: Introduction to Real Property Valuation

• Contents:
• Definition of terms:
• Land & Its peculiar nature
• Real estate, Real property & personal property
• Defining valuation, Appraisal, Price, Value, Cost etc.
• Definition of Market Value

4/7/2023 ABAY 1
 Learning Outcomes:
At the end of this session, students will be able to;
• Understand the nature of land & real property
• Differentiate among price, cost &value
• Understand the nature Land/property market
• Understand the concept of valuation, appraisal
• Comprehend the determinants of Market value

4/7/2023 ABAY 2
 The nature of Land
• Its the ultimate resource i.e. without it life on earth
cannot sustain.
• Is the free gifts of nature w/ch yield an income
(Classical economist)
• Includes all the subjacent & super-jacent things of a
physical nature like buildings, trees, minerals etc
(Lawyer’s defn).
• Is a primary source of wealth, social status, & Power.
• Is the basis for shelter, food, and economic activities.

4/7/2023 ABAY 3
 Basic Characteristics of Land
Unlike other factors of production, land has many unique features such as;
• Heterogenity:
• Each parcel of land is unique
• Renders information assymetry
• Incurs immmense transaction cost
• Immobility:
• a real property with its fixtures like buildings, factories.
• in exchangeable :
• No national/central market
• Source of negative/positive externalities
• Longevity/durability:
• Undepreciability of land unlike other factors of production
• Serve as inflation proof/protection.
• Serves as a basis for savings/ as a collateral.
4/7/2023 ABAY 4
 Basic Characteristics of Land Cont’d
• Relative Fixity of it’s supply:
• Supply of land is perfectly inelastic thus, one use can be
increased at the expense of the other
• Land is the least flexible factor of production
• Cause a tendency of monopoly by lessors, vendors etc
• Costyness:
• requires bulk finance to acquire & develop
• Incurs immmense transaction cost.
• No cost of creation:
• It is a free gift of nature not a commodity
• Thus, its more than just an asset:
• Its linked to individuals & community identity, history and culture,
as well as being a source of livelihoods and,
• the only form of social security for many poor.
4/7/2023 ABAY 5
 Cont’d
• Subject to the Law of Diminishing returns:
• It states that, MOT, AOT & TOT of land eventually
diminishes after successive application of labor &
capital to a given area of land.
• Absence of market for ‘Land’:
• unlike other factors of production transaction is not in
land itself, but in interests/rights in, on, under & over
land.

4/7/2023 ABAY 6
 Real estate Vs. Real & Personal Property
Real Estate:
 Physical Land and Appurtenances affixed to the land
(e.g., structures)
Real Property:
 all interests, benefits and rights inherent in the
ownership of real estate
 Portions of the bundle of rights
Personal Property:
 Moveable items not permanently affixed to, or part
of, the real estate such as;
 Manufactured Housing
 Plants
 Fixtures; movable property that is attached
4/7/2023 permanently to the land
ABAY like machines. 7
 Characteristics of Real Property
• Economic Characteristics
• Scarcity
• Improvements
• Permanence of investment
• Location
• Physical Characteristics
• Immobility
• Indestructibility
• Uniqueness

4/7/2023 ABAY 8
 Types of Real Property
• Residential Properties
• Commercial “
• Industrial “
• Agricultural “
• Special Purpose Properties

4/7/2023 ABAY 9
 The nature of property Markets
• Market is any arrangement by which buyers & sellers meet
together to determine the price to exchange goods.
• Real property refers to land, properties & resources
embodied in it.
• Real property transactions are not on the land it self, but on
interests/rights over the land,
• The real property Market is thus, an arrangement by which
buyers & sellers of virgin land, agricultural estates, industrial
buildings, offices, shops & houses are brought together to
determine the price of exchanged.

4/7/2023 ABAY 10
 Goods in Property Market:
• Are resources affixed with land
• Are neither physically movable.
• They differ from labor, capital & other goods in general.
• Too heterogeneous:
• Imperfect Information/assymetry among participants
• Low transaction frequency: participants buy/sell infrequently)
• No central market: mainly in informal markets
• Relatively small no of buyers and sellers
• Property Market is either formal or informal.

4/7/2023 ABAY 11
 Cont’d
• Prices are not determined by the market, rather by
other factors which differ in each transaction (e.g.
Crisis, location etc.)
• No clearing fixed price
• High transaction cost: high purchase & sale costs
• Market failures/imperfections are common.
• Therefore, Property markets are imperfect & not 100%
efficient.

4/7/2023 ABAY 12
 Cont’d
• No formal & organized central agency & market.
• Markets may be formal(Auction advertised) or
• May be informal (introduced by estate agents, dealings b/n
principals, brokers etc.).
• Its impossible to distinguish the means by which people are
informed from but, much is advertised through news papers,
which in turn is part of the market
• So, land market is subject to the law of supply & demand wich
determine the price & value of land.

4/7/2023 ABAY 13
 Cont’d
• Unlike Labor & Capital, land/property market is the least
efficient due to:
• Imperfect knowledge of buyers & sellers ( need experts
like surveyors, lawyers, va luers)
• Heterogeneity & immovability of land
• Imperfect competition (monopoly interests)
• Relatively high cost of dealing.
• If rights are clearly defined and costs of negotiation are
minimized, then the market will work efficiently.

4/7/2023 ABAY 14
 Definition of terms
• Valuation is the provision of a written opinion as to
capital price or value, or rental price or value, on any
given basis in respect of an interest in property.
• However, it does not include a forecast of value.
• Is the art and/or science of estimating the monetary value of
an asset at a particular point in time for a specific purpose.
• It could be the value to an individual or in the open market.
• In the case of real property, it is interests/rights in property
and not property by itself that are valued i.e. either freehold or
leasehold interests.

4/7/2023 ABAY 15
 Definitions (Appraisal)
• Appraisal means the written provision of a valuation,
combined with professional opinion, advice and/or
analysis relating to the suitability or profitability, or
otherwise, of the subject property for defined
purposes, or to the effects of specified circumstances
thereon, as judged by the valuer following relevant
investigations.
• It may incorporate a calculation of worth.
• Worth: is a specific investor’s perception of the
capital sum which he would be prepared to pay (or
accept) for a property,

4/7/2023 ABAY 16
 Definitions of Price, Cost & Value
• Price:
• Is related to exchange of property rights/interests
• Is the actual observable exchange price in an open market.
• Cost:
• Is a production-related concept, not related from
exchange,
• Is the amount of money required to develop a property,
service,
• Is a historic fact after development.
• May be in different forms direct/indirect.
• Value:
• Is the estimate of the price that would be paid if the
property were to be sold in the market.
• Determined by market orABAY
4/7/2023
non-market bases, 17
 Definition of Market Value
• Is an estimated amount for which an asset should
exchange;
• on the date of valuation b/n a willing buyer and a
willing seller,
• in an arm's length transaction after proper
marketing,
• wherein the parties had each acted;
• knowledgeably,
• Prudently/carefully and
• without compulsion/with out force.

