INTERNATIONAL ASSOCIATION OF ASSESSING OFFICERS

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					            INTERNATIONAL ASSOCIATION OF ASSESSING OFFICERS
                       Condensed from Course 101




FUNDAMENTALS OF REAL PROPERTY APPRAISAL

Module 1: Ad Valorem Tax System

Learning Objectives

Upon completion of this section, the reader should:

      Understand the importance of ad valorem taxation in relation to social, political,
       and governmental systems.

      Know the elements of an effective real property assessment system.

      Know the role and major responsibilities of the assessor.

      Understand the derivation of nominal tax rate, assessment level (ratio), and
       effective tax rate.

      Understand the terms market value, appraised value, and assessed value.

      Understand that appraisal is an estimate or opinion of value. This includes
       knowing that the appraiser does not "create" value, rather the appraiser uses
       market derived information to make the estimate.
I.      The History of the Property Tax in the United States
There were several different forms of property taxes used in Europe before the
settlement of America. When the U.S. broke away from England in the beginning of the
19th Century, the idea of a uniform tax, based on the value of all property owned, was
widespread. Administering the property tax was difficult. In 1851 Virginia wrote
provisions in the state constitution requiring property to be valued equally, uniformly and
―in proportion to its value,‖ also known as ad valorem. By 1910, appraisers and
economists had developed the outline of appraisal theory as it is known today.
Beginning in the 1900's, approximately 73% of local revenue came from the property
tax; however, by 1988, only 29% of local revenue was from the property tax.
In Virginia…..(insert data).
        Direct attention to the decline in the percentage of local revenue from the
property tax is due partly to increased federal and state aid, increased amounts of
revenue from charges, and other miscellaneous sources.

II.    Constitutional Mandates in Virginia
The Constitution serves as the law of the land with all its language approved by the
electorate. Tax policy is governed by Article X of the Constitution. Within Article X,
sections One, Two, Four and Six deal directly with the assessment of real property.

A.     Section One: States that all property shall be taxed unless specifically exempted
by the Constitution and shall be taxed uniformly upon the same class of property within
the territorial limits of the authority levying the tax. It is important to note that the
requirement for equity and uniformity has been held up by a number of Supreme Court
decisions.

B.      Section Two: Requires that all assessments be made at fair market value. This
section also allows for the General Assembly to define and classify real estate devoted
to agricultural, horticultural, forest, or opens space uses, and allows for locality deferral
or relief from portions of taxes otherwise payable on such real estate.

Section Four: Segregates real estate, coal and other mineral lands for local taxation
only, given that localities assess in a manner and time prescribed in law by the General
Assembly.

D.      Section Six: Outlines what property is exempt from Real Estate and Personal
Property taxes. Any property owned by the Commonwealth and its political subdivisions,
private or public not for profit burying grounds or cemeteries, public libraries, learning
institutions, and sites of religious, charitable, benevolent, and historic importance are
usually exempt. Assessment levels are monitored by The Department of Taxation,
which conducts an annual Sales Study for every locality.
This study is comprised of two key components:
1.      Sales/Assessment Ratio: Compares assessed values to bona fide sale prices.

2.      Coefficient of Dispersion (COD): is a statistical method used to measure equity.
A COD is the range assessments vary from the sales/assessment ratio. Example: If a
ratio is 90% and the COD is 8% then assessments average in the range of 82% to 98%.
Per state guidelines a COD of 10 or less is considered good.
                                             2
If the ratio drops below 70%, state funding to the locality will be cut off until such time
the ratio increases to the 70% level.

III.   Assessors and their Role in Administering the Ad Valorem Tax System.
Virginia localities are required by statute to reassess real property at regular
intervals.
Cities: Are required to reassess at least every two years unless they have a population
of 30,000 or less, in which case they may reassess as at four year intervals.
Counties: Are required to reassess at least every four years unless they have a
population of 50,000 or less, in which case they can opt to reassess at five or six year
intervals. Assessors operate under various legal requirements.
Each jurisdiction is required to have either a three-person board of assessors or at least
one assessor who has been certified by the Department of Taxation. Any locality
conducting an annual or biennial reassessment must have an Assessor appointed by
the governing body.

The assessor has many responsibilities that may vary from locality to locality; these are
a few of every assessor’s duties:

Discovery: The most important step in any assessment process is discovery. Deeds,
building permits, tax maps, real estate listings and canvasses are some of the more
commonly used methods of discovery.
Valuation: Once the property has been discovered, the assessor then must place the
appropriate value on the property. There are three approaches to value: the cost
approach, the income approach and the sale comparison approach. The two most
commonly used methods are the income approach for commercial properties and the
sales comparison method for residential properties. These methods will be discussed
at length later in the course.

Generating Assessment Notices: Once an assessment is completed, the property
owner must be notified by mail of the change in value at least 15 days prior to the date
of any appeal hearings. Each notice is required by statute to contain the magisterial or
other district, the new land value, the new improvement value and a time and place
when appeals could be heard.

Defending Assessments: Localities are required by statute to allow for appeals of real
estate assessments. The assessor is responsible for conducting fair and equitable
reassessments and then defending the assessments during in-house hearings and
Board of Equalization hearings, as well as any court cases in which an erroneous
assessment is claimed.

The Uniform Standards of Professional Appraisal Practice including: (see Appendix)
1. Preamble
2. Ethics Rule
3. Competency Rule
4. Departure Rule
5. Jurisdictional Exception
                                            3
6. Supplemental Standards
7. Definitions




                            4
Module 1 Diagnostic Drill

1.    The property tax is an _________________________ tax, meaning that it is
based solely on value.

2.    The assessor is responsible for internal controls as well as
_____________________, _________________, and __________________ all taxable
property.

3.   An assessed value not at 100 percent of market value is known as a
__________________ assessment.

4.      A jurisdiction's tax rate (nominal) is derived by dividing the total
____________________________ by the total _____________________ of the taxing
jurisdiction.

5.   An   individual property's    assessed     value   is   multiplied        by    the
_______________________ to obtain the property's tax amount.

6.     If the assessed value increases and the budget remains constant, the tax rate
will ___________________.

7.     The relationship between the assessed value and the market value of a property
is known as an assessment _____________.

8.    An appraisal is an ______________________ of value.

9.    The type of value usually sought by the assessor is ________________ value.

10.  The     opinion   of   value              is    established      as      of     the
__________________________________.

11.   The ethics rule of the Introduction to the Uniform Standards of Professional
Appraisal  Practice    (USPAP)      consists   of   the   following  four   parts:
___________________,        ________________,        __________________,      and
_______________________.

12.    The payment of undisclosed fees, commissions, or things of value in connection
with the procurement of appraisal, review, or consulting assignments is
__ethical/unethical___.

13.    An appraiser must prepare written records of appraisal, review, and consulting
assignments including oral testimony and report and retain such records for a period of
at least _____ years after preparation or at least _____ years after final disposition of
any judicial proceeding in which testimony was given, whichever period expires last.

14.   ___________ reflects the relationship between total property taxes on real
                                           5
property and the property's market value.

15.   Assessment level times the tax rate equals _________________.




                                            6
FUNDAMENTALS OF REAL PROPERTY APPRAISAL

Module 2: Appraisal Concepts and Theory

Learning Objectives

Upon completion of the section, the reader should:

      Define appraisal and market value.

