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Valuation

When financing a real estate purchase or refinancing a farm, residence, or rural property, the valuation is an important part of the loan process. Many people have questions about how the valuation is completed. This is the first of two articles that will explain what a valuation is and the appraisal process.

First, let’s define market value. Market value is the most probable price which 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 neither is under duress. 

This definition of market value assumes a few key components.  First, buyers and sellers are typically motivated.  Second, both parties are well informed and acting in their own best interest.  And finally, the conditions of the sale are assumed to be typical including normal market exposure and normal payment terms. 

Note the word normal in the market value definition. Landowners may sell property to tenant farmers at a discount or adjoining landowners may pay a premium to purchase a property. These instances may not be good representations of market value.

FCS Financial utilizes two forms of valuation for the loan process, Evaluations and Appraisals.

Evaluation is a study of the nature, quality, or utility of, interest in, or aspects of, an asset. An evaluation may take the form of a valuation or an appraisal.*

Appraisal is a written statement independently and impartially prepared by a qualified appraiser setting forth an opinion as to the market value of an adequately described property as of a specific date(s), supported by the presentation and analysis of relevant market information.*

An Evaluator develops an Evaluation, and an Appraiser develops an Appraisal. Both an evaluation and an appraisal develop an opinion of value; however, an evaluation may be less complex than an appraisal. Evaluations commonly use one approach to value while appraisals may consider one, two, or all three approaches to value. The approaches utilized to develop an opinion of value will be discussed in more detail in the next article.

The basic steps for any type of valuation are to obtain relevant data, analyze and/or adjust the data, make determinations from the data, and deliver those determinations.

For a real estate appraisal, the appraiser must identify the problem, determine the scope of work necessary to solve the problem, collect data and subject property information, analyze the data and information, develop the approach(es) to value, and reconcile the value indication(s) to determine a final opinion of value.

*59 FR 43730-43731, Sept. 12, 1994

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