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.

Identifying Existing Easements

When an owner has exclusive rights to a building, the property is said to be owned in “fee simple.” But when any part or use of the property is held by another, that part is a “fractional interest.” The interests can be physical, in title, financial, by specific use, or over time. Easements are a type of fractional interest that grants an entity the right to use a specific part of a property separate from the rest of the property.

Physical easements—often used for utilities, roadways, and open spaces—can apply to a site’s surface, its underground, and the space above it. Rights-of-way provide access across a geographic area. They usually are composed of easements over many properties. Whole property easements limit the owner’s right to develop, improve, or alter the property. This type of property easements includes conservation, façade, and historical designation easements.

Appraisers can identify a property’s easements in several ways: recorded documents, such as deeds and mortgages, contain detailed legal descriptions that describe existing easements; a title search will reveal all recorded documents relevant to a property over time; development plats, site surveys, and site plans usually show surface easements.

How Existing Easements Can Affect Property Usage and Value

Utility easements are assigned for gas, electricity, water, sewage, and communication lines. In order to provide uninterrupted delivery of those services, their easements usually don’t allow buildings or surface disturbance. Some kinds of site improvements, such as landscaping, might be allowed. Access easements (for roads, sidewalks, emergency corridors, etc.) prohibit any uses that would block or interfere with passage across a property. These physical easements can reduce a site’s usable area, therefore, the size of potential building improvements. The presence of easements may also dictate improvement layout, such as building height, the placement of driveways, or secondary structures. At the same time, while usable site area is diminished, the property owner is often responsible for maintaining and paying taxes on easement areas.

Whole property easements determine the use of an entire site. Conservation easements forbid improvement of land beyond its current use. Historic preservation easements limit the demolition of existing improvements. Façade easements require that existing improvements be maintained within a specific set of guidelines such as paint colors, materials, and architectural style; all of these restrict a property’s prospective alternate uses.

Value Estimates of Proposed Easements

The value of an easement is most often estimated through a “before and after” analysis. The appraiser develops two value opinions: one assuming no easement and the other reckoning the easement is available. The difference between these two opinions describes the easement’s value. When the intended use of the easement appraisal is to determine just compensation for eminent domain, the appraiser generally identifies which portion of the easement value results from damage done to the property in the “after” condition.

Some appraisers and easement purchasers use alternative methods to estimate easement value. The across-the-fence method compares actual prices paid for other nearby easements. Typically, this method is unreliable because an easement across a specific property affects each property’s use differently. The corridor method assumes a specific property’s easement value as a part of the acquisition cost of an entire right-of-way. Again, this method is unsound because it doesn’t consider the unique attributes of each easement within the right-of-way. Corridor valuation also sometimes ascribes added value to a group of easements over multiple properties.

Easement valuation is a specialized kind of real estate appraisal. Appraisers gain that special expertise through additional education, experience and, often, participation in professional organizations such as the International Right of Way Association.

Conclusion

A competent appraiser identifies existing easements, their limitations on usability and their effect on value for every subject property. Easements may reduce usable area of a site, the extent of improvements to the site, and future uses of the entire property. Careful review of sale documents, title insurance reports, site surveys, and development plats help the appraiser identify easements that are in effect on the date of appraisal. If quantifying the value of easement is part of an appraisal’s intended use, the most usual approach is “before and after” method. Easement and right-of-way valuation are an appraisal specialty. Appraisers and clients should ensure that competency requirements are met in this kind of assignment.

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It’s standard procedure for most commercial lenders to request all three approaches to value—sales comparison approach, income approach, and cost approach—be undertaken during an appraisal. Usually, there is a stipulation that an approach may be excluded from the valuation if such an approach is deemed dispensable. This omission can be a point of conflict between lenders and appraisers, as the necessity of one or more approaches is debatable in certain situations. This post attempts to clarify the instances where the cost approach is either relevant or extraneous to a property’s valuation. Being able to prudently determine the importance (or otherwise) of the cost approach to valuation increases efficiency and fosters understanding between lenders and appraisers.

