WIf we excluded these sections

from appraisal reports, would itaffect the use and value conclusionsin the report? If readers ask “Sowhat?” when they read these sec-tions, have we attained our objec-tive? Just what is the objective of theregional/city and neighborhood sec-tions of appraisal reports?

WHAT CREATES VALUE?

An appraisal report is a technicaldocument that answers certain, spe-cific questions. These questions typi-cally include: What is the highest andbest use of the property? What is itsvalue? If all the information con-tained in the report should be direct-ed toward answering specific ques-tions, what do the regional/city andneighborhood sections contribute?

Highest and best use is the ful-crum of the appraisal process since aproperty cannot be valued until ause is concluded. In highest andbest use analysis, the appraiserbrings together the subject proper-ty’s productive physical, legal, andlocational attributes (intrinsic analy-sis) and matches these with propertyuses that create value within themarket area (extrinsic analysis).

Because highest and best use is

$ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $

Market Analysis in Appraisal Reports:Vitalizing Key Data Sections

B Y C H A R L E S W . R E X I I I , M A I ,

A N D S U S A N M O T Y C K A R E X

Why are regional/city and neighborhood data sections included in appraisal reports?Typically, these sections provide descriptive data and general information that might helpa reader unfamiliar with the area to visualize it. In some cases, these sections contain his-torical, general population, employment, and income information, as well as descriptionsof property types in the area and an assessment of the health of its economy. Someappraisers “boiler plate” these sections so they can devote more time and effort to the val-uation sections of the appraisal report.

Valuation Insights & Perspectives8

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generally the use that results in thehighest property value, an under-standing of what creates value isessential in reportingthe results of theappraisal process. Foreach particular valua-tion scenario, valuesand prices cannot bedetermined withoutunderstanding relevantfactors; that is, whatbasic demand compo-nent creates the needfor a use? Growth in thenumber of householdscreates a demand forresidential properties,and household incomespent on retail sales cre-ates a need for retailcommercial space.Similarly, an increase inthe number of workersneeding offices creates ademand for office space. The scarci-ty of available housing, retail com-mercial space, and office space rela-tive to the demand determines theprice for each use. Therefore, under-standing demand is critical to cur-rent and future value.

Appraisers demonstrate that pric-ing is set by the market, based onthe demand and available supply, byincluding relevant statistics in theirreports. For example, in the valua-tion of a property 50 miles outsideOrlando with a highest and best useas a citrus grove, statistics on thenumber of hotel rooms in Orlandoshould not be included in theregional/city data section. Such astatistic may be very meaningful to arecreational/tourist property inOrlando, but there is probably noconnection between hotel roomsand the price of citrus grove land.

The primary purpose of theregional/city data and neighborhoodsections of an appraisal report is todiscuss the demand for and supply

of uses that may be appropriate forthe subject property. Without such adiscussion, the estimate of value is

based on theimplicit assump-tion that the sup-ply and demandfor a particularuse are in balanceor have notchanged since thecomparable salesused in the reportwere transacted.Only by analyzingthe factors thatcreate a need for aparticular use andthe existing sup-ply of competitiveproperties avail-able for that use

can one explicitly measure currentand future demand. Such an analysisanswers the often-asked question,“Will this property sell for a pricesimilar to competitive properties?”

So, if the supply of and demandfor uses appropriate for the subjectproperty are discussed in the region-al/city and neighborhood sections,the next questions is, “Must supplyand demand for all uses that occurin the region, city, and neighborhoodbe covered?” Such a propositionwould be as inappropriate as a dis-cussion on the Oklahoma Land Rushin an appraisal report on a strip

shopping center in Tulsa. Supply anddemand analysis should be limitedto those uses that are physically pos-sible, legally permissible, and reflectvalue in the market area.

HOW MUCH ANALYSIS ISNECESSARY?

The level of market (supply anddemand) analysis required dependson the extent of analysis required todetermine the financial feasibility ofeach physically possible and legallypermissible use of the subject prop-erty. The depth of analysis undertak-en should be adequate to estimatethe relative values for all uses thatare financially feasible. While thereare no absolute rules, several guide-lines can help the appraiser establishthe appropriate level of study.

