December 2018 – Boston Appraisal Services

Contrasting Property Value with Construction Cost: Untangling a Subtle but Critical Appraisal Complexity

The difference between construction cost and value is a central question in any appraisal assignment. Appraisers use several processes to estimate value. One of these is the cost approach, which takes into consideration the actual cost of building a structure similar or identical to the one under study. But other approaches to value often do not produce the same value estimate as simple as combining building cost and land value. Construction cost is an element of value, but it is not the same as value. An appraiser recognizes the difference and accounts for it in his value estimate. This difference is likely attributable to several causes that are identified and measured in market value appraisals.

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The Right Appraisal Report Form for the Job

Appraisers have nearly unlimited possibilities in how they report the results of appraisal assignments. These choices could be oral appraisal reports, written appraisal reports, limited written appraisal reports, or many standardized report forms. The appropriate appraisal report format is determined by the appraiser and the client, considering the appraisal’s intended use and specific requirements of the client and regulatory agencies. Available appraisal formats evolve as professional appraisal standards and regulatory requirements change. Awareness of current reporting options is required of any professional real estate appraiser.

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How Easements and Rights-of-Way Affect Property Value

Most improved real properties and many vacant tracts can only be sold subject to existing easements. Appraisers identify existing easements and consider their effect on value whenever a market value definition is part of an assignment. Easements and rights-of-way often influence how real property can be used and may even affect a property’s ownership cost.

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Fixed and Variable Expenses in the Income Approach

The appraisal process includes the income approach to estimate the value of a property that an investor would ideally purchase for its annual income. The income approach assumes a relationship between a property’s average net income and the price an average investor would pay for the property. The first step to defining that relationship is estimating the amount of net income that would accrue to a property in a typical operating year after all expenses to produce that income are deducted. The resulting estimate is shown in a stabilized or reconstructed operating statement for the subject property.

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New Appraisal vs. Appraisal Update: Which Do You Need?

Suppose you paid for an appraisal when you refinanced your property a couple of years ago. Now, your real estate taxes have taken a big jump. The question then becomes, can you use that previous appraisal to apply for a tax abatement? Or, perhaps, you work for a financial institution that is reviewing a property loan it made five years ago. Can you ask the original appraiser to just update that first appraisal? Or, in either case, can you ask another appraiser to update the original appraisal? Licensed and certified Massachusetts appraisers work under established practice standards. They know that several considerations dictate whether they can apply previous appraisals for different uses.

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