Property Appraisal in the United Kingdom

Around the globe, where private property exists, there typically are real estate professionals that are in demand to perform the various duties required for every process in a real estate transaction. More specifically, real estate appraisers are in need to help in the valuation of those properties, so that the transactions are traded at a “trustworthy” price. The United Kingdom is among those countries where its citizens are allowed to buy and sell real estate, and therefore valuation methods are in place to assist in many real estate transactions. In the United Kingdom, there are five methods in determining the value of a piece of property.

In comparing the United States to the United Kingdom, private property rights differ slightly. In the United States, people have a right to own their own property in a fee simple absolute ownership, which is the highest form of ownership that can be attained besides “allodial” ownership which is "land which is absolute property of the owner, real estate held in absolute independence, without being subject to any rent, service, or acknowledgment to a superior.” In the United Kingdom, however, the land is not owned by any individual, rather it is owned by the “Crown.” This does not mean the Queen herself owns the land, but means the royal hierarchy passed down through generations are the owners of the land. This “Crown” ownership does not allow all individuals to own property as a freehold estate, but does allow people to purchase the trust in the property along with certain rights of usage and length.

Even with the difference in ownership types between the United States and the United Kingdom, there is still a need to determine what a home or parcel-trust might sell for in a market; thus, there still exists a real estate market in the United Kingdom. The five methods in use for property valuation in the United Kingdom are: 1.) comparable method, 2.) investment/income method, 3.) accounts/profits method, 4.) development/residual method, 5.) contractor's/cost method. Each of these methods share steps or processes that appraisers use in the United States.

In the United Kingdom, the “comparable method” is similar to the sales comparison approach in the United States, which uses previous sales data. The “investment/income method” is a way of determining cash flow for rental properties, but is dissimilar to the income approach because it uses a type of comparison method. The “accounts/profits method” is used for certain properties such as hotels and restaurants, by taking a three year average of income statements arriving at an appropriate yield. The “development/residual method” is used for development, and also for vacant land. And finally, the “contractor's/cost method” is similar to the cost approach, and is used for construction costs, insurance loss, etc.

Even though there are differences in the trading of property between the United States and the United Kingdom, there remains a need for appraisers and appraisal methods for both countries. The need of appraisers is proof that there is indeed a market for real estate . Each country has slight variations in their methods, but in the end both have a structured process for the valuation of property, regardless of how it is owned.

Real Estate Appraisal

http://en.wikipedia.org/wiki/Real_estate_appraisal

Queen Elizabeth

http://www.funtrivia.com/askft/Question86458.html

Webster's Dictionary

Mineral Rights Appraisal

Mineral rights are the legal rights to produce or explore the resources below the surface of land. Resources below the land include tungsten, zinc, diamonds, coal, oil, natural gas, geothermal, gold, silver, uranium, copper, nickel, palladium, aluminum, iron, lead, molybdenum, and platinum (Appraisal Institute). The ownership of mineral sources was at first granted to the individuals or organizations that owned the surface. Though, once profitable mineral production became possible the ways in which mineral rights are recognized became much more complex. The property titleholders had both "surface rights" and "mineral rights" (Appraisal Institute). This complete private ownership is known as a "fee simple estate". “Surface rights” and “mineral rights” are separate; many mineral right owners retained their mineral rights long after their surface rights were sold (Ellis, T.R.). Once retained, mineral rights can be owned forever. Today, mineral rights are able to be leased, sold, bequeathed and gifted out to one or more individuals and/or businesses, while the original land owner still holds the surface rights of the property (Appraisal Institute). Since a fee simple estate owner is able to sell his or her mineral rights at any time, he or she will most likely want to get the most accurate and highest price for the mineral interests. In order to acquire an accurate market value, an appraiser with mineral rights valuation skills will likely be hired. My blog post will discuss the basic concepts, approaches, methods, and procedures an appraiser would use to determine a value for a property with mineral interests.


