Land Valuation Process Ge 504 Lecture.docx

Eastern Visayas State University College of Engineering DEPARTMENT OF GEODETIC ENGINEERING Tacloban City

Vision: A leading State University in technological and professional education. Mission: Develop a strong technologically and professionally competent productive human resource imbued with positive values needed to propel sustainable development.

GE 504 Group No. 6 Members 2013-00162 2013-02066 2014-03227 2013-00809 2014-02275 2016-00500

Date of Report: November 20, 2018

The Valuation Process Summary Report Definition. The valuation process is a detailed systematic procedure a licensed valuer follows to determine the market value of a property. Objectives. The property valuation process answers the following questions: ● How does a professional valuer perform valuation on a property? ● What are some of the challenges? ● How can property investors use knowledge of the valuation process to their advantage? Purpose. Valuation is most often used by lenders to determine the value of the assets being used as security for a loan, and calculate how much they are willing to lend. Steps in the Valuation Process 1. Written instructions

2. Analysis of the property market 3. Valuation Report/Appraisal Report Definition of Assignment Definition. Assignment is the process whereby a person (“the assignor”) transfers rights or benefits to another (“the assignee”). Collection and Analysis of Data Data Collection - Data collection is the process of gathering and measuring information on variables of interest, in an established systematic fashion that enables one to answer stated research questions, test hypotheses, and evaluate outcomes. Data Analysis - Data Analysis is the process of systematically applying statistical and/or logical techniques to describe and illustrate, condense and recap, and evaluate data. Data Collection Techniques ➢ Interviews ➢ Questionnaire and Surveys ➢ Observations ➢ Focus Groups ➢ Ethnographies, Oral History, and Case Studies ➢ Documents and Records Data

Source for the Appraiser - Public records are extremely useful in locating pertinent information. Some common sources are listed below. ● City or County Recorder's Office ● Planning and Zoning Departments ● Engineering Departments ● Sale Tax Offices ● State Licensing Boards ● State Land Office ● Bureau of Land Management ● County Assessor's Office ● Private Data Sources

Preliminary Analysis, Data Selection, and Collection ❖ General Data is that which affect values on national, regional, local neighbourhood, government, environmental, and economic forces. ❖ Specific Data refers to the site, title, improvements of the property, depreciation, history of ownership and use, income and expenses. ❖ Comparative data or the Supply and demand data is that which regards recent sales, cost, income information for similar properties, demand studies, and how long have they been on the market. General Data may include: ● Trends (in the business cycles, the economy, financing options, population, price levels, building costs, purchasing power and tax rates) ● Physical factors affecting value (i.e. location; size, topography, appearance, lot size/shape, street pattern, soil and subsoil conditions, drainage, hazards, climate, utilities, nuisances, conformity of improvements, and proximity to supporting facilities) ● Economic factors (i.e. population levels, balance of land use, vacant land, new construction, price and rent levels, vacancy rates, lender attitudes, utility costs, insurance rates, wage levels, and transportation systems) ● Governmental factors (i.e. municipal services, planning and zoning, building codes, development regulations, taxes, special assessments, and services) ● Social factors (i.e. population density, crime rate, income levels, labor supply and skill levels, and cultural activities available) The economic and general background information needed for development of an accurate property tax appraisal may often be beyond the resources of a county assessor's staff. The use of the computer has increased availability of historical and statistical data related to appraisals. Statistical analysis of large amounts of data using techniques like multiple regression analysis permit the development of valuation factors, which can substitute for some of the data, described above. Specific Data may include: ● Ownership data including owner's identity, type of ownership (warranty deed, titling information, etc.) easements or encroachments, zoning regulations, assessed value and taxes, and deed restrictions and covenants. ● Site information including a description of the land (size, shape, topography, and location) and public improvements (paving, walks, curbs, sewers, utilities). Corner influence, building orientation, accessibility of the site, and any advertising value offered by the site are also