4/7/2023 ABAY 18
 Definition of Market Value Cont’d
• Market Value assumes a price negotiated in an open
& competitive market,
• Market for one property could be an international or
a local market.
• A market may consist of;
• numerous buyers and sellers, or
• May be characterised by a limited number of
participants.
• the property must be exposed for sale in a non
restricted or constricted market.
• A market with out any barrier for entry and exit,
4/7/2023 ABAY 19
 Definition of Market Value Cont’d
• Does market value mean the best price that is likely
to be obtained in the market at the time or is it an
average price in current market conditions?
• ‘The estimated amount’…refers to a price expressed
in terms of money (normally in the local currency),
payable for the property in an arm’s length
transaction.
• Is measured as the most probable price reasonably
obtainable in the market on the date of valuation,
• It is therefore not typically an average.

4/7/2023 ABAY 20
 Definition of Market Value Cont’d
• Property is relatively illiquid and a reasonable
marketing period is needed to achieve the best price.
• Do you assume that this marketing period has
already taken place before the date of valuation or
that it has still to take place?
• The choice of time perspective could make a big
difference to the end figure in a market where prices
are moving rapidly up or down.

4/7/2023 ABAY 21
 Definition of Market Value Cont’d
• After ‘proper marketing’;
• the property would be exposed to the market in the
most appropriate manner to effect its disposal at
the best price,
• the length of exposure time may vary with market
conditions,
• But, the time must be sufficient to allow the
property to be brought to the attention of many of
potential buyers.
• exposure period occurs prior to the valuation date.
• The vendor should not be under any time pressure to
sell;
• Example; liquidation case may affect the price.
4/7/2023 ABAY 22
 Definition of Market Value Cont’d

• ‘A willing seller:
• Is neither an over-eager nor a forced seller, who
prepared to sell at any price,
• nor one who prepared to hold out for a price not
considered reasonable in the current market.
• Should be motivated to sell the property at market
terms for the best price attainable in the (open)
market after proper marketing, whatever that
price may be.
• ‘willing seller’ is a hypothetical owner not factual.

4/7/2023 ABAY 23
 Definition of Market Value Cont’d
• ‘A willing buyer:
• one who is motivated, but not compelled to buy.
• neither over-eager nor determined to buy at any price
• one who purchases in accordance with the realities of
the current market and
• with current market expectations, rather than an
imaginary or hypothetical market that cannot be
demonstrated or anticipated to exist.
• Should not pay a higher price than the market requires.
• A Valuer must not make unrealistic assumptions
about market conditions nor assume a level of
market value above the real condition

4/7/2023 ABAY 24
 Definition of Market Value Cont’d
• Valuation must determine the highest & best use
(HABU),
• HABU is ‘The most probable use of a property which
is;
• Physically possible,
• appropriately justified,
• legally permissible,
• financially feasible, and
• which results in the highest value

4/7/2023 ABAY 25
 Definition of Market Value Cont’d
• In an ‘arm’s length transaction is the one;
• b/n parties who do not have a particular special
r/ship (for example, parent and subsidiary
companies or landlord and tenant) that may make
the price level uncharacteristic of the market or
inflated because if an element of Special Value.
• Presumed to be b/n unrelated parties, each acting
independently.

4/7/2023 ABAY 26
 Definition of Market Value Cont’d

 Parties who act ‘ knowledgeably and

prudently’ presumes that both the willing
buyer and seller are reasonably informed
about;
 the nature and characteristics of the property,
 its actual and potential uses, and
 the state of the market as of the date of valuation.

4/7/2023 ABAY 27
 Definition of Market Value Cont’d

 Each is further presumed to act for self-

interest with that knowledge, and prudently
to seek the best price for their respective
positions in the transaction.
 Prudence is assessed by referring to the state
of the market at the date of valuation, not
with benefit of hindsight at some later date.

4/7/2023 ABAY 28
 Definition of Market Value Cont’d

 It is not necessarily imprudent for a seller to sell

property in a market with falling prices at a price
that is lower than previous market levels.
 In such cases, as is true for other purchase and
sale situations in markets with changing prices,
 the prudent buyer or seller will act in accordance
with the best market information available at the
time.

4/7/2023 ABAY 29
 Definition of Market Value Cont’d

 ‘…and without compulsion…’ establishes that

each party is motivated to undertake the
transaction, but neither is forced or unduly
coerced to complete it.

4/7/2023 ABAY 30
 Basis & Purposes of Valuation

Contents:
• Bases of valuation: Market vs. non market valuation
• Purposes of property valuation
• The valuation process
• The valuation report
• Factors affecting property value

4/7/2023 ABAY 31
 Learning Outcomes:
At the end of the chapter students will be able to:
• Differentiate Market vs.Non Market Bases of valuation
• Understand the purposes of land valuation
• Analyze the procedures of property valuation process
• Examine the factors that affect land/property value

4/7/2023 ABAY 32
 Basis of Valuation
Market Based Valuation;
• Is tied to the collective perceptions & behavior of market
actors.
• Recognizes diverse factors that influence transactions
in a market,
• Must identify and include the definition of Market Value
used in the valuation.
• Developed from data specific to the appropriate
market(s) and through methods and procedures that try
to reflect the deductive processes of participants in
those markets.

4/7/2023 ABAY 33
 • Such valuations are performed by application of;
• the sales comparison,
• income capitalization, and
• cost approaches to value.
• Data & criteria employed in each of these
approaches must be derived from the market,

4/7/2023 ABAY 34
 Non Market Based Valuations;
• Use methods that consider the economic utility/functions of an asset,
• Not consider ability of properties to be bought & sold by market
participants, or
• Not consider the effect of unusual or atypical market conditions on
property values.
• Must include the definition of value applied in valuations like;
• value in use, going concern value,
• investment value or worth,
• insurable value,
• assessed or ratable value,
• salvage value,
• liquidation value, or special value etc.
• The valuation report should ensure that such defined value will not be
construed as Market Value.

4/7/2023 ABAY 35
 Types of Non-Market Values
• Value in Use:
• Value of a specific property has for a specific use to a specific
user,
• Not consider market situations & HBU of the property,
• Investment Value/Worth:
• the value of property to a particular investor, for a specified
investment objectives.
• May be higher or lower than the market value
• Going Concern Value:
• Value of a business as a whole.
• Insurable Value:
• Value of property in an insurance contract or policy.
• Assessed, Ratable or Taxable Value:
• Is a value of a property assessed for rating, taxation etc.

4/7/2023 ABAY 36
 Types of Non-Market Values Cont’d…
• Salvage Value:
• value of a property, excluding land, as if disposed of for the
materials it contains, rather than for continued use without special
repairs or adaptation.
• Liquidation/Forced Sale Value:
• Determined by unwilling buyer and seller
• Special Value:
• Arise from physical, functional, or economic association of a
property with some other property such as the adjoining property,
• Mortgage Lending Value:
• prudent assessment of the future marketability of the property by
taking into account long-term sustainable aspects of the property,
the normal and local market conditions, and the current use and
alternative appropriate uses of the property.

