, GARBAGE OUT."

In appraisal, the accuracy of data is measured by how well they have been verified.

For some types of data, such as the physical characteristics of the subject property, personal review by the appraiser is the most reliable form of verification.

Other data, such as details of a sales transaction, are often verified by interviewing one of the parties to the transaction (the buyer or the seller).

If particular data are especially important to a transaction, it is especially important to verify the data using the most reliable source available.

Example:
An error in the data concerning the physical characteristics of the subject property (such as square footage of building area) could easily lead to a significant miscalculation of value. A similar error in the data concerning a comparable property i somewhat less critical, since more than one comparable will be analyzed. Any error in the comparable property data is likely to show up as a discrepancy in the adjusted sales price, in comparison to the adjusted sales price of the other comparables. Since the subject property data are more critical to the outcome of the valuation process, they require a higher level of verification.

In addition to confirming the accuracy of the original data, the appraiser must consider the level of accuracy of the resulting value indicator.

Even if the original data are completely accurate, the resulting value indicator may still be considered more or less reliable, depending on the nature of the appraisal technique used.

Example:
In the sales comparison approach, the sales price of comparable properties are adjusted to account for the differences between each comparable and the subject property. Assuming that the comparable sales data are completely accurate, the resulting value indicators (the adjusted sales price of the comparables) may still not be 100% reliable, especially if significant adjustments were required. Each time an adjustment is made to a comparable's sales price, the appraiser must determine the dollar amount of the adjustment. Since each adjustment amount is itself an estimate of value (the value of the characteristic for which the adjustment is being made), each adjustment introduces a level of uncertainty into the value indicator. The greater the number of adjustments, and the greater their dollar amounts, the greater the uncertainty in the resulting value indicator.

The appraiser's work must satisfy the requirement of a "credible appraisal" in Standard 1 of the Uniform Standards of Professional Appraisal Practice:

In developing a real property appraisal, an appraiser must identify the problem to be solved, determine the scope of work necessary to sole the problem, and correctly complete research and analysis necessary to produce a credible appraisal.

Standards Rule 1-1 elaborates on what a credible appraisal requires:

In developing a real property appraisal, an appraiser must:

(A) Be aware of, understand, and correctly employ those recognized methods and techniques that are necessary to produce a credible appraisal

(B) Not commit a substantial error of omission or commission that significantly affects an appraisal

(C) Not render appraisal services in a careless or negligent manner, such as by making a series of errors that, although individually might not significantly affect the results of an appraisal, the aggregate affects the credibility of those results

If the appraisal does not meet these standards for a credible appraisal, then additional data collection, verification, and/or analysis will be required before a final value estimate can be made.

The answers to the following questions will help an appraiser evaluate whether an appraisal has been completed in a credible and professional manner.

•Have sufficient general and specific data been collected and verified in order to support the value conclusion?

•Have any critical data (general or specific) been overlooked or omitted?

•Have the data been described and analyzed consistently throughout the appraisal?

•Hall all relevant appraisal techniques been applied?

•Is the derivation of all value indicators free from errors in calculation or logic?

• Does the value conclusion reflect all the terms of the appraisal assignment, including the definition of value, the real property interest subject to the appraisal, the effective date of the appraisal, the purpose and use of the appraisal, and any other terms and limiting conditions?

Automated valuation models play a substantial role in the appraisal process.

An automated valuation model, or AVM, is a computer program that analyzes appraisal data for a property, including market data, economic data, and demographic data.

It may be used only to perform certain complex or time-consuming analytical steps in the appraisal process, or it may be used to carry out all of the analysis and produce an estimate of the subject property's market value.

The use of AVMs raises practical and ethical issues concerning the role of the appraiser, and human judgement, in the valuation process.
The Appraisal Standards Board addresses the use of automated valuation models in its Advisory Opinion 18.

(The ABS's Advisory Opinions discuss the application of the Uniform Standards of Professional Appraisal Practice in particular situations, but the opinions are nonbinding.)