considered. Data collected for an industrial or commercial property may be very different from that needed to appraise a single-family residence. ● Improvement information such as the size, quality and condition of all buildings and physical improvements, along with an analysis of their layout, style, and design. A clear statement about the current use of the property should also be included. If multiple uses exist, they should be noted and documented as carefully as possible. Comparative Data may include: ● Cost data which may be obtained through developers and general contractors. It may also be used as historical cost for individual properties and as a basis for developing up-to-date factor tables to make historical costs current. ● Sales data which is collected and basic adjustments are developed, such as time and location, as well as adjustments for different property characteristics. ● Income data which is gathered from income and expense statements. Analysis of Highest and Best Use Definition. Highest and Best Use is the reasonable, probable and legal use of vacant land or an improved property, which is physically possible, appropriately supported, financially feasible, and that results in the highest value. A. Four Tests 1. Physically Possible - size, shape, topography, and other characteristics of the site. 2. Legally Permissible - analysis excludes uses that are not permitted by zoning, land-use planning, uses forbidden by the government regulations and any other uses that are prohibited by the deed restrictions. 3. Economically Feasible - any proposed use must not only generate adequate revenue to justify the costs of construction but also make a profit for the developer. 4. Maximally Productive - highest return can mean different thing to different people – IRR, NPV, development profit or residual land value. The use that generates the highest net present value is the highest and best use because it takes into account both time value of money and the cost of capital into account. B. Vacant Site or as if vacant Criteria to be considered: 1. Use 2. Timing for use (i.e. absorption, rents, occupancy, and other considerations) 3. Market participants (can either be a - users, or b - most probable buyers/tenants) C. As Improved

There are three possibilities that must be considered for the highest and best use of a property as improved: 1. Demolish the existing structure and redevelop the site 2. Continue the existing use 3. Modify the existing use Note: Demolition is an extreme step which can be considered when the profit from new use is more than the current use, less demolition cost and redevelopment cost. D. Interim Use ● A use for property until it can be put to its highest and best use. Land that is not quite ready for development because of insufficient population densities may be used as a sales lot for manufactured housing, for example. An empty freestanding department or discount store might be used as a flea market. ● The use to which a site or improved property is put until it is ready for future highest and best use. ● Likely to change in a relatively short time. ● Buildings that are nearing the end of their physical lives, farms, parking lots, and temporary buildings. Mining and quarry operations are considered special case that usually continue until depletion of the resource. Approaches to Value 3 General Approaches to Value ➢ Sales Comparison ➢ Income Capitalization Approach ➢ Cost Approach Purpose. Each approach is used to help assist an appraiser to determine an opinion of value, and many times all three approaches are used to appraise a single property. The Sales Comparison Approach It is the most frequently-used and accepted approach to determining value in real estate appraisal practice. It bases its opinion of value on what similar properties (otherwise known as “comparables”, or “comps”) in the vicinity have sold for recently. Requirements to qualify as “comps” 1. Resembles the subject in size, shape, design, utility and location. 2. Have sold recently generally within six months of the appraisal. 3. Have sold in arm’s-length transaction. Sales Comparison Approach Procedure 1. Identify comparable sales. 2. Compare comparables to the subject and make adjustments to comparables

3. Weight values indicated by adjusted comparables for the final value estimate of the subject. The Cost Approach This approach seeks to determine how much a property would cost to replace (meaning, rebuild) after subtracting accrued depreciation. Accrued depreciation is the reduction in actual value of property over a period of time as a result of wear and tear or obsolescence. The term reproduction cost is used if an exact replica of the original property is produced. Reproduction Cost is used if an exact replica of the original property is produced. Replacement Cost is used if a property is rebuilt with comparable utility, but using current design and construction methods and materials. Cost Approach Procedure: 1. Develop a land value opinion. Land is valued as if vacant and available for its highest and best use, regardless of its present use. Land value is based upon comparable sales with a similar highest and best use. 2. Estimate the production or replacement cost of the improvements. The cost is estimated as of the effective date of the appraisal and should include all direct and indirect costs and entrepreneurial profit. 3. Estimate the amount of depreciation. 4. Deduct the depreciation from the cost estimate. Depreciation from all causes is deducted from the new cost of each structure to calculate the depreciated value of each building. 5. Total the land and the building components. Methods of Valuing Improvements ● Quantity Survey Method ● Unit-In-Place Method ● Square Foot Method ● Cost Index Method The Income Approach It is the preferred valuation method for commercial real estate when reliable property rents and operating expenses are available. The success of the income approach depends largely on the availability of adequate property rents, operating expense and sales data. Income Approach Procedure: 1. Obtain annual rent schedules/revenue schedule for the subject property and compare with competition to arrive at a projection of reasonable rents/revenue for the subject 2. Estimate annual vacancy and collection losses 3. Subtract these from the gross income to arrive at the effective gross income