• In market—or supply anddemand— analysis for valuationpurposes, do only what is neces-sary to answer the client’s ques-tions. For example, assume thatboth office and retail/commercialuses are physically possible andlegally permissible for a subjectproperty and that the user pricespaid for each use are fairly close.However, preliminary study showsthat the office market is greatlyoversupplied and an office usewould not be appropriate for manyyears. In this case, a cursory office

The scarcity ofavailable housing,retail commercialspace, and officespace relative to

the demand determines the

price for each use.Therefore,

understandingdemand is critical

to current andfuture value.

Fall 1996 9

continued on page 11

Valuation Insights & Perspectives10

use study is reasonable and appro-priate.

• A more in-depth supply anddemand analysis should be provid-ed for the use that is determined tobe the highest and best use of thesubject.

• In market analysis for valuationpurposes, it is necessary and appro-priate to express demand estimatesas a range. For example, in anappraisal of land suitable for devel-opment, a demand estimate of 55to 65 housing units of the subjecttype per year may be adequate forhighest and best use purposes. Theranges indicated in supply anddemand analysis and highest andbest use analysis should be broadenough to contain the actualanswer.

• If the value ranges of two or moreuses overlap, the studies of theseuses may need to be refined.

• The level of study also depends onthe type of property being valued.In leased fee valuation of a propertysubject to a long-term secure lease,little supply and demand analysiswill be needed. On the other hand,a proposed property, a distressedproperty, or a large complex proper-ty may require a lengthy, in-depthanalysis of current and future sup-ply and demand.

Thus, the appraiser should forgohistorical information about JeanBaptiste Point du Sable’s 1781 canoetrip up the Chicago River in anappraisal of a suburban medical cen-ter and not report the frequency ofsnowfall in Deland, Fla., in an

appraisal of an industrial property inCentral Florida. (These examples aretaken from actual appraisal reports.)Once extraneous information hasbeen deleted, the question is: Howshould the regional/city data andneighborhood sections be structured?

Replacing the information tradition-ally found in the regional/city andneighborhood sections with a discus-sion of vital market features rede-fines the appraisal process and thereporting of the valuation and bringsit in line with our primary objective.With the report more focused andcogent, the regional/city data andneighborhood sections will no longerbe skipped over by readers. Thesesections will impart an understand-ing of the market and provide sup-port for the highest and best useconclusion.

Charles W. “Sandy” Rex III, MAI,

and Susan Motycka Rex are part-

ners in RMI Midwest, Evanston, IL.

With over 20 years of experience in

the appraisal industry, Sandy Rex

specializes in land-use and environ-

mental issues, and has experience in

consulting, valuation analysis, and

instructing. He wrote the Appraisal

Institute’s Highest and Best Use

Applications seminar.

Susan Motycka Rex is responsible

for RMI Midwest’s report communi-

cation and editorial production. She

has held managerial and editorial

positions in trade, children’s, and

financial association publishing. She is

the developer of the Appraisal

Institute’s Advanced Writing Skills for

the Residential Appraiser seminar.

OUTLINE FOR STRUCTURING DATA

First, “regional/city data” may not be the most precise title for this sec-tion. Perhaps the nomenclature could be simplified by referring to thissection as “the market area.” The following outline might be used to struc-ture the regional/city and neighborhood data report sections.

I. Description and discussion of market area

A. Definitions and purpose of this section

B. Market area boundaries

C. Uses prevalent in the market area

D. Uses in the market area that are physically possible and legallypermissible for the subject site

E. Demand and supply discussion of each use considered financiallyfeasible in the highest and best use section

F. Conclusion

II. Neighborhood

A. Definitions and purpose of this section

B. Neighborhood boundaries

C. Uses in the neighborhood

D. Uses in the neighborhood that are physically possible and legallypermissible for the subject site

E. Demand and supply discussion of each use considered financiallyfeasible in the highest and best use section

F. Conclusion

Market Analysis cont. from p. 9