      Know the difference between value in use and value in exchange.

      Identify real property as the rights, interests and benefits connected with real
       estate.

      Understand differences between real and personal, tangible and intangible
       property.

      Understand how limitations on property rights may affect market value.

      Define situs.

      Understand the steps in the appraisal process.

      Understand the relationship between general, specific, and comparative data and
       highest and best use analysis.

      Understand how shifts in supply and demand affect price and market equilibrium.

      Understand the inter-relationship of the twelve economic principles.

      Know the three approaches to value and the basis of each.




                                            7
I.    Appraisal Theory
An appraisal is the act of estimating the price at which a parcel of real estate would
sell.

A.     Ownership of Property
Inherent with ownership of property are the rights to possess, use, enjoy, and dispose of
property. Commonly referred to as the "bundle of rights", the six basic rights
associated with the private ownership of property are use, sell, rent or lease, enter or
leave, give away, and refuse to do any of these. The ownership of all legal rights to
property is known as fee simple title or fee simple absolute. Assessors/appraisers
usually value all rights that may be legally owned, that is, fee simple.

Ownership is limited by government. Unless property is owned by the government, it
is subject to certain public restrictions. The United States and other nations impose
imitations for the common good. The four rights of government follow:
1.      Taxation—the right to tax the property for support of the government
2.      Police power—the right to regulate the use of property for the public welfare in
the areas of safety, health, morals, zoning, building codes, traffic, and sanitary
regulations
3.      Eminent domain—the right to take the property for public use provided that just
compensation is paid
4.      Escheat—the right to have property revert to the state for nonpayment of taxes or
when there are no legal heirs of a decedent who dies intestate

Ownership is limited by private restrictions. Examples of private restrictions are
easements and rights-of-way, deed restrictions (covenants), liens and judgments,
mortgages, and leases.

Sometimes it is necessary to value partial ownership of rights. Examples of partial
ownership are mineral rights, leasehold interests, and air rights. Before a property is
valued, the appraiser must know which interests are to be valued.

B.     Property Classification
Real Property is the sum of the tangible and intangible rights in land and
improvements. Real estate is the parcel of land and any structures or improvements
that are permanently affixed to the land.

Personal Property is generally movable. Personal property can be broken down into
two large categories: tangible and intangible. Common examples of tangible personal
property include automobiles, boats, jewelry, and furniture. Intangible personal property
includes money, stock, bonds, and other evidences of debt. In some instances, the
General Assembly has classified property, which is tangible in fact, as intangible
personal property, but that discussion is worthy of another whole course of instruction!

The situs of real estate is the physical location. The situs of personal property is the
taxable location. Real estate is identified by legal description. The three forms most
common in the United States are lot and block, metes and bounds, and government
(rectangular) survey.
                                           8
C.     Property Value—Value in Exchange and Value in Use
Market Value (value in exchange) is 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 and knowledgeably, and assuming the price is
not affected by undue stimulus. Implicit in this definition is the consummation of a sale
as of a specified date and the passing of title from seller to buyer. A fair sale exists
under conditions whereby the buyer and seller are typically motivated, both parties are
well informed or well advised and acting in what they consider their best interests, a
reasonable time is allowed for exposure in the open market, the payment is made in
terms of cash in United States dollars or in terms of comparable financial arrangements,
and the price represents the normal consideration for the property sold unaffected by
special or creative financing or sales concessions granted by anyone associated with
the sale. Persons performing appraisal services that may be subject to litigation are
cautioned to seek the exact legal definition of market value in the jurisdiction in which
the services are being performed. In Virginia, the legal definition of market value is one
that has evolved through our court system, and it has stood the test of time. It is

―…the price which it will bring when offered for sale by one who desires, but is not
obligated, to sell it, and is bought by one who is under no necessity of having it.‖ {City of
Norfolk v. L. Snyder, 161 Va. 288, (1933); Tochahoe Woman’s Club v. City of
Richmond, 199 Va. 734, (1958)}.

Use value is the concept that a property’s value is in its use rather than in its highest
and best use. A hose rack built into a fire station is a useful and valuable item as long
as the building is used as a fire station. The hose rack probably will not add value to the
property if the property cannot be used for a similar or identical purpose. Use value is
also used by government for special assessment purposes. Virginia’s special
assessment of agricultural, horticultural, forest, and open space land permits land to be
taxed based on its productivity rather than its highest and best use.

II.    Appraisal Process

The appraisal process is a systematic, logical method of collecting, analyzing, and
processing data into intelligent, well-reasoned value estimates. It is used by both the
assessor and the single-property appraiser to estimate the value of property.

A.      Definition of the Problem
Five functions are necessary in the definition of the problem, which is the start of the
appraisal process:
1.      Identification of the property—street address, legal description, assessor’s parcel
identifier
2.      Determining the property rights involved—fee simple or fractional interests
3.      Purpose and function of the appraisal—the use to which it is put, such as
obtaining a mortgage loan or insurance, or in the case of assessors, the basis for
property taxation
4.      Date of appraisal—specified for the assessor by statute as the assessment date.
The date of appraisal is important because conditions and trends may substantially
                                             9
affect value over a short period of time.
5.      Definition of value—market value, use value, or some other kind

B.     Preliminary Survey and Analysis
This part of the appraisal process requires an inventory of the needed data, both
available and to be collected, and the allocation of time and resources to complete the
assignment.

C.     Data Collection and Analysis
Data to be collected, analyzed, and processed can be divided into three categories:
1.     General Data includes trends that affect value and may occur on the national,
regional, and neighborhood levels. These data also include environmental (physical),
economic, governmental, and social factors that affect value.
2.     Specific Data consist principally of site and improvement data.
3.     Comparative Data consist of benchmark properties, costs, multipliers, time/
location adjustments, and other appropriate measures of comparison.

D.     Economics of Supply and Demand, Highest & Best Use, and Appraisal
Principles
1.     Economics of Supply and Demand
Demand is the amount of a commodity that consumers will buy at a given price during a
specified period. Demand is influenced by consumer taste and preferences, consumer
income, the price of related commodities, consumer expectations, and the price of the
commodity.

Supply refers to the amount of goods that producers are willing to sell at a given price
during a specified period. The ―law of supply‖ states that, all else being equal, higher
sales prices will induce producers to offer more of a product. If prices fall, they will offer
less. If the price of new homes is high, more will be built. If prices fall, builders will cut
production. The major determinates of supply are the cost of production, the price of
other goods, entrepreneurs’ expectations, and the number of sellers in the market.

A Shift in demand occurs when the relationship between price and quantity changes.
The shift in demand depends on the elements of demand changing and the price of the
good staying the same. If an element of demand changes, the demand schedule will
move regardless of the price of the good. For example, if incomes increase, consumers
will usually buy more of a good at any price. This creates an increase in demand. If
income decreases, people will usually buy less of a good at any price, creating a
decrease in demand. Any of the elements of demand can cause a shift in demand.


A shift in supply is caused by a change in the relationship between price and quantity.
A shift in supply depends on the elements of supply changing and the price of the good
staying the same. If an element of supply changes, the supply schedule will move
regardless of the price for the good. For example, if entrepreneurs think that people will
buy more of a product or good, they will produce more of that good regardless of the
price.

                                             10
Equilibrium is the point at which the forces of supply and demand meet—the point of
balance. Equilibrium is not attained for long, but is a constantly changing point toward
which the system is always moving.