4. Estimate the annual expenses and subtract them from the effective gross income to arrive at the net income. Net income is sometimes called net operating income 5. Analyze comparable investments in order to arrive at a capitalization method and rate 6. Capitalize the projected net income into an estimate of value. Reconciliation Definition. Reconciliation is the process where the appraiser considers all of the evidence supporting the different value indicators, as well as the relevance of the different appraisal techniques to the particular appraisal problem at hand. It is a particular step in the appraisal process when the appraiser arrives at a final value estimate. Purpose. Reconciliation may be required for 3 different appraisal purposes. 1. To reconcile values indicated by different comparable properties - Considered reliable only if data are available from a number of comparable properties. 2. To reconcile values indicated by different units of comparison. - Occurs most often in the sales comparison approach. 3. To reconcile values indicated by different appraisal techniques. - Occurs when different appraisal techniques generate different value indicators. 2 Steps in the Reconciliation Process: 1. Reviewing the processes that led to the different value indicators. 2. Making the reconciliation judgement. Step 1. Reviewing the Appraisal In the 1st step in the reconciliation process, the appraiser reviews all of the data, calculations, and reasoning that led to the various value indicators. The appraiser also checks to see that: ❏ All value indicators were derived on the basis of the same definition of value. ❏ All properties were evaluated on the basis of the same highest and best use. ❏ All properties were evaluated on the basis of the same real property interest. ❏ The characteristics of the subject property were defined consistently in the various approaches and techniques. Purpose of reviewing the appraisal: ● To assess the relative reliability of the different value indicators. ● To see that the information used to arrive at the value indicators is thorough and complete•An indicator of unit cost (such as cost per square foot) in the cost approach.

● To see that the information used to arrive at the value indicators have been derived in accordance with the term of the appraisal assignment, including the definition of value, the purpose and use of the appraisal, and any other terms that may affect the value estimate. 3 Factors in Assessing the Reliability of Value Indicators 1. The amount of data supporting the indicator. 2. The level of accuracy of the indicator. 3. The relevance of the indicator to the appraisal problem. Value Indicator Criteria 1. Amount of data 2. Level of accuracy 3. Relevance Step 2. Making the Reconciliation Judgement This process relies heavily on the appraiser’s experience and judgement. There is “no formula” for reconciliation. In the end, the appraiser’s judgement must be the deciding factor. Final Value Estimate The process of reaching a final value estimate is essentially the same as the reconciliation process where the appraiser reviews all of the data, calculations, and reasoning contained in the entire appraisal. The Appraisal Report Definition. An appraisal report is a report prepared by a professional appraiser to determine the value of some type of property. Appraisal reports are prepared most frequently in real estate transactions to assess the worth of the home and land. 2 Appraisal Report Options: 1. Oral Report - where reporting is done directly to clients when an appraiser is asked for their opinion of value. 2. Written Report - the most commonly used reporting format that follows the professional standard practice for appraisers. 2 Written Report Formats: 1. Form Appraisals - highly structured, and nearly all forms have the same data in the same places. 2. Narrative Appraisals - can have different formats depending on the property type, client’s needs, and objectives. A Narrative Appraisal can either be complete or restricted. A complete appraisal obviously includes all information that is stated in the USPAP (Uniform Standards of Professional Appraisal Practice)

standards; while a restricted appraisal is intended for use by the client only and must contain a disclaimer. PARTS OF AN APPRAISAL REPORT A sample of an appraisal report with notes can be accessed at this link. I. Introduction A. Table of Contents B. Executive Summary of the Conclusions of the Report C. Title Page D. Letter of Transmittal E. Signed Certification II. Identification of the Appraisal Problem and Scope of Work A. Client B. Intended Use and the User C. Subject D. Property Rights Appraised E. Definition of Value F. Effective Date of the Value Opinion G. General Assumptions, Hypothetical Conditions, and Limiting Conditions III. Presentation of Data A. Legal Description of the Subject B. Personal Property and Other Non-Real Property C. Subject Listing and Sale History D. Subject Location and Market Area E. Land and Improvements F. Tax Information IV. Analysis of Data and Conclusions A. Description of Market Analysis B. Highest and Best Use Analysis C. Land Value D. Approaches to Value E. Reconciliation and Final Value F. Exposure Time Estimate G. Appraiser’s Qualifications V. Addendum A. Photographs

