In the United States and Canada, new residential development projects and the construction of significant office or commercial structures are subject to an appraisal for building-code compliance and impact fees. Owners of such assets commonly rely on appraisers from real estate firms to provide a market value assessment, but some owners turn to third-party opinions.
Third-party opinions are those provided by competent professionals who have no particular interest in the outcome of the appraisal process. The value of third-party opinions lies in their objectivity and transparency. These can be used to supplement for-sale market data and transactional sales data, which can be biased or challenging to obtain. Third-party opinions are also less expensive than comparable complete appraisal reports; the cost of a third-party opinion is typically 30 percent less than the cost of a comparable full report.
What is Allocation?
An allocation is a sum that can be allocated to each class of assets. It is often used to allocate costs or benefits to all of the different assets in an organization.
The term allocation is also used to refer to allocating the monthly rent due on an apartment building. An appraisal associates a monetary value with a given object or property by determining its market worth.
What is Allocation to Appraisals?
What is an allocation for appraisals in real estate?
Allocation for appraisal allocates land or property by collecting information on other comparable properties. This information may include sales or leases.
What is an allocation for appraisals, and what assumptions are made?
The primary assumption made during allocation for appraisals is that similar houses in the same geographical area have a similar land-to-value ratio. This ratio, also called a multiplier, is determined by comparing land values with property values.
The final value depends on the appraiser’s judgment and market conditions.
Most appraisers break down this process into two steps.
Determining the multiplier
It is the ratio of land value to the property value of comparable properties. This step is an estimate only and can help develop a reasonable alternative to the appraisal.
In this phase, the appraiser applies their experience and judgment concerning the necessary adjustment based on market conditions.
Comparing the multiplier-the ratio of land value to property value with a predetermined set of ratios.
- This step is based on the appraiser’s judgment.
- The predetermined ratios that are used to compare with the multiplier are:
- Resale/lease value ratio.
- It is the relationship between the price of a property and the rental income obtained from it.
- Sales/lease value ratio.
- It compares the selling price to the rental income obtained from a property.
- Price/rental ratio.
- The lender uses this to determine if an investment has sufficient yield to repay its cost within a specified period.
- Replacement cost/market value ratio.
- It is the ratio of construction costs to the replacement value of the structures.
- Income/capitalization ratio.
- It compares income from rents with debt service or capitalization rate (cost amortized over time).
- Development cost/market value ratio.
- It is the ratio of total costs to the capitalization of land value.
- Operating cost/market value ratio.
- It compares operating costs to market values.
- Net profits, taxes, and capital gains or losses to be obtained by selling the asset or increasing the lease rate.
- The gross profit is calculated by subtracting the financing and operating costs.
It is hard to obtain a sufficient market area for inclusion within an appraisal report because of inadequate sales data. It is also likely that a market area may be too small to define sufficient subdivisions of the subject property. In these cases, it may be necessary to appraise the land under the assumption that it is only used for a single purpose, such as residential use.
Applying the multiplier to the property in question to estimate its value
One property is generally chosen as a reference point for similar properties, and the multiplier ratio is applied to values from other comparable properties. Comparing prices with the appraisal price will give us an idea of how our home’s value compares with the other houses.
This calculation does not include price discounts for:
- Age of home.
- The age of the home is a factor that decreases value, so although the appraisal process will not include this, it will still be considered in the final assessment.
- Major repairs and renovations.
- It can be a huge factor in determining value, but it will be dealt with separately from the appraisal report.
- Home’s size can also be a significant factor in value.
The calculation is more accurate when more comparable sales to the subject property were sold recently rather than just a few years ago. The process of determining the value of our property uses the prices of other recently sold properties to determine the actual market value. If there are very few comparable sales, it can sometimes lead to inaccurate results.
Assessing special features and making adjustments
Adjustments are applied to factors that affect property values in the allocation process. These factors include:
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Age of the building.
- Age decreases the value of a property. The reason is that the structure does require a lot of maintenance. It may not be worth as much as a new structure.
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Condition of the building.
- If there are many problems with the building, it may not be worth as much. For example, if structural elements are in terrible shape or extensive damage to the foundation, this can lead to significant devaluation.
- If the front of the house is damaged, this will decrease value.
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Bad location.
- If a property is located in a place that does not attract many buyers and renters, then the value may be less than if it were located in a good location.
However, even changes that seem small can have a significant effect on the valuation process. For example, the re-shingling of a roof can increase or decrease the depreciation rate by 10%. On the other hand, minor damage such as broken windows can considerably reduce or increase the value.
5 problems for appraisals done by allocation
There are five major problems associated with appraisals done by allocation for appraisals; these are:
- The multiplier factor will vary and is often under or over-estimated.
- The rate at which land values are increasing is far greater than the increase in the value of residential property in general, leading to a bias in the results of the valuation
- The multiplier for similar properties can vary significantly between different areas, and developers sometimes use more sophisticated techniques to come up with a more accurate multiplier
- The neighborhood allocation is typically less reliable as the age of the improvements. The land to property ratio increases with age, so there is more accuracy if this valuation is done on newly developed property
- Newer remodeled old properties may not have the same land-to-property ratio compared to other old but non remodeled properties.
Learn More About Allocation to Appraisals
Due to the complicated nature of allocation and appraisals, the valuation process may be challenging for most people, thus requiring a professional.
If you’re interested in learning more about allocation and appraisals,call us at 1-801-882-2292 or request a free quote!