2.      Highest and Best Use
Highest and best use is defined as the use that will generate the highest net return to
the property over a period of time. It is an economic analysis that is carried out to
determine which market provides a property's best use. Almost all property is subject to
competing uses. When assessors estimate market value, they must determine which of
the competing uses is the highest and best one. Highest and best use is determined by
the derived demand for resources. Highest and best use reflects consumer preferences
for goods and services and requires a broad study of trends in consumer demand that
result in demand for land. Highest and best use analysis also requires the development
of conceptual skills in market analysis. The assessor must understand the social,
economic, environmental (physical), and governmental forces relative to the
determinants of supply and demand.

Highest and best use analysis is the culmination of the regional, neighborhood, and site
analyses. Understanding the factors affecting property values in the market being
analyzed helps determine a proper highest and best use. Highest and best use is the
reasonable and probable use that supports the highest present value as of the date of
the appraisal. For improved properties, the highest and best use is determined for the
site both as if vacant and as if improved. The latter analysis assumes that the existing
improvement will not be replaced, even though it may not be the best use of the site.

Once the highest and best use has been determined, the use must meet four criteria:
a.      physically possible—requires the assessor to consider such things as size,
shape, frontage, depth, soil condition, and topography
b.      legally permissible—requires the assessor to be completely familiar with zoning,
city ordinances, state and federal laws affecting use, deed restrictions, and leases
c.      financially feasible—requires the assessor to consider projected return as it
relates to risk
d.      most productive—requires the assessor to determine which use will produce the
highest rate of return or value to the property being appraised

In addition to the four criteria, there are other considerations in a highest and best use
analysis. First, there must be a demand for the use, currently or in the near future. If a
property possesses utility and scarcity and there are enough buyers with a desire for the
property and the purchasing power to buy it, then there is an assumption that the most
profitable use tends to produce the highest prices offered.

Second, the highest and best use should be a complementary use rather than a
competitive use. For example, if there are gas stations on three of four corners, a fourth
gas station will reduce the number of customers available to all four stations.

Third, the highest and best use must be the most profitable for the entire property (land,
buildings, and other improvements) because the market deals with the total property
unit, and land and buildings usually are not sold separately.
                                           11
Just as everything changes with time, the highest and best use of property will change.
The character of a neighborhood may be altered, thereby creating demands for different
uses. The assessor periodically reviews conclusions as to highest and best use and
revises them according to the data collected.

3.     Appraisal Principles
1.     Anticipation. Present worth of future benefits associated with the ownership of
property.
2.     Balance. Appraisers analyze the market to determine if there is a proper mix of
types and uses of property.
3.     Competition. Availability must be in harmony with demand. If one or the other is
in excess, prices will escalate or drop.
4.     Substitution. Basic to the approaches to appraisal - people will not spend more,
pay the cost of, or invest more than is necessary to acquire an equally desirable
substitute property.
5.     Consistent Use. Consistent use is the concept that land cannot be valued on the
basis of one use, while the improvements are valued on the basis of another.
6.     Surplus Productivity.       The income remaining after the costs of labor,
management, and capital have been paid. This income is attributable to the land.
7.     Variable Proportions. Also called the law of decreasing returns, this states that
as quantities of one productive service increases, the quantities of other productive
services remaining fixed, the resulting increment of product will decrease after a certain
point.
8.     Supply. The amount of product that producers are willing to sell under various
conditions during a given period.
9.     Demand. Quantities of various goods that people are willing and able to buy
during some period, given the choices available to them.
10.    Change. The tendency of the social and economic forces affecting supply and
demand to alter over time, thus influencing market value.
11.    Conformity. The value of a property depends in part on its relationship to its
surroundings. Value is created and sustained when the characteristics of a property
conform to the demands of its market.
12.    Contribution. The value of a component is measured in terms of its contribution
to the value of the whole. This principle is the basis for calibrating the comparative
sales approach.

E.     Application of the Approaches to Value
1.     Each of the approaches to appraisal represent both demand and supply in the
market.
2.     An appraiser must identify those supply and demand factors that best explain
value for a property in a specific market.
3.     The supply and demand factors that best explain a value for a property are
reflected in the appropriate approach or approaches to appraisal.
4.     Not all three approaches are pertinent in the valuation of all properties.
5.     All three approaches to appraisal require market data.
6.     Cost Approach
a.     The estimated value of the land, preferably derived from sales data, is added to
                                           12
the depreciated replacement or reproduction cost new of the improvement.
b.     Based on the principle of substitution.
7.     Sales Comparison Approach
a.     Provides for comparing the property being appraised with similar    properties
sold in the recent past.
b.     Based on the principle of substitution.
8.     Income Approach
a.     Converts the present worth of future benefits into value by capitalizing the net
income.
b.     Based on the principle of substitution.
F.     Correlation/reconciliation of Indicated Values to Determine Final Market Value
1.     statement of the values from each approach used
2.     statements as to the availability of data for each approach
3.     statements as to the relevance of data to each approach
4.     strengths and weaknesses of each approach
5.     applicability of each approach to the subject property
6.     opinions as to the reliability of each approach
7.     final value estimate

III.   Characteristics of Mass vs. Single Property Appraisal
A.     Mass appraisal - Used by assessor to value all of the parcels in the jurisdiction.
B.     Single-property - Used by assessor for special purpose or unique properties and
for properties being appealed.
C.     Both require the use of similar methods and techniques in developing value.
D.     Difference is primarily in scope and quality control.

(Possible redo this graph to illustrate the supply curve, the demand curve and the
affects of them moving on quantity of units sold the price and then illustrate
equilibrium)

Demonstration 2-6: Equilibrium

The point of equilibrium is that price at which supply and demand are equal and
therefore intersect. It is the point of balance. This is demonstrated in the graph below.

When a buyer and seller agree on a sale price that amount is the point of equilibrium.




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14
This page reserved for The Appraisal Process diagram.




                                      15
Module 2 Diagnostic Drill

1.   Market value is defined as the most probable price of a property in terms of
money, assuming:

A.
B.
C.
D.

2.    The six basic rights associated with property are:

A.
B.
C.
D.
E.
F.

3.    The most profitable use of a property at a specific time, given the probable legal,
physical,     and          financial       constraints,         is       called       its
__________________________________.

4.   Examples       of     partial    rights                       in         property        are
__________________,____________________,                                                      and
___________________________.

5.   The taxable location         of   personal         property    is   referred   to   as    its
______________________.

6.   The ownership of all              legal        rights   to    property    is   known      as
__________________________.

7.    Ownership of all legal rights to property is limited by government through four
ways:

A.
B.
C.
D.

8.    List two types of private restrictions that can be placed on ownership of real
property.

A.
B.

9.    Which appraisal principle affirms that land cannot be valued on the basis of one
                                               16
use   while  improvements  are             valued     on      the     basis   of   another?
______________________________.

10.   List the four tests which the appraiser must make in the analysis of the highest
and best use.

A.
B.
C.
D.

11.     An estimation of value, usually in writing, of an adequately described property, as
of a given date, is termed a(n) ______________________.

12.   _____________________ is a parcel of                 land     and   any structures   or
improvements that are permanently affixed thereto.

13.      Property is considered _____________________ if it can be moved without
causing any damage or change to either the item of property or the real estate to which
it is attached.