4/7/2023 ABAY 37
 Purposes of valuation:

• Valuation can be conducted for various purposes;

• Help clients to make key decisions.
• Assist purchasers to determine price of a property
• Help mortgage lenders to know the worth of a property.
• Used for a court case to decide just compensation when a
property is taken by compulsory purchase etc.

4/7/2023 ABAY 38
 Purposes of Valuation Cont’d
• Commonly property valuation can be applied;
• For sale/purchase purposes.
• For mortgage purposes.
• For assessing rental value.
• For rent restriction.
• For insurance purposes.
• For balance sheet/accounting purposes.
• For rating
• For taxation purposes e.g. inheritance tax, income tax, capital gains
tax or transfer tax.

4/7/2023 ABAY 39
 The Valuation Process
• Systematic approaches valuers use in estimating the value includes;
1. Receiving instructions: Via a letter, by fax, telephone, e-mail or verbally.
• Address, owner, purpose, date, deadlines of the valuation etc.
2. Defining the valuation problem:
• Clients real need, challenges/limitations of valuation
• Identity and location of the subject property
• Property rights to be valued
3. Setting the valuation strategy:
• Setting valuation team,
• support staff & equipment,
• visiting,
• Prepare work plan etc.

4/7/2023 ABAY 40
 The valuation process cont’d…
4.Physical inspection of the property:
• carryout detail inspection
5. Collection of information:
• Information about related land,
• Planning issues,
• Legal interests,
• Economic conditions
6. Valuation analysis:
• analysis of the collected data & value estimation
7. Presentation of a Valuation Report:
• present formal written & well bound report to client
• It must state clearly the interest being valued & the valuation date.

4/7/2023 ABAY 41
 The Valuation Report
• Is presented to the client in a written valuation report form.
• Indicates the valuer’s findings & conclusion, together with data &
analysis to support & justify the conclusion.
• It should be convincing (through data & logic rather than the valuer’s
powers of persuasion) to the client or to any other reader,
• Must state clearly the interest being valued & the valuation date.
• Is based on the type of value estimated.
• Description of the property,
• Statement of the purposes of the valuation work

4/7/2023 ABAY 42
 The Valuation Report Includes
• Statement of the contingent and limiting conditions to which the
valuation findings are subject
• Description and explanation in the valuation report of the
valuation method used:
• Statement of the valuer’s disinterestedness
• Valuers responsibility to communicate each analysis, opinion and
conclusion in a manner that is not misleading.
• Mandatory recertification statement
• Signatures to valuation reports & the inclusion of dissenting
opinions

4/7/2023 ABAY 43
 Issues to be includes in appendices;
• Confirmation of original instructions or terms of engagement;
• Site plan;
• Description of the situation and location of the property;
• Description of subject property;
• Details of construction, Services;
• Accommodation measurements/size, design, layout & description;
• rating assessments;
• planning consents and policies;
• Tenancy details, Details of any leases;
• Explanation of any defects and contamination;
• Overview of property market conditions;
• Market evidence and comparables;
• Valuation methodology, calculations and reasoning;
• Conclusion including valuer’s recommendations.

4/7/2023 ABAY 44
 Factors affecting property Values
• Land/property has no intrinsic value in and of itself.
• Its monetary value derived from rights & benefits that come from
its ownership, possession & use.
• So, its value is measured by the price paid for it.
• Essential basics/elements that determine land/property value
are:
Utility: usefulness or the ability to arose a desire for its
possession
• Scarcity: shortage/ lack of abundance in supply
• Demand: desire plus ability to buy/ effective purchasing
power
• Transferability: ability to change ownership/use of it.
• Land/landed properties have all these elements so, have high
market value, price & demand.
4/7/2023 ABAY 45
 Factors Affecting property Values cont’d
Land/peroperty value is created & modified by:
a. Physical forces: both natural & man made factors like;
• Natural r/ces like land, its topography, access, location, etc.
• Developed r/ces: size & shape of land parcel, public utilities,
• Health & safety facilities, infrastructures etc.
b. Social forces;
• Family size & age group distribution, neighborhood stability,
• Population growth, attitudes to property
• Lifestyles & living standards
• Attitudes to law enforcement (both Gov’t & the community)
• Attitudes to growth, development and ecology etc.

4/7/2023 ABAY 46
 Factors Affecting property Values Cont’d
c. Economic Forces:
• The general economic trend
• Income level & employment opportunities
• Wage levels
• Availability of money, credits/loan & interest rate
• Tax burdens, price level, savings, investment returns
• Supply & demand in housing etc.

4/7/2023 ABAY 47
 Factors Affecting property Values Cont’d
d. Political Forces:
• Zoning & land use regulations
• Building & safety regulations
• Environmental protection law
• Monetary policy & controls
• Fiscal policy & taxation
• Gov’t sponsored urban redevelopment & housing programs
• Crime prevention, education, recreational services
• Public works; power, water, transport, sewers, flood controls.
• Police, fire, health protection services.
• Business & industry regulations etc.
4/7/2023 ABAY 48
 property Supply Factors
• Supply factors: Such as gov’t policy, programs, rules & regulations
• Housing Supply:
• Existing housing stock & the supply changes b/c of:
• Decreases by abandonment, disaster, demolition & conversion to
other uses.
• Increases from new housing construction, conversion &
remodeling.
• Redeveloping neglected & abandoned inner city homes is crucial.
• New Construction Activities:
• Construction cost is related to the general price level
• It increases during inflation & decline during recessions.
• Low cost & local materials to reduce cost.
• While, higher constn cost halt the dev’t

4/7/2023 ABAY 49
 property Supply Factors Cont’d
• Supply of vacant Lands:
• Political & social changes influence the availability &
cost of vacant Land.
• Government rules play critical roles;
• Env’tal protection & sub division laws decrease the supply
of buildable land & increase its price.
• Limited or “No-growth” to preserve “Greenbelts”
• Property taxes & incentives also affects its supply
• Lengthy public approval procedures
• reduce the supply & raise the cost

4/7/2023 ABAY 50
 property demand factors
• Demand is an essential element of value
• Demand for land/property is mainly determined by two factors:
a. Population size: directly related to demand for land.
• Not only popn size but, HH compositions like BR, age, occupation
& income are very important.
• Popn growth raise demand leading to increased land price
b. Purchasing power:
• Size of national labor force,
• Family income level
• Annual change in the value of GDP, employment level, wage level
• Availability of money for mortgage, saving, loan,
• Monetary & Fiscal policies

4/7/2023 ABAY 51
 property demand factors Cont’d
• Federal & local gov’t Activities:
• Land is a national r/ce,
• So, gov’ts should involve LPD in their programs like;
• Housing programs: low cost & rental housing
• Urban dev’t programs: redevelopment projects, new constructions
• Energy policy: building energy efficient houses.
• Env’tal protection: encouraging ecology friendly dev’ts
• Monetary & fiscal policies: credit and taxation etc.
• Generally, land is subject to demand & supply relation i.e.
• Over demand increases land/property price & rent.
• While, oversupply reduces price of land/property.

