Appraisal

An appraisal is a formal, impartial estimate or opinion of value, usually written, of an adequately described property, as of a specific date, and supported by the presentation and analysis of relevant data. It is prepared as a result of a retainer, for reliance by identified parties, and for which the appraiser accepts responsibility.

3 TYPES OF APPRAISALS

There are 3 types of Appraisal Reports:

• Full Narrative - comprehensive and detailed
• Short Narrative - concise and briefly descriptive
• Form - a standardized format combining check-off boxes and narrative comments.

Most appraisals are Full Narrative reports, appropriate where all aspects of an assignment are researched and reported. No modification or exclusion of a Standard Rule (requiring what is referred to as an Extraordinary Limiting Condition) is permitted in a Full Narrative report.

A regular Narrative report may provide details generally equivalent to a Full Narrative, but is distinguished by the invoking of an Extraordinary Limiting Condition. Examples would include situations where no title search is made, or where no interior inspection of a building was possible.

A Short Narrative report is concise and briefly descriptive. A Form report is generally represented by its standardized format combining check-off boxes and narrative comment.

AN APPRAISAL REPORT

While professional standards do not dictate the form, format or style of reporting, the appraiser is bound by certain recognized rules as to content. The extent to which this content is detailed will determine the appropriate type of appraisal report to be prepared. Typically, types include a bound narrative - from concise and briefly descriptive to comprehensive and detailed - and a form report generally used to support a residential mortgage application. Any limitations imposed on the assignment may affect the level of risk accepted by each party to the assignment. In every case, however, the appraiser must comply with the standards of professional practice.

What reports contain

All reports contain the following:

• the estimate of value
• the effective date of the appraisal
• the certification and signature
• the purpose of the appraisal
• the qualifying conditions
• the condition of the neighbourhood
• an identification of the property and its ownership
• an analysis and interpretation of the data and the assumptions made
• the processing of the data by one or more of the three approaches to value
• other descriptive support material such as maps, plans, charts, photographs, etc.
THE RESIDENTIAL APPRAISAL FORM REPORT

This is a form completed by the appraiser on a residential property. The report includes general information, such as who owns the property, the address, legal description, taxes, assessed value and age of the dwelling. It also describes the neighborhood in terms of its age, distances to schools and shopping centres, common types of dwellings, services and utilities available, etc.

HOW IS VALUE ESTIMATED?

There are three basic methods of arriving at an indication of value:

Income Approach

- relates to income-producing property and is based on the theory that value is the present worth of the income stream which the property is capable of producing when developed to its highest and best use. The net operating income from the property is capitalized into value by an appropriate method and rate.

A set of procedures through which an appraiser derives a value indication for an income-producing property by converting its anticipated benefits (cash flows and reversion) into property value. This conversion can be accomplished in two ways. One year’s (stabilized) income expectancy can be capitalized at a market-derived capitalization rate or at a capitalization rate that reflects a specified income pattern, return on investment, and change in the value of the investment. Alternatively, the annual cash flows for the holding period and the reversion can be discounted at a specified yield rate.

The Appraisal Institute of Canada. 2002. The Appraisal of Real Estate, Second Canadian Edition. Vancouver, B.C.: UBC Real Estate Division, Glossary.

DIRECT COMPARISON APPROACH

- is based on the theory that an informed purchaser would pay no more for a property than the cost of acquiring another existing and equivalent property. The value estimate is based on the selling price and listings of comparable properties. To arrive at a final estimate of value, the appraiser selects the value indicated by the approach most appropriate for the property and supported by the most reliable, factual and relevant market data, which has been analyzed and verified.

A set of procedures in which a value indication is derived by comparing the property being appraised to similar properties that have been sold recently, applying appropriate units of comparison, and making adjustments to the sale prices of the comparables based on the elements of comparison. The Direct Comparison Approach may be used to value improved properties, vacant land, or land being considered as though vacant. It is the most common and preferred method of land valuation when comparable sales data is available.

The Appraisal Institute of Canada. 2002. The Appraisal of Real Estate, Second Canadian Edition. Vancouver, B.C.: UBC Real Estate Division, Glossary.

COST APPROACH

- estimates the cost to build a new building identical to the subject being appraised, at current prices, subtracting accumulated depreciation and adding the estimated land value.

A set of procedures through which a value indication is derived for the fee simple interest in a property by estimating the current cost to construct a reproduction of (or replacement for) the existing structure, including an entrepreneurial profit, deducting depreciation from the total cost, and adding the estimated land value. Adjustment may then be made to the indicated fee simple value of the subject property to reflect the value of the property interest being appraised.

The Appraisal Institute of Canada. 2002. The Appraisal of Real Estate, Second Canadian Edition. Vancouver, B.C.: UBC Real Estate Division, Glossary.

RECONCILIATION

- The last phase of any valuation assignment in which two or more value indications derived from market data are resolved into a final opinion, which may be either a final range of value or a single point estimate.

The Appraisal Institute of Canada. 2002. The Appraisal of Real Estate, Second Canadian Edition. Vancouver, B.C.: UBC Real Estate Division, Glossary.

A RESERVE FUND STUDY

- is designed as a budget planning guide for future expenses attributable to major repairs/replacements of the common elements of the condominium. It provides a financial plan for the funding of expenses, based on cost estimates, life cycle analysis and forecasted inflation and interest rates. The Condominium Corporation should consider the discussions and recommendations from the report when formulating their Reserve Fund Plan.

REPLACEMENT COST FOR INSURANCE PURPOSES

The term Replacement Cost is used herein as defined by the Appraisal Institute of Canada as follows:

The replacement cost of a building is the total cost of construction required to replace the subject building with a substitute of like utility. These costs include labour, materials, supervision, contractor's profit and overhead, architect's plans and specifications, sales tax where applicable, and insurance.

The replacement costs herein include building components, the building envelope, finishes, fixed partitions, mechanical systems etc. They do not include personal property, chattels, or furnishings. Nor do the replacement costs include underground servicing, demolition, removal and/or clean up costs which can vary significantly dependent on the nature of the incident/claim.

It should be noted that a replacement cost new estimate does not equate to an estimate of market value. No charges for deprecation have been made, nor have any amounts whatsoever have been included for the value of the land or the other buildings on site.

APPRAISAL REVIEW

-the act or process of developing and communicating an opinion about all or part of an appraisal.