14.   Real estate is identified by legal description. List three forms of identification that
are most common in real estate.

A.
B.
C.

15.    ______________ ____ ___________ represents the value of a property to a
specific user or for a specific use.

16.    List the two types of highest and best use analysis.

A.
B.

17.   Shifts in value due to consumer taste and preference demonstrate the principle
of _________.

18.   Consumers who expect the value of a commodity to increase are likely to make a
purchase __sooner/later__. Consumers who expect the value of a commodity to
decrease will __________ purchases.

19.  What elements of the marketplace are most likely to contribute to a change in
demand?
_________________________________________
_________________________________________
_________________________________________
                                             17
_________________________________________
_________________________________________

20.   What elements of the marketplace are most likely to contribute to a change in
supply?

_________________________________________
_________________________________________
_________________________________________
_________________________________________
_________________________________________

21.   A deteriorated house that cannot be sold, but is valued by its owner, is an
example of value in _____. A house that has been well maintained and can be sold is
an example of value in ______________.

22.    _____________________ and ___________________ are the two types of
related commodities.

23.    _________refers to the amount of goods that producers are willing to sell at a
given price during a specified time period.

24.   The number of sellers in the market has an impact on the amount of supply. If
the number increases, then the amount of goods on the market will ___________.

25.   Changes or shifts in demand occur when the relationship between _________
and __________ changes.

26.  A change in the quantity demanded results when the ______ of the good
changes.

27.  _________________ is the point where the forces of supply and forces of
demand meet.

28.   The three approaches to value used by appraisers to develop models to estimate
values within specific markets are the __________________, _______________, &
___________________ approaches.

29.   The six steps of the appraisal process are:




                                          18
FUNDAMENTALS OF REAL PROPERTY APPRAISAL

Module 3: Legal Descriptions and Mapping

Learning Objectives

Upon completion of this section, the reader should:

      Know that cadastral (assessment) maps, including tax, appraisal, property, real
       estate, ownership or assessment maps show boundaries and help identify
       parcels.

      Know that cadastral maps are used by the assessment office for planning, field
       use, and public information.

      Understand the relationship between a good cadastral mapping system and a
       fair, accurate assessment roll.

      Know the two most frequently used land description systems in Virginia.

      Be familiar with the five general types of base maps.

      Be familiar with the different map scales used.

      Know that modern mapping systems identify parcels by codes consisting of
       numbers or letters known as parcel identifiers.

      Understand the parcel identification systems currently used in cadastral mapping.




                                           19
I. Cadastral Maps In General

Cadastral Map, simply stated, is a map that shows the dimensions of each parcel of
land and related information such as parcel identifiers, survey lines, and easements.
Also included on these maps would be streams, roads, and other physical features.

These maps are used by assessment offices to facilitate planning and field operations
and provide a source of public information. Commonly referred to as Tax Maps, they
are used daily by appraisers while working in the field during reassessments.

It is important to have clear and accurate maps while appraising property. The appraiser
needs to know the general location of each parcel in relationship to other parcels and in
relationship to roads/streets. By having accurate maps, one can determine the amount
of road frontage a property has, as well as its general shape and how these factors
affect the value of the property.

II. Land Description System

Land description systems, commonly referred to as legal descriptions, are written
descriptions of ground areas. They describe the physical boundaries of property rights
and the placement of boundary lines on maps. They are unique to the property they
describe and will not be replicated anywhere else on the earth.

There are generally four types of legal descriptions used: Metes and Bounds,
Rectangular Land Survey, Lot and Block, and Rectangular Coordinates. For the
purpose of this course, discussion will be limited to the two methods used in the
Commonwealth.

A.      Metes and Bounds was the earliest form of legal description. Boundary lines
were described as distances between two semi permanent points such as trees, roads,
streams, etc. Other property’s boundary lines were also used as a point of reference.
As time passed and land became more valuable there were disputes over unclear
boundaries. Because the points of reference were of a somewhat temporary nature,
another method had to be developed. Today the common practice in surveying is to use
compass bearings and distances are measured with chains or tapes. That is where the
term metes and bounds became known. Metes refers to measurement and bounds
refers to boundaries.

B.     In more urban areas where land has been subdivided into smaller units, the Lot
and Block method is used. Individually, the parcels are created using Metes and
Bounds surveys but for the purpose of conveyance you need only to refer to the lot,
block, and plat book designation. For instance, a parcel might be described as Lot 5,
Block B, Section 3, Gobbler’s Nob Subdivision.

III. Base Maps

Cadastral Maps may be compiled by assembling field surveys and official records such
as Public Land Survey notes and maps, town plan layouts and subdivision plats. Deed
                                           20
descriptions can also be plotted onto a map. However, most maps are created from
aerial photos or a map base with symbols created from an aerial photo. This base
provides a physical framework of roads, streams, fences and other natural features on
which non-physical information may be plotted.

Cadastral map displays are generally on one of five types of base maps:

A.     Aerial photographs are exactly what they sound like--pictures of the ground
taken from an aircraft. Typically, there is a lot of distortion in the actual photo
depending on the angle of the plane at the time of exposure. These distortions are
called tilt and relief displacement. This system is widely utilized because it is quick to
obtain and relatively inexpensive. Its use, however, is limited to parcel inventory and on-
the-ground location by field appraisers.

B.       The rectified photo is the result of taking aerial photographs and removing the
tilt displacement during the development process. However, distortions created by relief
displacement cannot be removed. Because relief displacement decreases toward the
center of the photo, mapping-base coverage can be planned so that only the center
portion of each photograph is used.

C.      Orthophotographs are composites of enlarged rectified photos mentioned
above. A large number of photos of small areas are rectified and put together to make
one large image. The final product appears much the same as a standard aerial or
rectified photo, but because tilt and relief displacement have been removed, the
resulting photo becomes very close to a map. Once property lines are plotted on this
photo they should line up with any physical features already on the photos. This is an
expensive and time-consuming form of mapping and is typically used by multi-agency
programs.

D.    Planimetric Mapping is very similar to orthophotographic mapping. The maps
are made from a three-dimensional stereoscopic model of overlapping aerial
photographs.

The difference is that stereo plotting is used to draw selected lines and symbols on a
map. This creates a true map with no photographic imagery. Standard symbols are
used in the creation of the planimetric base. Physical features, like roads, fences
building, tree lines, etc., can be transferred from the model to a drawn map. This is also
a highly accurate system that is based on a geographic grid system and is suitable for
sophisticated multipurpose uses. This is a suitable method if reliable deed descriptions,
plats and other property line data are available. However, if creating the map requires
much fieldwork and compilation, where property lines must be matched to physical
features, the orthophotograph base is more useful.

E.     Topographic maps are the most sophisticated type of base map in general use
in the production of cadastral maps. Basically, they are a planimetric or orthophoto
base with contour lines. Contour lines are of little value in determining ownership
boundaries except in mountainous areas where ridgelines and streams are often
property lines.
                                            21
IV. Map Scale:

Map scale is the relationship of linear distance on the map to the linear distance on the
ground. Scale can be given as a comparison of units on the map to units on the ground
(such as 1‖ = 600’). A graphic scale, also called a bar or line scale, is a commonly used
method of units of length. (illustrate) This method is visually effective and has the
advantage that if the map is reduced or enlarged photographically, the scale will not be
lost.