What Is this Method all About

Per Investopedia, “The cost approach is a real estate valuation method that surmises that the price a buyer should pay for a piece of property should equal the cost to build an equivalent building.” Essentially, in the cost approach the market value of a property is equal to the cost of the underlying land plus the cost of new construction, minus depreciation. To assist with the cost approach, most appraisers turn to cost manuals, such as the Marshall & Swift Valuation Service, that provide pertinent information on building expenditures associated with different building types, locations, and dates of construction. The following section breaks down the ideal scenarios that require this approach to valuation in commercial appraisals.

When to Use the Cost Approach

The ideal stage to utilize the cost approach is when constructing or proposing a new property. Given that construction expenses associated with erecting a new building should be readily available to the appraiser, these costs are often the best indicator to determine a property’s value. While some buildings may be improved beyond market standards, generally, the most compelling reflection of the cost approach is when the actual price to construct a property is known. The over-improvement issue would likely be adjusted for in an associated sale comparison approach, which would then be reconciled with the cost approach to reach an appraiser’s value conclusion.

The valuation of special-use properties (such as churches, schools, libraries, or other non-income-producing buildings) usually requires the use of the cost approach. Since most of these buildings neither yield an income (and if they do, it’s often at non-market rates) nor frequently transact in some markets, the cost approach can be either the primary or the sole approach for valuation. Although calculating appropriate depreciation can be challenging in these instances, most cost manuals include reference charts to help appraisers determine the right amount of depreciation.

Often when an appraisal is ordered for insurance purposes, a cost-based valuation is required. An example of this is when an insurance company needs to know the exact amount to insure a building, which requires separating the underlying land value from the building’s worth. In this case, the cost method would be the most relevant approach to valuation.

The Cost Approach Is Not Always Relevant

For older properties, the cost approach is generally not as useful. While there are some exceptions, such as found in special-use properties, the high degree of depreciation in older buildings makes it difficult to accurately apply depreciation in the valuation. Considering this reality, buyers normally won’t consider this approach during their buying process, making it not only an unreliable approach to valuation, but also irrelevant in the market.

In some cases, the income approach and the sale comparison approach are enough to determine a property’s value without the use of a cost approach. This cost-approach exclusion tends to be especially true for income-generating properties. For example, unless it was very recently constructed, an appraisal of a multi-tenant retail building would likely exclude the cost approach. In this scenario, given the reliable data derived from the subject property’s income and expenses and the high probability that there are good supporting rent and capitalization rate comparisons in the market area, the income approach would provide the best indication of the subject’s value.

The second-best indication of the property’s value would then be determined by the sales comparison approach (also called the substitution method), again, assuming there are ample sales comparisons within the subject’s market. If there is an active market for the multi-tenant retail building mentioned above, and vacancy rates are relatively low, it is likely that there would be a large pool of buyers interested in purchasing the property. As with the case in older properties, a potential buyer for this multi-tenant retail building most likely wouldn’t consider the cost to construct a similar building in the area, unless the buyer had more specific needs. Their main concerns are the property’s income potential and the cost to acquire the property, compared to other similar properties in the area. Therefore, the cost approach would be irrelevant in the market in this situation and, thus, should be excluded from the appraisal.

Efficient Appraisals

Now that we’ve addressed some examples of when a cost approach is necessary, you’ll have a better understanding of when it’s proper to request a cost approach and when this valuation method is redundant. Identifying instances where the cost approach is not needed can ultimately increase an appraiser’s efficiency and speed up the appraisal process. The necessity of this approach should be discussed in your initial conversation with an appraiser when determining the appropriate scope of work.

The post The Cost Approach: Examining an Important yet Sometimes Irrelevant Appraisal Method appeared first on Boston Appraisal Services.