4/7/2023 ABAY 52
 Other factors affecting property value
• Property related factors;
• Location of the property: i.e. accessibility
• Age/ Physical state: old vs. new developments
• Tenure Type/status: terms of ownership like freehold/ leasehold
• Time: short/long time frame based of its use
• Locality/neighborhood: May have positive or negative effect
• Plot size:
• Building type: single or multi story
• Construction,
• Design,
• Layout,
• Material type,
• Specifications & finishes

4/7/2023 ABAY 53
 the valuation approaches
• Economic principles of value
• The valuation Approaches
• The comparative approach

4/7/2023 ABAY 54
 Principles of Value
• Anticipation:
– The perception that value is created by the
expectation of benefits to be derived in the
future.
• Residential: amenities & pleasures of
ownership
• Income: the income it will produce in the
future

4/7/2023 ABAY 55
 Principle of Change
• The result of the cause & effect r/ship among
the forces that influence real property value.
• Change is Eternal
• Physical
• Social
• Economic
• Political conditions
• Neighborhood Change
• Development (growth)
• Stability
• Decline
• Renaissance (rebirth)
4/7/2023 ABAY 56
 Principles of Value Cont’d...
• Supply and Demand
• the price of real property varies directly, but not
necessarily proportionately, with demand &
inversely, but not necessarily proportionately, with
supply.
• Supply:
• usually values vary inversely with changes in
supply
• quantity of space supplied is slow to adjust to
changes in demand
• Demand:
• effective purchasing power/effective demand
4/7/2023 ABAY 57
4/7/2023 ABAY 58
4/7/2023 ABAY 59
4/7/2023 ABAY 60
4/7/2023 ABAY 61
 Principles of Value Cont’d...
• Competition:
• Market demand generates profits
• Profits generate competition
• Excess profits usually generate devastating
competition
• Substitution:
• when several similar commodities, goods, or services
are available, the one with the lowest price will
attract the greatest demand and widest distribution.
• Basis for data selection in the approaches to
value
• Balance:
• Property value is created and sustained when
contrasting, opposing or interacting elements are in a
4/7/2023 state of equilibrium. ABAY 62
 Principles of Regression & Progression
• Progression
• Lower value properties benefit from being close to high
value properties
• Regression
• Higher value properties tend to decrease in value when
close to lower value properties.
• Is this an Illustration of Progression or Regression?

4/7/2023 ABAY 63
 Principles of Value Cont’d...
• Increasing and decreasing returns:
– Successive increments of one or more agents of
production added to fixed amounts of the other
agents will enhance income, … until a maximum
return is reached.
• Contribution:
– value of a component is measured in terms of its
contribution to the value of the whole property.
• Basis of adjustments in the sales comparison
approach

4/7/2023 ABAY 64
 Principles of Value Cont’d...
• Conformity
– real property value is created and sustained when
the characteristics of a property conform to the
demands of the market.
• Basis for under or over improvement of a site
• Externalities
– economies outside a property have a positive
effect on its value, while diseconomies outside a
property have a negative effect on its value.

4/7/2023 ABAY 65
 Highest and Best Use(HBU)
• The reasonably probable and legal use of vacant land or
improved property, which is physically possible,
appropriately supported, financially feasible, and that results
in the highest value.
• Two types:
• HBU of land or a site as vacant
• HBU of property, as improved
• Interim Use: temporary use to which a site or improved
property is put until it is ready to be put to its future highest
and best use.
• Consistent Use: Land can not be valued on the basis of one
use while improvements are valued on the basis of another.
4/7/2023 ABAY 66
 Methods & techniques of Valuation
Introduction:
• A valuer may value a multiplicity of assets for d/t purposes
• The method of valuation may vary based on;
• the nature of assets,
• the purpose of valuation and data availability.
• The five conventional valuation techniques are;
• the Comparative Method, - the Cost Method,
• the Profits method, - the Residual & Investment Method.
• Each method of valuation is suited to particular circumstances.
• A combination of methods also used to solve a particular valuation
problem.

4/7/2023 ABAY 67
 The Valuation Methods & Techniques
1. The Comparative Approach:
• Is the simplest method of valuation.
• Based on data provided from recent sales of properties
highly comparable to the property being appraised.
• Is a method of comparing ‘like with like’.
• Is based on comparisons b/n the subject property & similar
comparable properties sold recently.
• Is the most preferred method of valuation.
• An estimate of value is obtained by comparing the subject
property with recently sold comparable properties
(properties similar to the subject).

4/7/2023 ABAY 68
 The Comparative Approach cont’d…
• The factors to be considered for comparison are;
a) Property rights: If less than the full bundle of rights is involved,
b) Financing concessions: events like differences in mortgage loan terms
or owner financing
c) Market conditions: interest rates, supply and demand & other
economic indicators
d) Conditions of sale: motivational factors like foreclosure or a sale b/n
family members
e) Market conditions since date of sale: changes in economic conditions
b/n the date of the sale of the comparable property and the date of the
appraisal
f) Location: compensate for locational or neighborhood differences
g) Physical features and amenities: physical differences b/n the
comparable properties and the subject

4/7/2023 ABAY 69
 The Comparative Approach cont’d…

• Comparable properties are adjusted to the subject

property.
• Positive features that comparables possess relative to
the subject property require negative adjustments;
• Negative features require positive adjustments.
• Valuing properties using this method is a highly
subjective process,
• Thus, it should be justified with evidence based on recent
experience with highly comparable properties.

4/7/2023 ABAY 70
 The Comparative Approach cont’d…

• A dollar value(%) adjustment is assigned to each difference

b/n the subject property and the comparable properties.
• Adjustments are made as follows:
• If the comparable property is better than the subject
property or has a feature that the subject property lacks,
the value of the comparable is decreased accordingly.
• If the comparable property is not as good as the subject
property or lacks a feature that the subject property has,
the value of the comparable is increased accordingly.

4/7/2023 ABAY 71
 The Comparative Approach cont’d…
• The property to be valued is compared to others on
the market now or that have recently been sold or
let on the market.
• Adjustments are then made to allow for the
advantages and disadvantages of the subject
property in relation to each comparable to arrive at
a figure that can be considered the current market
value of the subject.

4/7/2023 ABAY 72
 The Comparative Approach cont’d…
• Is used for the valuation of all forms of property so long as
comparable sales data is readily available.
• In practice, its limited to the valuation of;
• single family residences for;
• market value and
• rental value assessments, and
• vacant/bare land & agricultural property.