The usual scales for cadastral mapping are:

  1" = 400' or 600' – Used in rural areas where parcels are larger than one acre.

  1" = 200'         – Used in suburban areas where lots are small with frontage
                      of 100 feet or more.

  1" = 100'         – Used in urban areas where the usual frontage is at least
                      50 feet or more.

  1" = 50'          – Used in congested areas where lots are quite small.


V. Parcel Identification Systems

Parcel identifiers are evaluated in terms of four standards: uniqueness, permanency,
simplicity, and uniformity. These are sometimes incompatible and must be balanced
against one another.

A.    Uniqueness – An identifier must identify one specific parcel, and each parcel
should have only one. This standard is the most important and must be followed if the
parcel ID system is to work properly.

B.    Permanency -- An identifier should only change when the boundaries of a parcel
change (split, divided, sold or combined with an adjoining parcel). It should never
change with a transfer of ownership. These identifiers refer only to the land, not the
ownership.

C.    Simplicity -- Identifiers should not contain an excessive number of digits,
segments or elements. It should be relative easy to generate and easy to understand by
those without specific knowledge.

D.     Uniformity – The ID system should be applicable throughout a jurisdiction or
state. Patterns of ownership, methods of conveyance, and legal provisions relating to
land ownership and property assessment should be considered. Electronic data
processing should be anticipated even though you might be using manual methods.



                                           22
VI. Types of Parcel Identification Systems

The parcel identification systems currently used in cadastral mapping are Map-Base
and Geographic Coordinate Code.

A. In metes and bounds areas where parcels tend to be irregular in shape and
individually described, map-base parcel identification is usually used. Identifiers have
no reference to their legal descriptions. The first component is a map sheet
designation. The remaining portion of the identifier is relative to the individual parcel.
(Show example.) In some jurisdictions maps are bound in a book form with the
individual maps as pages. This is called the map book-page system.

B. The Geographic Coordinate, or geocode, parcel identification systems have
developed for computerized land information systems. Each identifier is referenced to a
coordinate system and can be automatically located and retrieved. These systems are
usually based on state plane coordinates.

VII. Computers in Mapping

Generally speaking, most computerized mapping systems can be categorized as
computer-assisted drafting systems, automated mapping/facilities management
systems, or geographic information systems. All require a base grid with x-y
coordinates and permit the mapping of cartographic features as points, lines, and
polygons. Overlapping map layers, each with specific information, are used in all three
systems. All offer the ability to change scale, update maps readily, print or plot maps as
needed, and display and store text.

A.   Computer-assisted drafting (CAD) systems are suitable for traditional
mapping functions. They will produce the same type of map as can be produced
manually, but are produced and maintained electronically.

B.       Automated mapping/facilities management (AM/FM) systems differ from
CAD systems in that they feature sophisticated databases capable of storing and
manipulating related attribute information. This system was basically developed for
utilities and best serves networking functions. They are limited in their ability to analyze
relationships between different layers other than through visual inspection.

C.     Geographic information systems (GIS) were developed for spatial analysis
needs such as planning, natural resources, and land records management. This system
allows one to completely integrate spatial data and attribute data among different layers.
Many such systems are used by, but not managed by, the assessment office.

Each layer in the GIS can be compared to a single map overlay. The geodetic survey
control is usually the first layer, followed by the grid reference system, which is the state
plane coordinate system. Additional layers such as zoning, sewer lines, water lines, soil
types, property lines, topography, and political boundaries can be added.



                                             23
VIII. Mapping System Maintenance

Real property is constantly changing ownership. Therefore, mapping system
management needs an organized maintenance program. Ownership records need to
be updated to identify the current legal owner. Boundary changes are made to show the
current parcel configuration and size. A mapping system should become more accurate
as surveys correct errors made in the original mapping. If mapping systems are not
managed and kept current, the original investment in the program is lost, and a new
mapping program will have to be instituted.

A.      Systematic Maintenance is the making of ownership and property line changes
as a result of official documents such as deeds, wills, plats, and surveys. All of these
official documents for changes are obtained by the assessor’s office from the office of
the recorder and other sources. These changes could be changes in ownership,
changes in acreage, divisions of properties, or improvements added to the properties.
Cooperation between the recorder’s office and the assessor’s office is necessary to
ensure records are maintained efficiently.

B.     General Maintenance is maintenance related to changes other than ownership.
New streets and new highways are constructed, and the names and the right-of-way
widths are changed. Occasionally, roads are vacated. City limit lines are changed due
to annexation. Many mapping systems maintain the location of buildings, which
requires updating to reflect the construction of new buildings and the destruction of old
ones. If these types of changes affect parcel boundaries, acreage should be
recalculated and new dimensions determined.           As in systematic maintenance,
ownership records are updated and corrected to reflect all changes.

C.     Field Checks may be necessary occasionally when information in the office is
inadequate to complete the job. Field research is particularly helpful in areas with old
metes and bounds surveys. The field researcher should study all available data before
going to the field, but should not develop preconceived ideas. Not all ownership
discrepancies can be resolved. Overlapping property owners should be contacted and
informed of their right to take appropriate legal action.

Summary

A complete and accurate set of maps is essential for the location, identification, and
inventory of all parcels in a jurisdiction. Assessment offices with good mapping systems
are an important public resource. Offices that have taken advantage of computer
technology for managing maps and assessment information can be an especially
important resource for other public agencies.




                                           24
Module 3 Diagnostic Drill

1.    The land identification system based on semi-permanent physical features or
bearings on a compass is known as _________ _____ ___________________.

2.   Residential subdivisions are commonly described by the ___________ and
_______ ______________ system of land identification.

3.   A numerical code representing a parcel's               legal   description   is   a
_______________________ ____________________.

4.     In mapping and land survey two terms, ___________ and ______________ are
substituted for measurements and boundaries when addressing a form of land
description based on semi-permanent landmarks.

5.    A map displaying property ownership boundaries, dimensions, and other useful
information is called a(n) _____________ _____________.

6.    There are _________ square feet in an acre and _________ linear feet in a mile.

7.    Baselines run _________ and _____________, meridians run ____________
and _____________.

8.    An appropriate scale for a cadastral            map     in    a   rural   area   is
      _____________________________.




                                         25
FUNDAMENTALS OF REAL PROPERTY APPRAISAL

Module 4: Land Valuation

Learning Objectives

Upon completion of this section, the reader should:

      Understand the importance of accurate land values and the nature of land
       valuation.

      Know the appraisal principles that apply to the valuation of land.

      Understand the factors that affect land values.

      Know the importance of market analysis in the land valuation process.

      Understand the rationale for which formulas and rules for land valuation are
       based.

      Know the generally accepted methods of land valuation.




                                            26
I. Land Valuation

In appraising real estate, two separate entities must be considered. Land, which is the
non-wasting portion of real estate, and the improvements, which are the wasting portion
subject to various forms of depreciation. Land and improvements are valued separately
so that the trends and factors affecting each can be studied and applied. Statutes
require separate values to be shown on the Land Book. The highest and best use of
land must be determined before the assessor can estimate market value. The
development of land value generally uses six accepted methods:

      Sales comparison
      Allocation
      Abstraction
      Anticipated use or development
      Capitalization of ground rent
      Land residual capitalization

The first step in land valuation is identifying the property. The assessor must know the
size and location of the subject parcel. Once identified, an analysis of the subject can be
made using data specific to the site, a study of trends and factors influencing value, and
the physical measurement of the site. A site is a parcel of land that has been made
ready to use for an intended purpose.