The Market Analysis section in an appraisal report contains precious information that directly influences the value of a property and also provides priceless insight into a myriad of data relating to the financial feasibility of a property. It is common for many prospective users of an appraisal report to ignore various sections of the report and focus solely on segments that indicate property value. The downside of this approach to valuations is that the reader, therefore, misses key insights into the subject market that can benefit the owner, buyer, seller, or lender.

Highest and Best Use Application

The impact of the marketability studies in the Highest and Best Use section is perhaps the most meaningful—highest and best use refers to the utilization of a real estate in a way that such property will yield the greatest economic benefit for the owner or operator of the property. These studies provide valuable information for the highest and best use decision. While it would be easier to read only the Highest and Best Use section of an appraisal, the hard data that support the financial feasibility element of the highest and best use conclusion is found in the market analysis. In the Market Analysis segment, you can expect to find the ‘what’ and ‘why’ of a property’s marketability and feasibility.

Typically, the best use is consistent with the usage of surrounding properties and complies with existing and emerging zoning policies. Also, the Market Analysis section provides the figures required to identify the use that could lead to a higher profit potential (relative to that derived from the existing use) and making purchase or finance offers that leverage this potential.

Business/Tenant/Occupant Insight

One of the more overlooked aspects within a commercial appraisal market analysis is a review of the primary business(es) or tenant(s) occupying a property. Beyond surface-level information, many reports will address a business’s history at the subject, as well as their competitive market and long-term potential at the site. Businesses, schools, churches and other special-use properties can have some of the more interesting and insightful analyses into their operations. Understanding not only the property, but the use and functionality for the current occupants help to provide a more holistic comprehension of the subject and make investment decisions that are guided by extensive research and objective statistics.

Local and National Economic Information in the Market Analysis

Being well informed on the inner workings of the market influencing subject value is always a good idea, regardless of the locality or economy. A well-rounded report serves to cover market trends and economic obsolescence of the location more thoroughly. Fortunately, nearly all Market Analysis sections will (to varying degrees) assess the local and national economic factors that are directly affecting both the subject property and the economy as a whole. The best reports will further include an array of compelling charts and graphs to pair with the data presented in the text. Experienced local appraisal firms strive to provide the most recent and accurate data on these topics; these companies can be reliable sources for important economic and market information, as well as assisting in interpreting the results generated.

The post Market Analysis: Why This Might be the Most Important Section in an Appraisal appeared first on Boston Appraisal Services.

Local Market Experience

When it comes to selecting an appraiser, it’s critical to consider and ask questions about the appraiser’s years of experience in the market surrounding the subject property. Each market is unique and has demand and economic factors that can differ greatly from areas just a few miles away. This is one of the most common issues we see in reviewing appraisals conducted by firms that are less experienced, and either don’t have access to complete property data or are not as skilled in interpreting complex data sets. It’s best to select an appraisal firm with local market knowledge in each of the markets you service to increase efficiency and save time in having to select a new company every time you need an appraisal across Massachusetts.

A Strong Reputation

Ask for references from previous clients to get honest feedback on how the appraisal firm conducts business and treats its customers. If they’re not willing to share references, you can be certain that they’ve had problems satisfying prior clients. It’s common in the appraisal business to find valuations professionals that have attitude issues and place little emphasis on ensuring a positive experience. There isn’t as much competition in the appraisal field as other real estate sub-industries, which can lead to complacency and reliance on hand-fed orders from appraisal companies.

Online review sites such as Google Review can sometimes be helpful, but regular valuation clients are accustomed to industry-standard poor service, and won’t take the time to leave reviews and ratings. Excellent customer service is not the norm in the valuations industry. It’s your best bet to request, and call, at least three references.

Accuracy and Reliability

Another important aspect to consider, an extension of reputation, is the accuracy of reports, and the reliability of their service. The best way to determine their performance is by seeking referrals, as well as asking to see sample reports (redacted), to get an idea of their level of detail, and the quality of their comments and adjustments. Sometimes you must take the leap and place an order; when the report comes in, don’t hesitate to carefully evaluate and scrutinize the report for the level of diligence and accuracy of the details it contains. It’s okay to have the report reviewed by a third-party with experience in appraisals. Your first experience with an appraisal firm will also give you all the information you need to learn how promptly they perform, and their degree of customer service.