B. C. D. E.

Legal Description of the Subject Statistical Data Leases Summaries Exhibits The Valuation Process Powerpoint Slides

The lecture slides and other resources of the whole Group 6 report can be accessed in Google Drive at this link. (Short URL: bit.ly/GE504group6)

The Valuation Process Activity and Quiz Part I. Activity ~ Quiz (30 pts) A 5.5 has property is located at Brgy. Buri, Burauen, Leyte. The land is classified as agricultural with Corn, Banana, and Coconuts as the main crops. After Typhoon Yolanda, the crops were destroyed and can no longer be utilized by the owners. The heirs of the property have decided to hire you as an appraiser to conduct a valuation on the said property as they are planning to get a business loan from the bank (DBP). The process requires them to create and submit a business proposal.

The land is classified as a flat agricultural land. It is strategically located along the national highway Tacloban-Dagami-Burauen road. Brgy. Buri is 4.8 km (7 minute drive) away from Burauen Town Proper. Burauen is a first-class municipality in the 2nd district of Leyte having the most number of barangays and largest area among its constituents. The town boasts of its mountain springs and the Mahagnao National Park which are continuously being developed by the Tourism Sector. It’s adjacent lot to the East, which is approximately 5 has in area have recently been sold for PHP 5M and was developed into an organic farm. Its adjacent lot to the South with an approximate area of 6.5 has was sold in 2014 and remains vacant but with slight developments where it looks like the owner is converting it into a commercial space (i.e. resort). The latter is estimated to reach a current market value of PHP 10M. Using the valuation process learned from the report, can you create a brief analysis if the following: 1 Highest and Best Use 2 Approach to Value to be used 3 Final Value Estimate Part II. Quiz 1.&2.) ________________ is a detailed systematic procedure a __________________ follows to determine the market value of a property. 3.&4.) Valuations are most often use by __________ to determine the value of the assets being used as security for a loan, and to ____________ how much they are willing to lend. 4-6.) Steps involved in Valuation Process. 7.) The transfer of property to be held in trust or to be used for the benefit of creditors. 8-10.) Who are the people involved in assignment agreement? 11.) ____________________ is the process of gathering and measuring information on variables of interest, in an established systematic fashion that enables one to answer stated research questions, test hypotheses, and evaluate outcomes. 12.) _________________ is the process of systematically applying statistical and/or logical techniques to describe and illustrate, condense and recap, and evaluate data. 13-15.) Give at least three (3) data collection technique. 16.) A data, which affect values on national, regional, local neighborhood, government, environmental, and Economic Forces. 17.) Data about the site, title, improvements of the property, depreciation, history of ownership and use, income and expenses. 18.) A data which regards recent sales, cost, income information for similar properties, demand studies, and how long have they been on the market.

19-20.) Give at least two (2) factors of general data.. 21.) Who defines the rules and standards of what needs to be included in an appraisal report? 22.) What does USPAP mean? 23-24.) Give 2 ways on how you can deliver an appraisal report. 25.) This type of written report follows a checklist pattern that is highly structured. 26.) A one-unit residential property can have an appraisal report of up to 200 pages. True or False. 27.) Which part of the appraisal report is the Letter of Transmittal included? a. Introduction b. Scope of Work c. Presentation of Data d. Addendum 28.) Which part of the appraisal report are photos and other digital data are included? a. Introduction b. Scope of Work c. Presentation of Data d. Addendum 29-30.) Give 2 (out of the 5) major parts of the Appraisal Report.

ANSWERS: 1&2.) Valuation Process, licensed valuer 3&4.) Lenders, calculate 4-6) Written instructions Analysis of the property market Valuation Report/Appraisal Report 7.) Assignment 7-10.) assignor, assignee, 3rd party 11.) Data collection 12.) Data Analysis 13-15.) Data Collection Techniques ● Interviews. ● Questionnaires and Surveys. ● Observations. ● Focus Groups. ● Ethnographies, Oral History, and Case Studies. ● Documents and Records. 16.) General Data 17.) Specific data 18.) Comparative data or the Supply and demand data 19-20.) General Data Physical

may

include: factors

Economic Governmental Social 21.) USPAP 22.) Uniform Standards of Professional Appraisal Practice 23-24.) Oral and Written 25.) Form Reports 26.) True 27.) A 28.) D 29-30.) See choices in nos. 27-28

factors factors factors