4/7/2023 ABAY 73
 The Comparative Approach cont’d…
The three main requirements of property comparables are:
• Similar property type to the subject,
• Similar location to the subject and
• Evidence obtained is recent & reflects current market
conditions.
• How recent will depend on the state of the market.
• In a sluggish or static market, evidence within the last twelve
months could still be relevant.
• It is thus difficult to be too precise over the question of what
constitutes ‘recent’, but as a general rule evidence taken from
up to six months prior to the valuation date will normally be
sought & considered.
4/7/2023 ABAY 74
 The Comparative Approach cont’d…
• The major problem that faces valuers in the assembly of
comparable evidence is how to obtain all the necessary
information.
• It is essential to obtain as much relevant data as possible on
each comparable.
• The market is not completely ‘transparent’.
• Not all deals are fully reported in the press & some are kept
private & confidential.
• ensuring the exact & complete details of a property & the
transaction concerning it requires extensive research & analysis.
• The results of this work should be carefully & accurately
recorded before the valuation of the subject property.
4/7/2023 ABAY 75
 The Comparative Approach cont’d…
• In situation of few/no comparable sales, estimation will be
made by taking the ffg into account;
• Site location, accessibility, topography, geology
• Building size:
• Construction quality; age, condition, layout,
specification
• Construction materials:
• Other building features:

4/7/2023 ABAY 76
 Benefits of the Comparative Approach:
• Objectivity/ minimizes subjectivity
• Avoids personal opinions about future income
expectations/estimation
• Is valuable for old properties with high subjective
cost & depreciation estimates
• Is accepted by legal opinion & the public at large.
• Market value found by reference to recent sales
corrects the declining value of money caused by
inflation.
4/7/2023 ABAY 77
 Example how to apply the comparative Method:
• Value the market rent of an industrial unit with a
gross internal floor area of 3,250 sq.m.
• A nearby and very similar comparable building,
measuring 4,100 sq.m., has recently been let on the
open market for £287,000 per annum.
• Comparable = £287,000/4,100 = £70 psm (per
square metre)
• Thus estimated market rent value of subject property
• = £70 × 3,250 sq.m.
• = £227,500 per annum
4/7/2023 ABAY 78
 Week-4 Methods & techniques of Valuation
• Contents:
2. The Cost Approach of property Valuation
3. The Residual Method “ “
4. The Profit Approach of property Valuation
5. The Investment/Income Method “ “
• Learning Outcomes:
• Comprehend how to compute the cost approach
• Apply the residual method to property valuation
• Comprehend how to compute the profit approach
• Understand the nature of the investment method

4/7/2023 ABAY 79
 2. The Cost Approach
• the value of a property can be estimated by summing the land
value and the depreciated value of any improvements.
• Hence, was once called the ‘summation approach’.
• Is the cost of building a house/other improvement with the
same utility, but using modern design, skills & materials.
• Land values & depreciation must be derived from an analysis
of comparable sales data.
• Is most reliable when used on newer structures,
• But, becomes less reliable for older properties.
• Is often the only reliable approach when dealing with special
use properties.
ABAY 80
4/7/2023
 the Cost Approach Cont’d

• buyers & sellers relate value to cost.

• Value is derived based on cost of construction & depreciation.
• It is used for non commercial & residential properties like town halls,
schools, police stations, public buildings, industrial plants etc.
• Cost approach is widely used for;
a. Valuation of new buildings.
b. Valuation of plant and machinery.
c. For ‘special purpose’ valuations like insurance, rating, rent
restriction & tax assessment.
Land/property Value = ELV + COC - Depreciation

4/7/2023 ABAY 81
 Steps of the cost approach:
1. Estimate building cost (new).
2. Add: cost of land improvements (i.e. the cost of
leveling, paving, landscaping etc.).
3. Value of building and site works
4. Less: depreciation & obsolescence allowance: some
% of the building cost say 15-20%
5. Add: land value (estimated from comparable sales).
6. Indicate Market Value based on cost approach/
Depreciated Replacement Cost.

4/7/2023 ABAY 82
 Cont’d
• Depreciation: is the loss in the value of the property
due to its use, life, wear, tear, decay and
obsolescence.
• Is an assessment of the physical wear and tear of the
building or property.
• Is naturally dependent on its original condition,
quality of maintenance & type of use.
• B/c of this, the value of a building or a property (but
not land) decreases gradually up to the utility period.

4/7/2023 ABAY 83
 Cont’d
• Advantages
• Sets the value at the actual price of the property.
• Disadvantages
• Relies upon other valuation methods to derive the
value of the land;
• Neglects the d/ce b/n cost and value i.e. one property
might be cheaper than another but, generate a much
higher net income.

4/7/2023 ABAY 84
 Example;
• A public library in the city center has to be valued. The
building is about 100 years old and shows some evidence of
deterioration.
• The valuer using evidences & his own judgment decides that
an equivalent site would today cost $800,000 that a 500m2
building in the same style would cost $1,250/m2 to build
today and that considerable allowance should be made for
deterioration & obsolescence.

4/7/2023 ABAY 85
Procedure:

1. Estimate the value of the land as if vacant, by comparing it

to similar properties;
2. Estimate the replacement cost of the building at present
by considering its site preparation, utilities, types of
building improvements, tenant improvements & soft costs;
3. Assess the depreciation that has occurred to the building
& deduct the figure from the new replacement cost;
4. Add the estimated worth of the land.
• Then, the result is the value of the existing property.

4/7/2023 ABAY 86
 Cont’d
The Procedure;
• The Cost of site = $800,000
• Plus Cost of building 500m2@$1,250/m2 = $625,000
$1,425,000
• Less/Minus 25% obsolescence allowance
(Based on building cost i.e. 25% of 650,000) = $156,250
$1,425,000 - $156,250 = $1,268,750
• Less 15% depreciation allowance
(based on building cost 15% of 625,000) = $93,750
• Thus, value of the existing property is $1,268,750 - $93,750
= $1,175,000
4/7/2023 ABAY 87
 3. The residual Method
• Used when a property has dev’t/redev’t potential
• Used for properties that have latent value w/ch can be released by
investment.
• Used for properties w/ch can became more valuable through
improvement/modernization by expanding money.
• Example: a purchaser looks a house & decides its worth to be $100,000
and it needs $40,000 further expenditure to improve & then, it will have a
mkt value of $180,000 i.e. its latent value can be released by expanding
$40,000 to improve it.
• Critics: being clumsy & containin many variables.
• but, it’s the only real method of valuation for properties with latent value.

4/7/2023 ABAY 88
 the Residual Method Cont.d
• Used for valuation of development properties like;
a. Bare land to be developed.
b. Properties needing complete redevelopment.
c. Properties needing refurbishment/rehabilitation.
• Its use is restricted to dev’t properties i.e. properties that may possess
latent value which is released by expenditure of capital, change in use or
both.
• Thus, Land Residual Value = Gross Dev’t Value – Cost of dev’t
• GDV: is the capital value of the improved site/sale value of the finished
development.
• COD: is pure building costs, professional fees, developer’s profit &
interest.

