The Importance of Real Estate investments
Real estate is one of the reliable and important investment types for individuals and institutions. Interest in the price appraisal of real estate has increased with rapid development of real estate sector and its legal infrastructure in recent years.
The appraisal of real estate is a main principle for all businesses. Land and property are factors of production and the value of the land is dependent on the demand and supply for the product that is produced.
Conducting planned urbanization, choosing settlement areas and estimating their inner or outer transport costs, improving capital markets transparency and reliability require a reliable price valuation of real estate asset. Appraisal in real estate is also important for the tax income of the national budget.
Appraisal is, in simplest explanation, the determination of amount for which the property will transact on a particular date. (FRENCH, 2005 ) There is a wide range of purposes for appraisals are needed. These range from appraisals for transfer of ownership, financing and credit, litigation, tax matters, investment counselling, decision making, accounting and etc.
Aim of this thesis is to provide a brief overview of the methods used in real estate appraisal according to international valuation standards, to research the position of appraisal practice in Turkey and to designate which valuation method should be used for analyzing the actual value of the real estate assets.
For this purpose, a case study is prepared to investigate advantages and disadvantages of valuation techniques for specified real estates in a chosen sample area in Ankara.
In reviewed literature; there are several definitions of appraisal and appraisal methods that are used internationally. Sales comparison method have been investigated by related studies mostly because this method is used more than other methods in appraisal practice. But; there is no detailed study to find out advantages and disadvantages of each methods by comparing applications in practice. The comparison of the valuation techniques to indicate the advantages and disadvantages of each other is the point where this thesis differs.
Method of the Study
Over the past decade there has been a significant growth in real estate appraisal research throughout the world. There are several books, articles, doctoral or master thesis that are written about real estate appraisal.
This thesis has been prepared by using the following methods;
Library & resource search,
Research the appraisal practice in several countries and Turkey
Interviews with Appraisal Companies and professionals in the sector,
Research any organizations and associations about appraisal in world and in Turkey.
This thesis comprises five parts. First part of this thesis includes conceptual description and principles of real estate appraisal. In this stage; library & resource search is used as a method while data gathering about the appraisal practice in several countries and Turkey. There are many associations and organizations about appraisal all over the world; such as Appraisal Institute (AI), International Valuation Standards Committee (IVSC), The European Group of Valuers (TEGoVA), American Society of Appraiser (ASA), Councelors of Real Estate (CRE) and etc. Publications of these institutions are rewieved.
Second part of this thesis includes the valuation methods and valuation process step by step. This stage includes library, resource and e-sources research about appraisal such as The Appraisal Journal, Journal of Real Estate Literature, Real Estate Review and etc. In addition, publications of the appraisal institutions are rewieved.
Third part of this thesis includes the situation investigation of the Real Estate Appraisal in Turkey. For this purpose, interviews will be made both with appraisal companies and professionals in the sector. Interviews will analyse the application of appraisal to designate the problems, anticipations and etc. The purpose of interviews is to find out what is presently ongoing in appraisal practice. In this stage, interviews will also include the investigation of any associations -like Capital Boards of Turkey- and committees for their roles, purposes in appraisal sector.
Fourth part of this thesis includes a case study. This case study investigates advantages and disadvantages of valuation techniques for specified real estates in a chosen sample area in Ankara. In this stage, each valuation technique is applied and the results are compared. The comparison results are used to define the most suitable technique for each type of real estate.
Finally, the conclusion part of this thesis includes a general evaluation about "Real Estate Appraisal and Appraisal Practice in Turkey".
General Approach and Definitions
Appraisal of Real Estate
Appraisal is a professional appraiser's opinion of value. The preparation of an appraisal include research into market areas; analysis of information relevant to a property; and the knowledge, experience, and professional judgment of the appraiser.
Appraisals may be required for any type of real property, such as single-family homes, apartment buildings, office buildings, shopping centers, industrial sites, and farms. There are several reasons for performing a real property appraisal whenever real property is sold, mortgaged, taxed, insured, or developed. For example, appraisals are prepared for:
Mortgage lending purposes
Tax assessments and appeals of assessments
Negotiation between buyers and sellers
Government acquisition of private property for public use
Business mergers or dissolutions
Real estate appraisal is the task of determining the potential price of a site or building in case of sale and also important for investment decisions, for real estate funds and project developments.
Fisher and Martin defined real estate as an identified parcel of land, including improvements, if any. In addition, all permanent building attachments (plumbing, electrical wiring, heating systems, etc.,) as well as built-in items (cabinets, elevators, etc.) are usually considered part of the real estate. Fisher and Martin also defined real property as the interests, benefits and rights inherent in the ownership of real estate.
Pagourtzi and Assimakopoulos also defined real property as all the interests, benefits, rights and encumbrances inherent in the ownership of physical real estate, where real estate is the land together with all improvements that are permanently affixed to it.
According to The Uniform Standards of Professional Appraisal Practice (USPAP), appraisal is
"An analyses, opinion or conclusion relating to the nature, quality, value or utility of specified interests in, or aspects of, identified real estate. In this usage, appraisal covers a variety of assignments, including valuation, consulting and review."
Appraisal (Valuation) is the provision of a written opinion, independently and impartially prepared by a qualified appraiser, setting forth and justifying an opinion as to the market value (as of a specific date) of a property that is the subject of a real estate-related financial transaction.