Making a Choice

If you take the time to ask questions, check on referrals, and carefully review your first reports, you’ll greatly increase the quality and reliability of your reports. Once you’ve found a Massachusetts appraisal firm that places your needs first, and follows through with quality valuations that are delivered on time, you’ll have a reliable long-term source of expert property value estimates.

The post 3 Tips for Selecting a Real Estate Appraiser in Massachusetts appeared first on Boston Appraisal Services.

Long-term Savings, Reduced Risk, Less Wasted Time, and Local Expertise

Choosing to work with an expert local appraisal firm in Massachusetts, and the greater Boston community, will allow you to cut out the middleman. Appraisal management firms have taken advantage of limitations created by legislation to build their market share. Independent firms have to go the extra mile in everything they do to build their competitive advantage and provide the greatest value to clients. AMCs aren’t compelled to provide excellent service or strict quality control, as they rely on industry fears and misconceptions.

Independent firms offer greater value by eliminating the excess fees and costs incurred by management companies that do little to merit the additional costs. The typical AMC quality assurance process takes 1-3 weeks, after inspection, before you receive your completed valuation report. When errors slip through, you’ll typically be left waiting another week or two before your revised report is ready; whereas, a reputable independent team of appraisers will deliver a more reliable and detailed report the first time, with prompt turnaround (48hrs), and rarely-needed revisions ready in hours or a day, rather than weeks.

When you’re working with third-parties that will rely on the content of your reports, it’s especially critical that valuations be accurate the first time. Every time a report is rejected, it incrementally diminishes your credibility and can lead to lost business opportunities, financial loss, and damage to your reputation. Impersonal management firms don’t place much emphasis on customer service and will often discourage and scorn you for suggesting that their reports contain errors.

A major advantage of selecting an independent appraiser is the greater level of local market expertise and the ease of communications. Dedicated local professionals take extra time to understand and research their markets. Appraisers that rely on orders from AMCs can become complacent in their research and diligence, and will take reports in any market, regardless of their actual knowledge of regional market factors.

Go Independent

Reduce your risk, expense, and improve your customer experience by selecting and working directly with a local, family-owned firm that genuinely cares about your business and its success. If you’re accustomed to the AMC model, you will be astonished with how efficient and positive your experience is when you work with a team of Massachusetts specialist appraisers that put quality and customer service first.

The post Why Working with an Independent Local Expert Massachusetts Appraiser Will Save you Money & Time appeared first on Boston Appraisal Services.

Highest and best use analysis considers these issues and provides indicators of how the value is, and will be, influenced by emerging local market factors. When you understand what usage of the property is likely to produce the greatest value over time, you can formulate development and disposition plans that will yield the greatest ROI, and reflect the most positively on your Massachusetts investment portfolio and resume.

Zoning Issues

The most common influences on best use are zoning changes that impact how current and future occupants can use the property. When local officials change zoning rules for a subdivision, older properties that do not conform with the new usages can become obsolete. The existing usage of a property will typically be ‘grandfathered,’ or allowed to continue in its current usage until transferred. This is important to consider in a valuation as most properties will need to be resold, often in the near future.

If the appraiser fails to consider, and research existing and emerging zoning regulations, the valuation could be drastically inaccurate when the current usage will no longer be allowed after transfer. The most common example of this situation iswhen existing residences are supplanted by commercial developments, or when agricultural uses are shifting toward new residential subdivisions.

Prevailing Usage and Anticipated Developments

Sometimes changes in usage are gradual and not driven by zoning regulations. This can occur when the current property design, style, or functionality is not consistent or ‘uniform’ with surrounding properties. In valuations, uniformity in a subdivision is considered desirable and contributes to increased property values. The opposite is the principal of regression that holds that properties of lesser uniformity, condition, or desirability will have a negative impact on the value of properties in the surrounding community.

