Real Estate appraisal standards establish the base layer of RealValue. Real Estate is essentially the “stocks” of natural capital from a pragmatic approach.
The Appraisal Institute defines “market value” in ”The Appraisal of Real Estate, 14th Edition" as:
Market value is the most probable price that a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller, each acting prudently, knowledgeably and assuming the price is not affected by undue stimulus. Implicit in this definition is the consummation of a sale as of a specified date and the passing of title from seller to buyer under conditions whereby:
- Buyer and seller are typically motivated;
- Both parties are well informed or well advised, and each acting in what he or she considers his or her own best interest;
- A reasonable time is allowed for exposure in the open market;
- Payment is made in terms of cash in U.S. dollars or in terms of financial arrangements comparable thereto;
- The price represents the normal consideration for the property sold unaffected by special or creative financing or sales concessions granted by anyone associated with the sale.
There are three primary approaches to value use in real estate appraisal: Cost Approach, Market Approach, Income Approach. They are generally defined by the Appraisal Institute as:
Based on the principle of substitution, this approach estimates the cost to construct a replica or replacement for the existing structure, deducts the accrued depreciation, and adds the estimated land value. The cost approach is often useful for estimating the value of properties for which there are no recent comparable sales.
The approach is based on the principle of substitution, which assumes that a buyer will not pay more for a property than the cost of an equally desirable alternative. Comparable sales are identified, and adjustments are made for differences between the comparables and the subject property to derive a value indication.
The Income Approach converts future or current benefits of property ownership into a value indication through capitalization or discounting. Anticipated income streams and a reversion are converted into present value through a capitalization rate or discount rate. This approach is commonly used for income-producing properties.
Other commonly used and accepted real property valuation methods are:
- Broker Price Opinion (BPO): A valuation by a licensed real estate broker, often used for quick estimates. It's less detailed and less expensive than a full appraisal, considering factors like comparable sales and property condition.
- Automated Valuation Model (AVM): A tech-based system, like Zillow's Zestimate, that estimates property value using algorithms. While quick and convenient, it's generally less accurate than a formal appraisal.
- Assessed Value: The value assigned by a tax assessor for taxation purposes, usually a percentage of the property's market value. It forms the basis for the property owner's tax liability.
For assets like infrastructure, commodities, and natural resources, or for valuing businesses as going concerns, traditional real estate appraisal methods may not be applicable. In such cases, the most suitable valuation approach should be selected based on the specific context and circumstances.