4/7/2023 ABAY 89
 Cont’d
• Example; A site with approval for the development of 4
houses of $160m2 each is to be auctioned & a developer
wishes to know how much he can afford to bid for it. He
estimates, it will take one year to complete & sell the dev’t,
that he will have to pay 10% Pa interest on borrowed money,
& the houses will cost $525/m2 to build all site works and
provision of services. He also decides that he will require a
profit of $20,000 per house, each house having an estimated
mkt value of $160,000. Calculate the residual value?

4/7/2023 ABAY 90
 Cont’d
• 4 detached houses @ $160,000 each (GDV = 4 × $160,000) = $640,000
• Less/Minus Cost of development including the ffg;
1. Building cost 4 houses * 160m2 @ 525/m2 = 336,000
2. Prof fees (Architect, planner, surveyor)@10%
of the blg. cost = 10/100 × 336,000 = 33,600
3. Cost of borrowing half of blg. cost & prof. cost @10%
= 10% of (1/2 (336,000 + 33,600) = 18,480
4. Legal expenses on sale of houses = 12,000
5. Agent’s fees on sale = 10,000

4/7/2023 ABAY 91
 Cont’d
6. Advertising cost on sale = $3000
7. Developers profit = 4 × $20,000 = $80,000
Total development cost = $493,080
Residual sum = $640,000 – $493,080 = $146,920
• If the cost of purchase would be 5% of the price of the land.
• The sum for purchase of land, cost of purchase & interest charges
during constn & marketing period of 1year = $146,920
• Present Value of $1 in a year @ 10% per annum = 0.909090
• Sum net of interest per year @ 10% pa = $146920 * 0.909090
= $ 133,563
• Divided by 1.05 to allow for 5% cost of purchase 1.05
= $127,203
• Thus, the price payable for the land would be = $127,203
4/7/2023 ABAY 92
 Cont’d
• Therefore, $127,203 is paid for land purchase & the
purchase cost is 5% of $127, 203 = 6,360
• The total expenditure = $127,203 + $6,360 = $133,563
• Interest is @ 10% of $133,563 = $13,356
• Finally, the total expenditure of land is = $146,919

4/7/2023 ABAY 93
 4. The Profits Method:
• Assume that the value of some properties is related to profit made
from their use.
• Is only used to value special types of properties like hotels, cinema
halls, petrol stations, restaurants etc.
• It is used where rental evidence is either absent or inconclusive.
• The level of sales clearly determines profits,
• Profits determine the price & the opportunity to obtain the profits and
• Value of the property can be determined from knowledge of the profits
(Britton, Davies and Johnson, 1991).
• Thus, Gross Profit = Gross Earning - Cost of goods sold
Net profit = Gross Profit – Working Expenses

4/7/2023 ABAY 94
 Profit Method Cont’d
Example:
• Total property income = $40,000pa
• Purchaser’s capital = $200,000
• Return required @ 7.5% ( i.e. 0.075 * $200,000)
• Purchaser’s income required = $15,000pa
• Balance available to pay mortgage interest = $40,000 - $15,000
= $25,000
• Mortgage obtainable @ 9% pa
• Interest payable = Mortgage capital * Interest rate
$25,000 = MC*IR = $2,500,000 = 9MC then, MC = $277,777
100
• Equity = $200,000 plus mortgage capital $277,777 = $477,777
• Thus, maximum price available for the property = $477,777
4/7/2023 ABAY 95
 5. The Investment/Income Approach:
• Is a method of ascertaining the capital value of rights to future
benefits that are derived from the ownership of specific interests
in property under given market conditions.
• The interests that are normally valued include freehold,
leasehold interests and analogous interests in land.
• Its used in the valuation of investment properties i.e. income
producing properties.
• When valuing a property/an interest in property, the valuer
would estimate the present value of the income stream that
would be enjoyed from ownership or occupation of the property.

4/7/2023 ABAY 96
 The income Approach cont’d…
• Is based on the present value of the rights to future income
• Income divided by rate equals value
• Steps in the income approach to value;
a) Estimate the annual potential gross income from all
sources; including rent, concessions & vending
b) Deduct for vacancies & collection losses ("bad debt") to
obtain the effective gross income.
c) Deduct the annual operating expenses to obtain the
net operating income; but, does not include;
• Debt service (principal and interest payments)
• Depreciation (a noncash expense)
• Capital expenditures/capital improvements
4/7/2023 ABAY 97
 d) Estimate the price an investor would pay for the income produced by
this particular type and class of property.
• Compare the annual net operating incomes of recently sold similar
properties to the sales price of those properties.
• The annual net operating income divided by the sales price results in
the capitalization ("cap") rate.
e) Apply the capitalization rate to the subject property's annual net
operating income to obtain an estimated value.
• Obtaining the final value estimate by analyzing and weighing the findings
from the three approaches;
• All three should be used in estimating the final value in 3 d/t ways.
• The three indications of value are not averaged.
• Depending on type of property, one approach would be given more
weight than others.

4/7/2023 ABAY 98
 Cont’d
• The process of converting future income flows into
present day capital sums is termed as capitalization.
• Capitalization is the process of summing up future
benefits each having been discounted to the present
at an appropriate discount rate or capitalization rate.
• The valuation of freehold/non-terminable interests is
quite distinct from the valuation of leasehold/
terminable interests, even if the basic capitalization
process is similar.

4/7/2023 ABAY 99
 Cont’d
• A salient feature of real estate investment is its ability to
produce income.
• Production of income evolves through the leasing of the
physical assets - the land, the building or both - to a lessee
who pays a specified rental for use of the premises for a
prescribed term.
• The rental can be either an actual consideration or an
imputed (implied) amount.
• Cases of imputed rentals arise where the property is owner
occupied.

4/7/2023 ABAY 100

 Cont’d
• Capitalization is carried out using the Investment
Valuation Equation is: CV = NI X YP
• Where: NI = Net Income i.e. Gross income, adjusted for all
outgoings.
• CV = Capital Value or the present worth of the income
being valued.
• YP = Years’ Purchase/a multiplier
• Before capitalization is carried out, a valuer must
often consider the Full Rental Value receivable or
potentially receivable from the property & also make
allowances for ‘outgoings’.
4/7/2023 ABAY 101
 Cont’d
• Full Rental Value is the maximum rent for which a property
could be let in the open market on a given set of letting terms.
• The terms can be either F.R.I. or I.R.
Leases on FRI terms
• F.R.I. stands for ‘Full Repairing & Insuring’.
• In FRI terms, the tenant is obliged to meet full repairing & insuring costs
in addition to the rent he would be paying to the lessor.
• Most medium to long term leases are on FRI terms.
• Properties let on these terms where the tenant is responsible for all
outgoings including rates, repairs & insurance are mainly good shop
premises, industrial & warehouse properties.