When the predominant style and functional utility of homes in a neighborhood are evolving, older homes tend to lose value more quickly. This can also be the case in commercial developments when the dominant usage gives way to a new industry. The zoning may remain the same, but the impact of new operations can have a disruptive effect on declining industries, decreasing the value of existing improvements that are no longer relevant or functional for emerging industry.

Another common influence are developments and changes that are planned, but not yet confirmed or implemented. These types of market forces have a potential speculative effective on the market that can drive up prices. A valuation must temper the potential positive and negative effects to offer a balanced opinion of value.

A Complete Valuation

A reliable commercial or residential appraisal, especially in dynamic and growing markets such as Massachusetts and Boston, must consider highest and best use to offer the most insightful and complete valuation. Take special care in reviewing your next appraisal to ensure that it addresses emerging market factors. When in doubt, consult with quality-oriented and experienced valuation professionals that specialize in the market in question.

The post The Importance of Highest and Best Use in Commercial & Residential Appraisals appeared first on Boston Appraisal Services.

Level of Detail and Accuracy

The first thing you’ll notice when reviewing an appraisal of any type, is the level of detail that the appraiser puts into the report. When you’re reading it through, what questions come to mind? What has been left unanswered? The mark of a quality appraisal is a thoroughness that addresses the market issues that are most relevant. If the subject property is in a market that is experiencing a withdrawal of industry, economic decline, or a surge in housing starts, the issue should be clearly addressed with explanations of how it affects the property’s value.

If you notice obvious errors in the property’s characteristics, you can be sure that other less obvious inaccuracies may be present. Although not an indicator of the appraiser’s market knowledge, typographic and grammatical errors can indicate a lack of diligence on the part of quality assurance staff. These small things can reflect poorly on your company and diminish your reputation with partners.

Clear and Well Supported Comments

While appraisals are sophisticated documents, they shouldn’t be obscurely worded or difficult to understand. When a claim is made regarding the market, or other influences on the property, it should be backed-up with solid market data and explanations as to their relevance. The purpose of a valuation is to provide an opinion of value as of a certain date and provide the context and reasoning behind the estimate. When the cost and income approaches are utilized, particularly in a commercial appraisal, extra time should be taken to explain the capitalization rates employed and how the value was derived.

Whereas residential appraisals primarily rely on the substitution, or market comparison method, commercial appraisals require estimates of value derived from the income and expenses generated, and incurred, by the property’s operation. This requires sophisticated methods that utilize investment trends to determine how the appraiser converted the income and construction cost to a concrete and accurate estimate of value. Not unlike a homework assignment, correct answers don’t score you full points: it’s the depth of the logic, rationale, and market understanding that earns full credit.

Accurate Adjustments

The adjustments are the additions and subtractions that appraisers make to the values of comparables based on the functional and economic differences between the properties. This helps narrow the range of possible value for the final estimate. Take a careful look at the amount that the appraiser uses to adjust the differences between the subject and comparables. The scientific method of determining the adjustment amount is termed the Paired Analysis Method.

This approach involves a statistical analysis between two sets of data for properties that are most distinctly different based on the feature in question: ex. pool vs no pool, with all other features being roughly similar. Not every appraiser has the local market knowledge, data, or skill to employ this method, and will base adjustments on informal observation or guess work, leading to grossly inaccurate valuations, a common occurrence when an appraiser’s local market knowledge is lacking. You can use your intuition to determine if adjustments make sense considering the economic direction of the community and value of each feature.

Being Certain

Don’t be afraid to question the reasoning for comments and values; you deserve to be certain of the validity of the report. It’s worth the extra time to carefully evaluate the appraisal before accepting it as final and distributing to any third-parties you’re working with in the transaction. If you need assistance reviewing the report, reach out to a team of expert local Massachusetts appraisers to help you evaluate, and ensure your move forward with complete and accurate information.

The post What to Look for in an Accurate Massachusetts Appraisal appeared first on Boston Appraisal Services.