Once analyzed, the land must be classified as residential, commercial, industrial, land-
in-transition, agricultural, special-purpose, or undeveloped. In determining the highest
and best use of a parcel, the assessor must consider what is physically possible, legally
permissible, financially feasible, and most productive.


II. Site Analysis

Land can be unimproved (raw) or improved (ready for development). Undeveloped land
or land in agricultural use is considered unimproved. Land developed to the extent that
it is ready to be built upon is considered a site. A site analysis is the collection of the
site-specific data (physical characteristics) and the collection of information about trends
and factors affecting value.

A. Trends and Factors

After classification of the land and establishing highest and best use, the assessor must
analyze the trends and factors affecting the parcel. Identifying the environmental
(physical), economic, governmental, and social factors is an important aspect of the
valuation and can help in determining the correct valuation method.




                                            27
B. Site Data

Site-specific site data includes:

1. Frontage: the measured distance along which a property abuts a street or public
way and expressed in front feet.

2. Width: usually measured along the front of a parcel. In a regular shaped lot, the
width and the frontage are the same; in an irregular shaped lot, the width is an average
measurement that is either larger or smaller than the frontage. (Generally the average
of the front and rear measurements.)

3. Depth: the distance from the front to the rear line of a parcel.

4. Shape: shape may have a direct bearing on the value and may be described as
regular, slightly irregular, very irregular, or square, rectangular, or triangular.

5. Area: area is one of the most important characteristics affecting value because it
can determine how the land can be used. Always consider the effective area (where a
building may be constructed). Zoning or deed restrictions generally apply set backs from
the front, rear, and side property lines, having a major effect on the value of a site
because it reduces the amount of land available for improvements.

6. Topography: physical features of a site, such as view, slope, contour, grading,
drainage, trees, and soil condition. These physical features dictate how a site may be
developed, and the size, type, and location of the building allowed on the site. Slope
determines what site improvements (retaining walls or fill) may be needed. Soil and
subsoil conditions determine the feasibility of construction. Percolation refers to the
ability of the soil to accept moisture. Poor percolation may require special drainage
features. Soil condition determines whether ordinary means of landscaping may be
used or whether additional cost will be required to improve the soil’s condition.

 7. Off-Site Improvements: streets, sidewalks, street lighting, and traffic patterns affect
value. Street width is important to commercial and industrial properties for transportation
needs, while traffic flow, noise, and hazards may affect residential properties. The site
value is affected by the availability of utilities (water, gas, electricity, telephone, and
sewers).




                                            28
III. Land Valuation Methods

Sales Comparison

This is the method of comparing the subject property with comparable vacant parcels
that have recently sold. Sales are processed for indicators of value by adjusting the sale
prices of the comparables for their differences from the subject property.

The process has the following steps:

       Market research to obtain sales information
       Verification of the sales information
       Selection of appropriate units of comparison
       Comparison of sold properties with the subject property
       Adjustment of sales prices of the sold properties, as appropriate
       Reconciliation of the value indicators developed from the analysis into an
       indication of value for the subject site


In market research and verification it is necessary to list all pertinent information
connected with the comparable sale. Data to be recorded is the names of grantor and
grantee, date of sale, description and location, price verification and recorder fee, and
mortgage terms. It is a preferred practice to verify every sale with the buyer, seller
broker, or attorney involved. Knowledge of the motives of buyers and sellers is
mandatory.

The process of comparison with the subject site requires units of comparison. Care
must be exercised in selecting the appropriate unit of comparison. There are five units
of comparison are used in valuing sites.

A. Front Foot: The front foot unit of comparison is based on the premise that frontage
significantly contributes to value. Each front foot is a one-foot-wide strip of land that
fronts on a street, a railroad siding, or a body of water and continues to the rear of the
parcel.

B. Square Foot: This unit of comparison is used for parcels that sell for an average
price per square foot of land area.

C. Acre: Acreage amount is calculated by dividing the square footage by 43,560.
Acres are used in the valuation of large sites. It may be necessary to break down a site
between the acres that front on a public thoroughfare and the rear acres. In many
circumstances, front acres are more valuable.

D. Site: The site, or lot, unit of comparison is used when the market does not indicate
a significant difference in lot value even when there is a difference in lot size. Typically
found in residential subdivisions, the site unit of comparison may also be used in valuing
industrial sites located in industrial parks.
                                            29
E. Units buildable: This unit of comparison is used when the market indicates that a
site is sold on a unit basis. Examples of this type of comparison are apartment
properties, the sale price per buildable apartment, and parking garages, the sale price
per car space.

Adjustments No two parcels of land are exactly alike. They might be identical in size
and physical characteristics, but each parcel has a unique location and is likely to differ
from other parcels in some way. Typical differences requiring adjustments are in the
time of sale, location, and physical characteristics. Other differences may become
apparent with the study of the environmental (physical), economic, governmental, and
social factors affecting the sale property and the subject property. The adjustment
process is an analysis designed to show what the comparable property would have sold
for if these differences were eliminated.

Reconciliation In estimating the value of the subject site, each important difference
between the subject property and the comparable sale is considered. To provide an
indication of value for the subject site, one would place the greatest emphasis on the
value indicators from the properties that require the fewest adjustments.

IV. Alternative Land Valuation Methods

Alternative valuation may be necessary when reliable sales data is unavailable.

A. Abstraction Method

Abstraction method uses the cost approach to analyze the sale price of an improved
property. The depreciated value of the improvements is subtracted from the sale price.
The remaining value is the indicated land value.

B. Allocation Method

Allocation is defined as the principle that land has a logical relationship to total property
value. Therefore a proportion of the total property value is allocated to the land.
Typically relationships are established from the sales of improved properties by
considering site values in previous years, land-to-improvement ratios in similar
neighborhoods, and the analysis of new construction on similarly classified sites.

C. Anticipated Use or Development Method

Anticipated use or development is primarily used in the valuation of land that is in
transition from agricultural use to residential or commercial use. Development costs are
subtracted from the projected sales prices of developed lots to indicate the value of the
land.

D. Capitalization of Ground Rent Method

The capitalization of ground rent uses the income approach to value, that of converting
                                             30
or capitalizing income into an indication of value. This method may be desirable in
business districts where no vacant land sales can be found. There are many instances
where land is leased on a net basis. Once the market rent of the subject site is
established, a net income is calculated and a capitalization rate selected.

E. Land Residual Capitalization

Land residual capitalization is used only for income producing properties for which an
improvement value can be developed and supported. The assessor must be able to
develop the annual net operating income attributable to the property and to develop a
land and building capitalization rate. The annual net operating income attributable to the
improvement is deducted from the total annual income. The remaining income, the
residual amount attributable to the land, is capitalized into a value indicator for the land.


SUMMARY

Land valuation is basic to real estate appraisal and requires a detailed site analysis
before valuation. Both site analysis and valuation encompass principles and techniques
pertinent to the approaches to value.




                                             31
Module 4 Diagnostic Drill

1.      Under normal conditions, land prices typically increase over time because of the
limited                        of land.

__________________ ________________ is the result of income remaining after the
cost of labor, capital, and management are satisfied.