Appraisal Consulting is a study of nature, quality or utility of a parcel of real estate or interests in real property in which a value estimate is not necessarily required.
Appraisal Review is the act or the process of studying a report prepared by another.
The table from the 12th edition of Appraisal of Real Estate by Appraisal Institute explains the differences of these three terms.
Table 2.1. Comparison of the Terms: Appraisal, Consulting, Review
The act or process of developing an opinion of value.
Appraisal involves selective research into appropriate market areas, the Assemblage of pertinent data, the use of appropriate analytical techniques, and the application of knowledge, experience, and professional judgment to develop an appropriate solution to an appraisal problem. The appraiser provides the client with an opinion of real property value that reflects all pertinent market evidence.
An opinion of market value for a fee simple estate, leasehold estate, reservation easement, or other estate (to assist in mortgage lending decisions, to assist in purchase or sale decisions, etc.)An opinion of investment value or some other properly defined value of an identified interest in real estate as of a given date (for insurance purposes, for relocation purposes, for property tax appeals, etc.)
The act or process of developing an analysis, recommendation, or opinion to solve a problem, where an opinion of value is a component of the analysis leading to the assignment results.
Current market activity and evidence are studied to form a conclusion that may not focus on a specific value indication. An appraiser develops a value opinion in an appraisal consulting assignment as part of the process of answering some other question about real estate, such as whether a proposed use of a given property is economically feasible.
Economic feasibility studies
Marketability or investment considerations that relate to proposed or existing developments
Land utilization studies
Supply and demand studies
The act or process of developing and communicating an opinion about the quality of another appraiser's work.
Appraisal review procedures may be likened to a quality control or auditing function. A review appraiser examines the reports of other appraiser to determine whether their conclusions are consistent with the data reported and other generally known information.
Field review, desk review
Source: Appraisal of Real Estate, 12th Edition, 2001:12
Real estate appraisals conducted for all institutions need to follow valuation approaches that result in a market value estimate that is both provident and rational in relation to the physical and legal characteristics of the property appraised. The sales comparison, income capitalisation and cost analysis approaches are methods mostly used to calculate the market value of real estate. Calvin Lin (2007) indicated that real estate appraisal methods can be divided into cost, sales comparison and income approaches. In section 2.4 these appraisal methods will be explained.
Value and Price
In common life ; there are several usage types of the word "value", such as market value, use value, leasehold value, investment value, active value, tax value, insurable value and other types of value. Each terms has a different meaning and each of them will be explained in this section.
The Aim and Role of Appraisal
McParland, Adair, and McGreal (2002) found out, many European countries have their own national valuation standards. The internationalization of real estate suggests an investigation of such standards, because foreign investors need to understand the concepts that national appraisers use.
Parker (1996) attempted to identify the main valuation methods adopted internationally, and the relative importance affecting the capitalization rate. Dorchester and Vella (2000) also addressed the demands arising from the globalization of real estate activities and the importance of the development of the international valuation standards. It is obvious that real estate appraisal has turned into an international financial analysis from the traditional comparison of local physical assets.
Calvin Lin (2007) indicated that real estate appraisal techniques can usually be divided into cost, sales comparison, and income approaches.
The Valuation Methods
Sales Comparison Analysis For Appraisal
Kummerow (1997) indicated that the sales comparison approach may misrepresent long-term value where there are speculative bubbles and temporary crashes. Tsukamoto (1999) examined the experience in Japan where the bubble economy in the late 1980s was largely caused by the inability of Japanese appraisers and investors to properly estimate real estate value. The sales comparison approach uses similar properties as the basis for estimation. The merits of this approach include its ability to reflect the property's market value, and its relative simplicity. The drawbacks are that the appraised value may be inflated during periods of a bubble economy, and the adjustments are sometimes subjective. (Lin, 2007)
The cost approach applies the reconstruction or replacement costs and the deduction of depreciation as the basis for valuation. Objectivity is the well-recognized advantage of this method. The major drawback is that this approach lacks market value and profit consideration. The appraised value through this approach thus often deviates from market value.
The income approach discounts all the future net income to present value. It reflects the fundamental value of the property according to the revenues and costs; therefore, this method focuses on the estimation of the income stream and the discount rate. The income approach consists of two routes: direct and yield capitalization. Income producing properties are the major investment objects for Real Estate Investments Trusts (REIT), so the income approach seems to be the most appropriate method for REIT valuation.
Gorlow, Parr, and Taylor (1993) indicated that the final reversion value should be estimated through the construction costs of the comparable project. The cost approach can assess the construction value; however, the accurate determination of land value of the final period still requires market or revenue information for evaluation. Hirota (1999) stressed that the income approach should put more weight on the operating income than on the final reversion.
Income Capitalization Analysis For Appraisal
Cost Analysis For Appraisal
The Valuation Process
Data Analysis (Market Analysis - Highest and Best Use Analysis)
Application of the Valuation Methods
Reports of Defined Value
Appraisal of Real Estate in Turkey
History and Present Situation of Appraisal in Turkey
Capital Markets Board of Turkey and Appraisal
The Methods of Appraisal that are used in Turkey
The Position of Appraisal Companies in Turkey
This case study will investigate the disadvantages and the advantages of valuation techniques for specified real estates in a chosen sample area in Ankara.
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