4/7/2023 ABAY 102

 Cont’d
Leases on IR terms:
• IR stands for ‘Internal Repairing’.
• In leases based on IR terms, the tenant contracts to meet
internal repairing only.
• Lessor, under IR letting terms is responsible for paying for
external repairs & insurance.
• With IR leases, the rent accruing to the lessor is gross and to
obtain the lessor’s net income, costs incurred for insurance and
external repairs should be deducted from the gross rent.
• Properties commonly let on internal repairing terms include:
blocks of offices let in suites, blocks of flats & residential
houses.
4/7/2023 ABAY 103
 Cont’d
• Before an income is capitalized using the Investment Method
of valuation the income to be capitalized must be net of all
outgoings.
• Outgoings are ‘periodic costs incidental to the ownership of
property.’
• The main categories of outgoings include repair costs,
insurance, management, general rates, voids and the cost of
provision of services.
• In addition to the above methods, other modern approaches
are also used for valuation like regression analysis, CAMA,
GIS & LIS.

4/7/2023 ABAY 104

 Reconciliation of Value Indication and Reporting Appraisal
The appraisal process typically involves three approaches to
value.
 Each approach may have one or more methodologies that are
utilized in estimating the value of a property. They may produce
different value for a single subject property.
 In a perfect world, all the methods used would result in the same
value.
 Unfortunately, given the property valuation, it is inevitable that
each methodology will generate a unique value estimate that
differs from the other methodologies.
 Thus, appraisers should resolve the difference among value
indicators and end up with a single or a range of values

54 .
4/7/2023 ABAY 105
In real estate appraisal, the process of resolving the
difference among value indicators is called
reconciliation.

Reconciliation and Final Value Estimate

Reconciliation can be defined as the last phase of any
valuation assignment in which two or more value indications
derived from market data are resolved into final value
opinion which may be either
I. a single point estimate or
II. a final range of values
455
4/7/2023 ABAY 106
 Unit VI: Reconciliation …..

In the process of reconciliation, the appraiser should consider

the relative applicability of each of the three approaches to
arrive at the final value estimate of defined value.
The final value opinion does not simply represent the
average of the
different value indications obtained.
A final reconciliation relies on the proper application of
appraisal techniques and the appraiser’s judgment and
expert opinion.

456
4/7/2023 ABAY 107
The Process of Reconciliation
Before reconciling the multiple value indications of a
property, an
appraiser has to review:
the purpose and use of the appraisal,
relevance and adequacy of data gathered and
all tasks previously carried out to be sure that an adequate
appraisal was
performed and can lead to consistent judgment.

108
4/7/2023 ABAY
 Review of the Appraisal Process
In reviewing the appraisal process, all previous works and
analysis
are checked and verified.
It is a good starting point for reconciliation.
At this stage of the valuation process, the appraiser has to
ask the following questions:
Is the property precisely located and identified?
Are the property rights to be appraised clearly identified?
Have the agreed scope of work and the purpose of the
appraisal been considered?
Is the effective age of the property used in the cost
109
approach consistent with the
4/7/2023 ABAYphysical condition
 Unit VI: Reconciliation …..

Is the same physical condition assumed in making

adjustments to rent comparables, expense comparables, and
sales comparables in the income and sales comparison
approaches?
Are the results of all the approaches consistent with the
appraiser's conclusion of highest and best use?
Do the indications derived from the approaches applied
reflect the same defined value?
Reviewing an appraisal helps us to ensure its
Accuracy
Consistency, and
The logic leading to the value indications
in
Anreconciliation
appraiser relies more
than on professional
in any other part of experience and
the valuation
459
4/7/2023 ABAY 110
judgment
process.
The appraiser weights the relative significance, applicability,
and defensibility of each value indication and relies most
heavily on the approach that is most appropriate to the nature
of the appraisal problem.

Reconciliation Criteria
In theory, the different valuation approaches and methods
used should produce a relatively narrow range of value
indications. This is not always the case. Value indications
may be divergent.
The following are reconciliation criteria with which an
appraiser forms a meaningful final value opinion:
Appropriateness
Accuracy and
4/7/2023 ABAY 111
Appropriateness
The appropriateness of an approach to
the intended use of the
appraisal is usually directly related to property type.
For instance:
It often gives little sense to use an income approach when
you are appraising a special use property such as Museum,
Church, Mosque and etc.The cost approach would be more
appropriate for such properties.
It is justifiable to use sales comparison approach to estimate
the value of a property for which good comparable sales are
available in the market and income data is scarce.
The income approach is more relevant for the income
generating properties.
4/7/2023 ABAY 112
Accuracy
The accuracy of an appraisal is measured by the appraiser’s
confidence in the accuracy of data and the adjustments made
to each comparable property analyzed.
The approach which is considered to be more reliable in the
appraisal at hand should be given the greater weight in
arriving at the final value conclusion.

Quantity of Evidences
 When using any generally accepted approach to value, the
quantity of data used should be adequate to provide reasonable
support for the value indicator.
4/7/2023 ABAY 113
 7.2.2 Final Opinion of Value and Rounding
 In an appraisal report, the final opinion of value may be stated as
A single figure
A range of values or
In relation to a benchmark amount (e.g “not more than” or “not
less than”)
 Traditionally, an opinion of value is reported as a single monetary
amount called point estimate.
 A point estimate is required for many purposes:
Real estate taxation
Calculating depreciation deductions for tax
Estimating compensation in casualty, liability, and condemnation
cases
Determining value-based rent

114
Making property transfer decisions
4/7/2023 ABAY 114
 Unit7: Reconciliation …..

It may also be stated as a range of values if it is specifically

stated in
the appraisal assignment and the agreement with the client.
There is no magic method to reach to a final value opinion
of the
property.
Arriving at a final value opinion is the most difficult task in
the appraisal process. However, it is sometimes justifiably a
weighted average of the three value indications.
After givingfull consideration to each
approach, the appraiser
uses judgment and reasoning to arrive at one conclusion.
115
4/7/2023 ABAY 115
 The final value conclusion should not be reported in odd
birr and cents rather it should be rounded to reflect the
degree of precision the appraiser can associate with the
particular opinion of value.
There are no standards of practice for rounding. Often the
manner in which the figure is rounded is a matter of
convention- e.g., to two or three significant digits.

For example, if the final value estimate is a six-digit

number, the figure will likely be rounded to the nearest
thousand or ten thousand birr. In other words, the value
233,495 birr can be rounded to 230,000 birr or 233,000
116 birr.
4/7/2023 ABAY 116
 7.3 Appraisal Report
The essence of property valuation is to arrive at a
conclusion of
value that is both reasonable and supportable.
After the appraisal task has been carried out, the appraiser
has to formally communicate the details of the task
performed to the client through a report.
The process and the result may be communicated to the
client or
other users either through orally or in writing.
The appraisal report must include certain minimum
elements that are required to satisfy practical, professional,
117
and legal requirements. ABAY
4/7/2023 117
 7.3.1 Standards ofWritten Reports
The appraisal report leads the reader from the
1. definition of the appraisal problem
2. analysis and relevant descriptive data
3. specific conclusion.
The length, type and content of the appraisal report are
dictated by
the intended use and purpose of the appraisal,
the nature and complexity of the problem solved.