The principle that illustrates that market value is influenced over time is
_______________.

The principle that illustrates that market value is the present worth of future expected
benefits is ______________.

List the five units of comparison used to value land.
_____________________,                                ________________________,
_________________________,
_____________________, and ______________________.

The supply of a type of land may be increased or decreased by ________________
limitations.

List three economic factors that affect the demand for land.
_____________________________________________________
_____________________________________________________
_____________________________________________________

S - IV = LV is the formula for the __________________ method of land valuation.

The most reliable method of land valuation is _______________.

The ______________________ method of land valuation is based upon the principle of
balance.

The units of comparison generally used in land valuation of commercial retail properties
are _________ and ___________.

List three site characteristics that may require an adjustment when utilizing the sales
comparison approach to site valuation.
_________________, _______________, & ___________________.

An undeveloped vacant parcel is generally termed _________ _______ while a parcel
ready for the use for which it was intended is generally termed ________.

____________ is a method of valuing land that subtracts RCNLD from the sales price of
an improved property.

In the valuation of land by the sales comparison approach, sales must first be
                                          32
_______________        into        homogeneous   groups   by
_________________________________.

List five methods of land valuation.
_______________________________
_______________________________
_______________________________
_______________________________




                                       33
FUNDAMENTALS OF REAL PROPERTY APPRAISAL

Module 5: Cost Approach

Learning Objectives

Upon completion of this section, the reader should:

Know the formula for the cost, or summation approach: V = LV + RCN - D.
Understand that the cost approach reflects supply and demand activity in the real estate
market.
Know how to develop a cost estimate.
Know how to apply depreciation to determine value from cost.
Understand the elements of cost.
Understand the types of cost.
Understand the four methods of estimating cost.
Know the six primary characteristics that influence cost.
Understand the definition of accrued depreciation.
Understand that accrued depreciation reflects the demand side of the market, because
it represents the loss in value perceived by the buyers due to diminished utility.
Understand the three causes of accrued depreciation.
Understand the concept of effective age, remaining economic life, and total economic
life.




I.     Foundations of the Cost Approach
The cost approach is also known as the summation approach and is based on
theprinciple of substitution. A potential owner will pay no more for a property than the
amount for which a similar property may be purchased. The formula for the cost
approach or summation approach is Value (V) = Land Value (LV) + Replacement Cost
(RCN) – Depreciation (D). This approach is the most widely used approach in mass
appraisal, and it can be applied to all types of properties.

II.   Steps in the Cost Approach

A.    Estimate the site value, as if vacant.
                                           34
B.    Estimate the replacement cost new or reproduction cost new of the
improvements.

C.     Estimate the amount of accrued depreciation.

D.     Subtract the estimate of accrued depreciation from the estimated cost new.

E.     Add the site value to the depreciated replacement or reproduction cost.

III.   Elements of Cost

A.    Direct Costs are expenditures for labor and materials necessary to construct a
new improvement.

B.     Indirect Costs are expenditures other than labor and materials including
architecture and engineering costs, building permits, construction loans, etc.

IV.    Types of Costs

A.     Reproduction Cost is the cost new to build an exact replica.

B.       Replacement Cost is the cost new to replace the building today with one of like
utility, using modern methods and materials.

C.     Historical Cost is the cost at the time of original construction.
D.     Trended Historical Cost is the historical cost factored by reference to some
current index.

V.     Important Characteristics of Cost

A.     Quality
B.     Design Type (refers to use for which they were designed)

C.     Construction Type

D.     Floor Area (square footage)

E.     Building Shape

F.     Story Height

VI.    Methods of Estimating Cost

A.     Quantity Survey Method is a complete cost itemization of all direct and indirect
costs incurred in the construction of a building.

B.     Unit-In-Place Method is a modification of the quantity survey method. It combines
                                           35
direct and indirect costs into a single unit-in-place figure, which when multiplied by the
area of the building being priced, results in a total cost estimate for that portion.

C.    Square Foot or Comparative Unit Method is the easiest, fastest, and most widely
used method of cost estimation. Direct and indirect costs are summed and divided by
square feet of ground area or floor area, or cubic feet to derive a cost per unit.

D.    Trended Original Cost or Factored Historical Cost is the method of obtaining an
estimate of reproduction cost by trending historical cost with a factor from an
appropriate construction cost index.

VIII.   Depreciation

A.      Accrued Depreciation is a loss of value from all causes.

B.    Cost and value are most similar when improvements are new and represent the
highest and best use.

IX.     Three Causes of Accrued Depreciation

A.     Physical Deterioration is a loss in value due to ordinary wear and tear and the
forces of nature.

B.   Functional Obsolescence is a loss in value due to inability of the structure to
adequately perform the function for which it is used as of the appraisal date.

C.     Economic Obsolescence, (also called locational or external obsolescence) is a
loss in value because of impairment in utility and desirability caused by factors outside
the property's boundaries.

X.      Types of Depreciation

A.     Physical Curable is measured by the cost of repair or replacement offset by the
value added to the property.

B.      Physical Incurable exists when the cost of repair exceeds the gain in value, and
is not generally economical to repair or replace.

C.     Functional Curable Obsolescence is measured by the cost to cure the condition
offset by the value added to the property.

D.    Functional Incurable Obsolescence exists when the cost to cure the condition
exceeds the increase in value.

E.      Economic (External) Obsolescence is generally considered incurable.

XI.     Effective Age, Remaining Economic Life, and Total Economic Life

                                            36
A.     Effective age is the age indicated by the condition and utility of a structure.

Remaining economic life is the estimated period during which improvements continue to
contribute to property value.

C.     Total economic life is the period of time over which improvements to real estate
contribute to property value.


Module 5 Diagnostic Drill

1.     The formula for the cost, or summation, approach is V = LV + (RCN - D). Define
the variables:
a.     V is                              .
b.     LV is                             .
c.     RCN is                                   .
d.     D is                              .

2.     The cost approach to             valuation   is   based     on   the    principle   of
       ______________________.

3.                            is the cost of producing a building with like utility, using
today's materials and methods of construction.

4.                              is the loss in value from cost new due to all causes
except depletion, as of the date of appraisal.

5.     Cost and value are/are not necessarily synonymous or equal.

6.    Accrued depreciation reflects the         supply/demand       side of the market in
conjunction with the principle of contribution.

7.     List the steps in the cost approach.

(1)                            .
(2)                            .
(3)                            .
(4)                            .
(5)                            .

8.                                   is loss in value due to wear and tear and the forces
of nature.

9.                                  is loss in value due to inability of the structure to
perform adequately the function for which it is used, as of the appraisal date.

10.                                 is loss in value resulting from a decrease in utility
and desirability caused by factors outside the property's boundaries.
                                              37
11.                               is the cost of producing an exact replica of a building.

12.    Three direct methods of measuring depreciation are ,                      , and
.
13.                            is the number of years from the date of the appraisal to
the date when the building became economically valueless.

14.   Material, labor, and on site supervision are examples of costs.

15.   List the four methods of calculating cost.

(1)                           .
(2)                           .
(3)                           .
(4)                           .

16.   method is the easiest and most widely used cost estimator method.

17.   shows the relationship between sales price and gross income.