Here is an excerpt from Advisory Opinion 18:

The output of an AVM is not, by itself, and appraisal. An AVM's output may become a basis for appraisal or appraisal review if the appraiser believes the output to be credible for use in a specific assignment.

An appraiser can use an AVM as a tool in the development of an appraisal or appraisal review. The appropriate use of an AVM is, like any tool, dependent upon the skill of the user and the tool's suitability to the task at hand.

Advisory Opinion 18 goes on to say that before using an automated valuation model for an assignment, the appraiser should consider the following questions.

The AVM should be used only if the answer to all of these questions is "yes."

1. Does the appraiser have a basic understanding of how the AVM works?

2. Can the appraiser use the AVM properly?

3. Are the AVM and the data it uses appropriate given the intended use of the assignment results?

4. Is the AVM output credible?

5. Is the AVM output sufficiently reliable for use in the assignment?

A client may ask an appraiser to provide an AVM report on a property without appraising the property -- to simply enter data about the subject property provided by the client and relay the AVM's output without alteration.

Advisory Opinion 18 says that in this case:

...the appraiser is not acting in the capacity of an appraiser but rather is functioning only as an AVM operator. In such a situation, an appraiser must carefully avoid any action that could be considered misleading or fraudulent. The appraiser should take steps to ensure that communication of the AVM's output is not misconstrued as an appraisal or appraisal review.

Advisory Opion 18 also lists the USPAP provisions that are relevant to the use of automated valuation models and provides illustrations of appropriate and inappropriate use.

Appraisers are likely to be grappling with issues surrounding AVMs for some time to come, as the program themselves and practices in regard to them continue to evolve.

An appraisal is an estimate or opinion of value and thus is inherently uncertain.

The majority of appraisals state the final value estimate as a single dollar amount, known as a point estimate.

A point estimate is required by the terms of the appraisal assignment, either for legal reasons or because of client preference.

A value estimate may be stated as a range value.

For example, an appraiser may estimate that a property's value falls in the range of $200,000 to $220,000, and report this as the final value estimate.

Range values reflect the inherent uncertainty of appraisal estimates, but they can present problems of their own.

If the stated range is TOO BROAD, it can be essentially meaningless and of no use to the client.

A NARROW RANGE may imply a level of certainty that does not exist.

Many people misinterpret a range value as a guarantee that the property's value is no lower than the bottom of the range, and no higher than the top, when in fact a range value is simply the appraiser's estimate of the range in which the property's value is most likely to fall.

For this reason, many appraisers prefer to use POINT ESTIMATES instead of RANGE VALUES, even when this is not required by the terms of the appraisal assignment.

Whether a final value estimate is stated as a point estimate or range value, it is customary to round the figures to reflect the degree of certainty that the appraiser has in the value estimate.

The figure(s) for the final value estimate will contain no more than 3 significant digits (numbers other than zero), followed by the appropriate number of zeros.

A HIGHER NUMBER OF SIGNIFICANT DIGITS would imply a level of certainty that is unrealistic in most appraisals.

Example:
An estimated value of $343,800 (four significant digits) would normally be rounded, perhaps to $344,000 (three significant digits).

The degree of rounding is a reflection of the APPRAISER'S DEGREE OF CONFIDENCE in the value estimate.

LOWER DEGREES OF ROUNDING reflect higher degrees of confidence, and vice versa.

Example:
In the example above, the estimated value was rounded to the nearest $1,000, reflecting a high degree of confidence. If the appraiser had a lower degree of confidence in the estimate, the figure might have been rounded to the nearest $5,000 ($345,000), or even to the nearest $10,000 ($340,000).

Which of the approaches to appraisal compares the subject property to similar properties in order to arrive at a value?

What are the three appraisal approaches?

What type of property can be valued by the sales comparison approach?

What are the various approaches that can be used to determine the value of the property?