Main Mistakes of Estimating Company When Evaluating Real Estate

Main Mistakes of Estimating Company When Evaluating Real Estate Objects Revealed During the Examination of Appraisal Reports

Types of errors

1. Lack of a source of information on the data involved in the assessment.

2. Lack of calculation justification for the data involved in the assessment.

3. Violation of causal relationships (one does not follow the other).

4. Contradictions in the report.

5. Wrong methodology.

6. Arithmetic errors.

7. Violation of formal requirements.

Errors by section

Formulation of the problem

1. The type of value does not correspond to the purposes and objectives of the valuation (for example, using the investment value to determine the initial price at the auction)

2. There is no justification for the choice of the type of value (for example, liquidation or disposal value).

Description of the object of assessment

1. It is not specified what type of land title is being assessed.

2. The right of economic management was erroneously recorded as the assessed right to real estate.

3. The main technical characteristics of the object of assessment are not indicated: total area, construction volume, construction readiness, etc.

4. There is no source of information on the basis of which the main quantitative characteristics of the object of assessment are taken.

5. There is no justification for accepting the land plot as the estimating company area – the building area.

6. There is no description of the location of the subject of assessment.

7. There is no description of the technical condition of structural elements of the object of assessment.

8. Encumbrances on the subject of assessment are not described.

Best and Most Effective Use Analysis (ANNIE)

1. There is no best and most effective use analysis section

2. For the object of appraisal with a high degree of physical deterioration, the analysis of the option of demolishing the old object and building a new one has not been carried out.

3. There is no justification for the quantitative characteristics of the object taken into account after reconstruction (or new construction).

4. The ANNEI results were not used in the calculation in separate assessment approaches; the calculation was carried out on the basis of current use.

5. An erroneous justification is given for the impossibility of alternative use of the object of assessment (for example, change of functionality, reconstruction of the object, demolition of the object and new construction, etc.).

Cost approach

1. The value of the land plot is not determined.

2. Methodologically, the market value of the land plot is incorrectly calculated (for example, as capitalized rent or as the normative price of land).

3. A lowering amendment for the urgency of the lease agreement for a land plot for housing construction was mistakenly applied.

4. To calculate the full replacement cost, UPVS collections are used for modern construction facilities.

5. The description of the technical condition of the structural elements and the photographic data of the object of assessment do not correspond to the accepted quantitative values ​​of wear.

6. There is no calculation justification for the accepted value of functional (or external) wear.

7. Functional (or external) wear was calculated incorrectly methodologically.

8. The physical wear and tear of individual structural elements were mistakenly taken into account twice.

9. The construction readiness of the object was calculated incorrectly.

estimating project

Income approach

1. There are no sources of information on analog objects when calculating the market rental rate.

2. There is no description of analog objects.

3. The given objects cannot be analogous objects to the object of appraisal due to the involvement of these objects and the object of appraisal in different market segments.

4. The calculation justification for certain significant adjustments is not provided.

5. The rental rates for the given analogous objects do not correspond to the ranges given in the market analysis of the appraised object.

6. The cash flow does not include a capital reversal.

7. The calculation of the amount of the initial investment is not provided.

8. The revenue losses (or operating costs) are not within the ranges given in the subject market analysis.

9. With a significant amount of initial investment, the direct capitalization method was mistakenly chosen for the calculation.

10. The capitalization ratio for a estimating company object was incorrectly calculated according to the methodology for calculating the capitalization ratio for a business.

11. In the direct capitalization method, the capitalization ratio is assumed to be equal to the discount rate.

Comparative approach

1. There are no sources of information on analogous objects.

2. There is no description of analog objects.

3. The given objects cannot be analogous objects to the object of appraisal due to the involvement of these objects and the object of estimating company in different market segments.

4. The sales (offers) prices for the given analogous objects do not correspond to the ranges given in the market analysis of the object of assessment.

5. The calculation justification for certain significant adjustments is not provided.

6. The weighted average for significantly different peers is mistakenly used as a benchmark result.

Harmonization of results

1. The results obtained using individual assessment approaches differ more than two times from each other, which indicates errors in the calculations.

2. The results obtained by individual methods as part of the approaches were mistakenly included in the final agreement instead of weighing in the composition of the approaches.

Other remarks

1. Methodologically, the cost of encumbrance in the form of a lease agreement was calculated erroneously.

2. There is no market analysis of the subject of assessment.

3. Standard values ​​are taken as the initial market data (rental rates, sales prices).

4. It is not specified whether VAT is included or not included in the initial values ​​used in the calculations for the approaches.

Formal signs

1. There is no book value of the appraised item.

2. The date of the report is missing.

3. There is no valuation date (valuation date).

4. The concepts used do not correspond to the current legislation.

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