Definition
The “Purpose of (Appraisal) Assignment” refers to the stated objective or goal that an appraisal aims to achieve. This can encompass a variety of valuation objectives such as estimating market value, insurance value, value in use, liquidation value, or any other specified type of value. Defining the purpose is a critical first step in the appraisal process, as it dictates the methods and approaches to be used by the appraiser.
Examples
- Estimation of Market Value: This is an appraisal to determine the most probable sale price of a property in an open and competitive market.
- Insurance Value: This seeks to estimate the replacement cost or the insurance recoverable amount for a property.
- Value in Use: This appraisal objective focuses on the value of a property to an individual user, rather than its potential sale value.
- Investment Value: The specified value based on a particular investor’s criteria, which can be different from the market value.
- Liquidation Value: The potential sale value under a forced or rapid sale scenario.
Frequently Asked Questions
Why is defining the purpose of an appraisal assignment important?
Defining the purpose is crucial as it sets the scope, approach, and methodology of the appraisal work. It ensures that the appraisal is formulated in a way that meets the intended objective, guiding the appraiser on which valuation techniques and considerations to use.
What is the difference between market value and insurance value?
Market value is the estimated amount for which a property should exchange on a specific date between a willing buyer and a willing seller in an arm’s length transaction. Insurance value relates to the replacement or reproduction cost of the property, often not considering land value.
Can a single property have different values under different appraisal purposes?
Yes, the same property can have different values depending on the purpose of the appraisal. For example, its market value might differ from its insurance value or its value in use.
How is the purpose of the appraisal communicated?
The purpose is typically outlined in the scope of work section of the appraisal report. It’s explicitly stated to ensure clarity for the client and any other stakeholders.
Are there standardized terms and definitions for different purposes of appraisals?
Yes, industry standards such as those set by the Appraisal Institute and the International Valuation Standards Council (IVSC) often define terms and purposes to help ensure consistency and clarity in their use.
Related Terms with Definitions
- Market Value: The price at which an asset would trade in a competitive auction setting.
- Insurance Value: The amount that insurance companies will pay upon damage or loss of the property.
- Value in Use: The net present value of cash flows generated by an asset in a specific use.
- Investment Value: The value of the property to a particular investor, which differs from universal market value.
- Liquidation Value: The likely price of an asset when sold in a slower moving, less competitive market, possibly under duress.
Online Resources
- Appraisal Institute
- International Valuation Standards Council (IVSC)
- The Appraisal Foundation
- American Society of Appraisers
References
- “Real Estate Appraisal: From Value to Worth” – David Mackmin, Gary Sams
- “The Appraisal of Real Estate (14th Edition)” – Appraisal Institute
- “Real Property Valuation Methods” – Gerardus Blokdyk
- “Fundamentals of Real Estate Appraisal” – William L. Ventolo Jr., Martha R. Williams
Suggested Books for Further Reading
- “The Appraisal of Real Estate, 14th Edition” by Appraisal Institute – A comprehensive guide used as a core text for those pursuing a career in real estate appraisal.
- “The Valuation of Real Estate” by William N. Kinnard, Jr. – This book provides a more in-depth exploration of various valuation methods and their applications.
- “Valuing a Business, 5th Edition: The Analysis and Appraisal of Closely Held Companies” by Shannon P. Pratt – Although more focused on business valuation, it offers insights into the principles of valuation that are transferable to real estate.
- “The Essentials of Real Estate Finance” by David Sirota – Discusses financing principles tied to property appraisal and valuation from a financial perspective.
Real Estate Basics: Purpose of (Appraisal) Assignment Fundamentals Quiz
### What does the "Purpose of (Appraisal) Assignment" define in an appraisal?
- [x] The stated objective or goal of the appraisal
- [ ] The methodologies used for appraisal
- [ ] The timeline of the appraisal process
- [ ] The personnel involved in the appraisal
> **Explanation:** The purpose of an appraisal assignment defines the stated objective or goal of the appraisal, guiding the process.
### What can be an objective of an appraisal assignment?
- [ ] Determining the owner's financial situation
- [ ] Only understanding the history of the property
- [x] Estimating the market value of the property
- [ ] Finding a potential buyer immediately
> **Explanation:** These objectives can include estimating market value, insurance value, or value in use, among others.
### How does "insurance value" differ from "market value"?
- [ ] Insurance value includes market indicative prices
- [ ] Market value excludes replacement costs
- [x] Insurance value relates to replacement costs; market value relates to sale price.
- [ ] They are fundamentally the same.
> **Explanation:** Insurance value relates to replacement costs, whereas market value is the price the property would fetch in a competitive market.
### For what purpose would an appraiser estimate "value in use"?
- [ ] To determine refurbishment needs
- [x] To value its worth to a specific user, not for sale
- [ ] To analyze location convenience
- [ ] To appraise exterior aesthetics
> **Explanation:** Value in use focuses on the value of a property to an individual user, reflecting its utility rather than potential sale price.
### What term describes the value when property is sold quickly, possibly under duress?
- [ ] Insurance Value
- [ ] Value in Use
- [ ] Market Value
- [x] Liquidation Value
> **Explanation:** Liquidation value refers to the probable price of an asset sold in a shorter time, often under pressure, reflecting rapid sale conditions.
### Why is it important to state an appraisal's purpose in the report?
- [x] It provides clarity and directions for appraiser and client
- [ ] It avoids legal repercussions
- [ ] It helps in property renovation
- [ ] It ensures broker uses correct marketing strategy
> **Explanation:** Stating the purpose provides clarity and directions for both the appraiser and the client, dictating the approach and techniques used.
### What variable might affect the value determined by "investment value"?
- [ ] Market trends
- [x] Specific investor criteria
- [ ] Universal appraisal standards
- [ ] Local weather patterns
> **Explanation:** Investment values can vary based on a particular investor's criteria, which can be different from the property's typical market value.
### Which resource provides standardized definitions and practical guidance for appraisals?
- [ ] National Weather Service
- [x] International Valuation Standards Council (IVSC)
- [ ] U.S. Geological Survey
- [ ] Environmental Protection Agency
> **Explanation:** The International Valuation Standards Council (IVSC) offers standardized definitions and guidance for appraisals internationally.
### What document usually contains the stated purpose of an appraisal assignment?
- [x] The scope of work section in the report
- [ ] The deed of the property
- [ ] The property's lease agreement
- [ ] The real estate certificate
> **Explanation:** The scope of work section in an appraisal report usually details the stated purpose of the appraisal assignment.
### Besides appraisers, who benefits from clearly defining the appraisal's purpose?
- [ ] The local government exclusively
- [x] Clients and stakeholders involved in property transactions
- [ ] Real estate advertising agencies
- [ ] Contractors and construction workers only
> **Explanation:** Besides appraisers, clients and stakeholders involved in property transactions benefit from a clearly defined appraisal purpose, ensuring all parties understand the valuation objectives.
