Chapter 1 The Student Handbook to THE APPRAISAL

Chapter 1 The Student Handbook to THE APPRAISAL OF REAL ESTATE Ch 1: Real Property and Its Appraisal 1

Definition of property to be appraised n n An Appraisal is the act of developing an opinion of value for “real estate” q “Real estate” as the term is usually used, includes both the physical asset and the legal definitions of real property q Appraisers may be asked to value real estate, real property, or some combination. q The typical assignment is to value fee simple ownership of a given parcel of real estate Real estate typically does NOT include personal property Student Handbook to THE APPRAISAL OF REAL ESTATE Chapter 2 2

Real Estate, Real Property, and Personal Property n n Real estate is a physical thing. It is the land its permanent improvements such as – q buildings, fences, walls, decks; q improvements to the land that make it suitable for structures – e. g. , streets, walkways and utilities (waterlines, electrical conduits). Real property is the rights in realty. Real property cannot be touched but can be appraised and sold. Personal property is tangible but not affixed to the real estate. A fixture such as a kitchen sink was personal property in the showroom, but once affixed it is part of the real estate. Student Handbook to THE APPRAISAL OF REAL ESTATE Chapter 1 3

Real Estate: Fixtures vs Trade Fixtures n n n A fixture such as a kitchen sink was personal property in the showroom, but once affixed it is part of the real estate. Often real estate contracts will specify that window treatments (shades, curtains, drapes) stay with the real estate. They become fixtures in this contract. Trade fixtures such as shelves or a pizza oven are attached to rented structures for purposes of the tenant’s business. q Typically, they are not considered part of the real estate. q There can exceptions made by local law and custom. Student Handbook to THE APPRAISAL OF REAL ESTATE Chapter 1 4

Why is an appraisal needed? n n n Ownership transfers Applications for mortgage financing Lending decisions -this is the most common assignment Litigation and divorce settlements Investment decisions Valuing a portfolio of assets for accounting or regulatory reporting purposes. Student Handbook to THE APPRAISAL OF REAL ESTATE Chapter 1 5

Type of value required depends on the purpose of the appraisal n n n Most appraisals require an opinion of the cash equivalent amount a property would sell for if marketed for a reasonable amount of time. In some cases an investor may want to know the value from a particular point of view: e. g. , the investor is assembling adjacent parcels to manage them as a whole. Or the investor wants to know the cost to rebuild. In other cases there are extraordinary conditions such as a government subsidized interest rate on the loan. q Any extraordinary conditions must be clearly stated in the purpose of the report Student Handbook to THE APPRAISAL OF REAL ESTATE Chapter 1 6

Review exercises are strongly recommended n n See pp 22 -23. Suggested solutions begin on page 416. Student Handbook to THE APPRAISAL OF REAL ESTATE Chapter 1 7