18.   Physical deterioration curable is measured by the                        .

19.   Physical deterioration incurable, both short-lived and long-lived, is measured by
                 .

FUNDAMENTALS OF REAL PROPERTY APPRAISAL

Module 6: Sales Comparison Approach

Learning Objectives

Upon completion of this section, the reader should:

Know the sales comparison approach is preferred when comparable sales exist.

Understand the relationship of supply and demand and the principle of substitution to
the sales comparison approach.

Know the steps of the sales comparison approach.

Understand comparables are selected based on similarities in date of sale, economic
conditions, physical attributes, and competition in the same market.

Know typical elements of comparison that may be used to adjust the sale prices of the
comparables to estimate the value of the subject property.

Know typical units of comparison by which a property may be analyzed for comparison
                                              38
purposes.

Understand the paired sales method used to determine adjustment amounts.

Know the lump-sum method used to adjust comparables.

Know that time adjustments are made after adjusting for terms of cash. Time adjusted
sale price then provides a common starting point for making all other adjustments.




                                        39
I.     Foundation of Sales Comparison Approach
The objective in the sales comparison approach is to estimate the market value of a
subject property by analyzing data of properties that have recently sold in the area,
which are similar in size, age, construction, and amenities. These properties are also
known as comparable properties. Because no two parcels are exactly alike, the prices
of the comparables must be adjusted for any differences between the properties and the
subject property.

The economic principle of supply and demand provides the framework for this
approach, and essentially the sales comparison approach establishes market value
under the premise that a buyer will not pay more for a property than a cost to purchase
a similar property. The fundamental strength of the sales comparison approach is that it
reflects the behavior of typical of buyers and sellers, however it is difficult to use without
adequate sales.

II.    The steps required In the Sales Comparison Approach:

A.     Definition of the Appraisal Problem consists of 5 functions:
               Identifying the property to be appraised
               Determining the property rights to be appraised
               Defining the purpose and function of the appraisal
               Specifying the date of the appraisal
               Defining the type of value

B.     Data Collection and Verification can be divided into three categories:
             General
             Specific
             Comparative

C.    Analysis of market data to develop units of comparison and select attributes for
adjustment: An examination of market data reveals which features the market perceives
to contribute value. For single-family residential property, adjustments are typically
made to the total property sale price.

D.   Development of reasonable adjustments: After the appropriate unit of
comparison is selected, the data is reviewed to determine which characteristics and
comparable sales are most applicable.

E.     Application of adjustments to the comparable sales: Adjustments are always
applied to the sales prices of the comparable properties, and are never made to the
subject property in the comparison process. The total adjustment for any comparable
property is determined by a series of individual adjustments for each item in the sale.

F.     Analysis of adjusted sale prices to estimate value of subject property: The
adjustment process that produces a final value decision consists of a series of smaller
decisions. Typically, comparable sales requiring the least amount of adjustment are
most applicable in determining the fair market value of a subject property.
III.   Supply & Demand provides an understanding how the market works. Interaction
of supply and demand forces determines property prices. Supply depends on current
inventories and on availability of human skills, material and capital. Population levels,
mortgage rates, income levels, local services, preferences and the cost of substitutes
influence demand. If the demand for a particular type of property is high, prices tend to
increase; if demand is low, prices tend to decline.

IV.    Units of Comparison
Comparability is a measure of similarity between the sale and subject. Three to five
comparable sales are usually adequate. Most properties can be analyzed with several
units of comparison and then examined for the most appropriate and reliable unit.
Typical units of comparison for residential properties include sale price per:

A.     Dwelling unit

B.     Room

C.     Bedroom

D.     Square foot of building

V.     Elements of Comparison
The selected unit of comparison for the comparable sales is adjusted through an
analysis of the elements of comparison.

A.     Financing terms: Financing arrangements for the sale of one property may be
different from the sale price of another that is virtually identical. If a comparable sale
must be adjusted for financing, this adjustment must be made before any other
adjustments.

B.     Market conditions (time): The principle of change states that change continually
affects the real estate market. During an inflationary period, the value level tends to rise,
and during deflationary times, value levels tend to fall. Values may have appreciated or
depreciated since the transaction dates of the comparable sales.

C.     Location: An adjustment for location may be required when the locational
characteristics of a comparable property are different from the subject property. Most
comparable properties in the same neighborhood have similar locational characteristics,
but variations may exist within a neighborhood.

D.     Physical characteristics: If the physical characteristics of a comparable property
and the subject property differ substantially, each of the differences may require
adjustment. Physical differences may include building size, quality of construction,
architectural style, building materials, age, condition, functional utility, lot size, and
amenities.

VI.    Determining adjustment amounts

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A.     Paired Sales analysis is a process in which two or more sales are compared to
derive the amount of an adjustment for a single characteristic, such as air conditioning
or a garage. This process requires properties that are very similar in design, location,
age, and physical attributes. Adjustments are typically expressed as a dollar amount
(lump sum), or as a percentage.

VI.   Applying the Sales Comparison Approach

A.   Use of a market data grid ensures that adjustments are made in a consistent
manner. The grid should include the subject and comparable sales data and the
elements of comparison describing the sequence of adjustments.

B.     Select Adjustment Method: Adjustments are always made to the sales prices of
comparable properties, whether expressed as a lump sum or a percentage, and include
financing, time of sale, location, and physical characteristics.

C.     Measures of Confidence for Comparables: In selecting a single value estimate
for the subject property, the results must never be averaged. Comparable sales
requiring the least amount of lump sum or percentage adjustments should be given the
greatest weight in determining the market value of the subject property.




Module 6 Diagnostic Drill

List the six steps of the sale comparison approach.
1.
2.
3.
4.
5.
6.

Adjustments in the sales comparison approach are always made                       to   the
______________ property and never to the _________________ property.

_____________________ analysis, the foundation of single-property appraisal, requires
that sales properties be identical in all attributes except the one being measured (or that
adjustments have already been made for the other attributes).

The adjustment process of the sale comparison approach involves the application of the
________________ value of an attribute to the total property.

Three methods of adjusting comparables in the sales comparison approach are:
1.

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2.
3.

Four methods for extracting the contributory value of various property components are:
1.
2.
3.
4.

What is the main advantage of using the sales comparison approach to value?

Sales are reviewed and adjusted for ________________ if necessary. The next
adjustment considered is the __________ adjustment which must be made before
adjusting for location and physical characteristics.

The best source       of   verification   of sales    data   is   through interviews with
_______________                           and/or                      _________________.




FUNDAMENTALS OF REAL PROPERTY APPRAISAL

Module 7: Income Approach

Learning Objectives

Upon completion of this section, the reader should:

Have a basic understanding of the income approach

Know that it is generally used for valuing income-producing properties


I.    The income approach, often referred to as capitalization of net income, is
generally used for valuing income-producing properties. The capitalization process
estimates market value by converting future net rental income into an expression of
present worth. In most cases, it is the least reliable value indicator for single-family
residential housing.
From an investor's perspective, the earning power of a real estate investment is the
critical element affecting its value. The fundamental investment premise is the higher
the earnings, the higher the value. Investors rely primarily on the income approach in

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making decisions to buy or sell. The income approach is an integral part of the valuation
process. Income capitalization techniques and procedures are employed to analyze and
adjust sales data in the sales comparison approach and to measure functional and
external obsolescence by capitalizing an estimated income loss in the cost approach. It
is also a valid check on the value indicators provided by the cost and sales comparison
approaches to value.




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