469 .
4/7/2023 ABAY 118
 Reporting requirements may differ from one client to
another
client depending on the purpose and intended use of the
appraisal.
Thus, the form and the general content of appraisal report
is a
• matter to be agreed in between
the client and the appraiser as part of defining the scope of
work to be performed.

4/7/2023 ABAY 119

Preamble to the Uniform Standards of Professional
Appraisal Practice (USPAP)states:
It is essential that professional appraisers develop and
communicate their analyses, opinions, and conclusions to
intended users of their services in a manner that is
meaningful and not misleading.
Standard 2 of USPAP sets forth the requirements for
reporting an
appraisal of real property.
Standards Rule 2-1 states that each written or oral real
property appraisal report must:
Clearly and accurately set forth the appraisal in a manner that
will not be misleading;
Contain sufficient information
4/7/2023 ABAY to enable the intended 120
 Clearly and accurately disclose any extraordinary
assumption, hypothetical condition, or limiting condition
that directly affects the appraisal and indicate its impact
on value.

Standards Rule 2-2 requires that each written appraisal

report be prepared under one of the following three
options, which must be promi•nently stated in the report:
1. Self-contained appraisal report
2. Summary appraisal report
3. Restricted use appraisal report
The essential difference between the three reporting
471 accompanying
options
4/7/2023 is the work ABAY 121
 Clearly and accurately disclose any extraordinary
assumption, hypothetical condition, or limiting condition
that directly affects the appraisal and indicate its impact
on value.

Standards Rule 2-2 requires that each written appraisal

report be prepared under one of the following three
options, which must be promi•nently stated in the report:
Self-contained appraisal report
Summary appraisal report
Restricted use appraisal report
The essential difference between the three reporting
471 accompanying
options
4/7/2023 is the work ABAY 122
 6.3.2 Types of Reports
A final value opinion of a property may be communicated
to the
client orally or in a written form.
Written report prepared under one of the three reporting
options
mentioned above may be form or narrative reports.
An appraisal report is often prepared in a way requested
by the intended user.

1. Oral Reports
report.
An oral report may be carried out when the circumstances or
472
4/7/2023 ABAY 123
the needs of the intended user do not permit
 The most common form of oral reporting is performed to
clients in person or by telephone when appraisers are
asked for the opinion of value only.

Expert testimony presented in court is considered an oral

report.
Each oral report must include the underlying bases of the
appraisal, especially any extraordinary assumptions or
hypothetical conditions used.

After communicating an oral report, the appraiser must

keep on file all notes and data relevant to the assignment
124
4/7/2023 ABAY 124
 2. Written Report
Written report may be form or narrative report.
The type of a report that will be prepared determines the
extent of file documentation.
A self-contained appraisal report includes detailed
descriptions of the data, reasoning, and analyses used to
arrive at the value conclusion. In this case, the appraiser is
expected to have less file documentation.
A restricted appraisal report contains virtually none of this
information which needs the appraiser to keep more file
documentation.
The summary appraisal report contains some, but not all,
of the
4/7/2023descriptive information gathered in the appraiser's analysis. 125
125
ABAY
 3. Form Reports
Institutions and agenciesthat regularly contract for
appraisals
require the use of standard form appraisal report.
Most form reports may be classified as summary appraisal
reports, depending on the level of detail and the quantity of
supporting documentation.
Form reports often meet the needs of financial
institutions,
insurance companies, and government agencies.
Form reports are often preferred by appraisers and clients
since they are usually designed in a standard check list
126 format on a printed page
4/7/2023 ABAY 126
 Narrative Appraisal Report
The narrative appraisal report is the most formal of the
written
appraisal report.
It is perhaps the ideal format for self contained report.
Narrative reports are preferred when the user needs to
have comprehensive appraisal document.
In this type of report appraisers can fully explain what
they have related to the valuation process to persuade the
reader about the reliability of the final value estimation
of the property.
It is more detail than form report. It is descriptive in
127
nature.
4/7/2023 ABAY 127
 6.3.3 The Basic Appraisal Report Format
The appraisal report should be formal organized report.
The structure of the report should be as user friendly as
possible, logical, sequential in the presentation of the
valuation conclusion and precise in value statements.

The appraisal report contain three catagories

must information: of
Appraisal-specific
information
Item-specific information
Supporting documentation
128
4/7/2023 ABAY 128
 Appraisal specific information:
it includes
 USPAP report format option employed
Identify the client and other intended
users
 use
Ownership interest
Definition of value
Effective date of appraisal
Scope
Professional assistance provided by others
Valuation approac
Markets researched
Limiting conditions and hypothetical
478
4/7/2023 ABAY 129
conditions
 Item specific information
Item description
Quantity and quality characteristics
Physical attributes
Economic attributes
Condition and Age
Description of authentications, grading or tests performed
Significant client information r
Comparable market data and value issues (if item specific in
nature)
Photographs

479
4/7/2023 ABAY 130
 Supportive Documentation: it can be attached to the
report as
addenda.
The appraiser’s professional profile
Copies of authentications
Glossary or abbreviations used
 Bibliography of reference resources
Artist chronology
 Diagrams or sketches
Photographs

480
4/7/2023 ABAY 131
Most narrative appraisal reports have four major parts.These

are:
Introduction,
Premises of the appraisal,
presentation of data, and
Analysis of data and conclusions

In addition to these, several reports include the addendum or

appendix which includes additional information which

supplements the description in the major report parts
information.

481
The
4/7/2023general outline of the narrative
ABAY report which includes the
132
 General Outline of Narrative Appraisal
Report
Part One: Introduction
Titlepage
Letter of transmittal
Table of contents
Certification
Summary of important conclusions
Part Two: Premises of the Appraisal
Identification of type of appraisal and type of
report
Extraordinary assumptions and hypothetical

482 conditions
Definition of value and dateABAY
of opinion of
4/7/2023 133
General assumptions and limiting conditions
 Property rights appraised
Scope of work

Part Three: Presentation of Data

Identification of the property
Identification of any personal property or other items that
are not real property
History, including prior sales and current offers or listings
Market area, city, neighborhood, and location data
Land description
Improvement description
Taxes and assessment data
483  Marketability study if appropriate
4/7/2023 ABAY 134
 Part Four: Analysis of Data and Conclusions
Highest and best use of the land as though vacant
Highest and best use of the property as improved
Land value
Cost approach
Sales comparison approach
Income capitalization approach
Reconciliation and final opinion of value
Estimate of exposure time
Qualifications of the appraiser

135
4/7/2023 ABAY 135
 Addenda or Appendix
Detailed legal description, if not included in the
presentation of
data
Detailed statistical data
Leases or lease summaries
Other appropriate information
Secondary exhibits

136
4/7/2023 ABAY 136