Mineral interest properties are appraised with the same basic appraisal process described in USPAP and appraisal manuals, except for the addition of specialized sections that document details of specific items of regional and local geology, mineral deposits, mineral product market details, mining costs and methods, and geological controls (Paschall, Robert). The planning step of the appraisal process tends to be more important in the appraisal of mineral properties than conventional real estate appraisals because of the variety and magnitude of material that is essential for credible mineral appraisals (Ellis, T.R.). An exact definition of the value being pursued is very important, for the forms of ownership of a mineral interest property is typically very complex (Paschall, Robert). Depending on the stage of exploration and development of the mineral interest property, the cost approach, sales comparison approach, and income approach can all be used to determine a value, although the methods typically will not produce the similar value estimations.
The cost approach concentrates on the money spent on the property, plus a discount or premium depending on the situation. The value of a mineral interest property is reliant on the mineral products it is capable of generating and by what the marketplace will pay for the mineral products in question (Ellis, T.R.). The sales price of the mineral product is the basis for recovering the exploration and development costs, operating costs of removing minerals from earth, and any further processing that may be needed to get the mineral product to the customer. The value of the mineral deposits on property in question should materially exceed the costs of discovery and development of the mineral, if not than the mineral interest will not be profitable, which could cause appraisal value to be lower (Ellis, T.R.). Using the cost approach, appraisers can determine the current value of past expenditures on mineral interest properties, although the cost approach is rarely applicable due to the fact that presently most mineral interest properties are not in the exploration stage (Paschall, Robert).
The sales comparison approach tries to calculate what a likely buyer is willing to pay for the property, based on the investigation of other transactions in the marketplace. Mineral interest properties are typically in a direct search market, which is a market where individual buyers and sellers must seek each other out directly. Mineral property markets often include irregular participation, relatively high-priced, and nonstandard real properties (Paschall, Robert). Because of the lack of total transactions and the specialized property needs of purchasers, such as type of mineral, mineral resource size, and type of mining knowledge and skill required, it does not pay most brokers to seek profits by specializing in such a geologically and mineral interest diverse market. Most transactions in mineral property markets are actually negotiated mining leases with a type of owner financing or mineral production royalties (Paschall, Robert). Many sales of mineral deposits used for comparison will usually require at least as much research and on-site examination as the subject mineral property to accurately identify, measure, and account for any difference that may affect value (Paschall, Robert). This can make using the sales comparison approach even more difficult since most mineral property buyers and sellers will not willingly share the detailed property data, nor allow an appraiser on their property to examine the site to make reliable adjustments.
The income approach focuses on the cash flow generated by the property, such as the income being produced from mining and producing the minerals. The first step in the income approach to appraise a mineral property is to determine the general supply and demand situation of the market for the mineral goods to be manufactured. The next step would be to estimate the quality and quantity of mineral reserves available to be mined, treated, and sold. After these steps than a reasonable expected gross income estimate can be calculated (California State Board of Equalization). A primary economic factor used to appraise oil, gas, and hard minerals is the discount rate used to convert the future value of an income stream to a present day value (California State Board of Equalization). The discount factor typically used to appraise properties includes the base discount rate, risk adjustments, and the ad valorem tax rate. By using the income approach formula such as: FI = R X P, where FI= Future Income (est. reserves), R=Rate, and P=Price, mineral interest value can be determined. In most mineral appraisals there are two separate calculations, one for working interest, and one for non-working interests (California State Board of Equalization). The calculations are done for each year into the future, until the appraisal reaches its economic limit and the appraisal stops (California State Board of Equalization). The income approach is primarily the method of appraisal used in the mineral industry to estimate value due to the fact that mining operators only work in mining in anticipation of getting paid.
Electing between the cost approach, sales comparison approach, or income approach depends on what stage of exploration or development the mineral interest property has reached. The cost approach is best suited for exploration properties, because future cash flow is unknown. The sales comparison approach is applicable at any stage as long as there are accurate, arms-length transactions. The income approach is useful once the property has reached early development or late-stage exploration. Mineral interest appraisals are one of the most difficult appraisals there is due to their complexity and information needed to determine an accurate value. Selecting a knowledgeable appraiser who spends more than 50% of their time on mineral right appraisals will be the best individual in determining a value for a mineral interest property (Mineral Business Appraisal).

Sources:

Appraisal Institute. The Appraisal of Real Estate. 10th Edition, Appraisal Institute, 1992.

California State Board of Equalization, Assessors Handbook AH560, Valuation of Mines and Quarries, 1973.

Ellis, T.R., 2001a, U.S. and International Valuation Standards- The Future: Preprint # 01-161, SME Annual Meeting, Denver, Colorado, February 26-28, 2001, 10 pp.

Mineral Business Appraisal. USPAP in Mineral Appraisal. http://www.minval.com/firreauspap_mineral.html, 1999.

Paschall, Robert, H., Appraisal of Construction Rocks, American Institute of Professional Geologists, 1993.

Pictures:
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Dairy Farms

Dairy farms are one of the more difficult special use properties to perform a valuation for. This is because of the limited market dairies have and the many different aspects you need to consider when appraising dairies. “Appraisers generally utilize three common approaches in estimating the market value of real property. These approaches are known as the Sales Comparison Approach, Cost Approach, and Income Approach” (Appraisal Report).

In valuing dairy properties the Sales Comparison Approach is most often used. This is typically due to the availability of recent market sales in the subject area. The Sales Comparison Approach is considered to best demonstrate the current market value of dairy properties (Appraisal Report). In the Sales Comparison Approach there are elements of comparison for each type of property. In dairy properties these elements of comparison are often areas of concern. Each subject property must be analyzed to identify the dairy’s capacity, i.e. animal units, and the compliance of the dairy with all regulations such as zoning, state water quality, air quality, special use or conditional use permits, and Williamson Act Status. Examples of other elements of comparison are physical attributes of the facility, which include; milk barn capacity, freestall barns/corral capacity, feed storage facilities and support structures(San Joaquin Valley Ag Lenders Society). Once these elements of comparison have been established, and comparable properties selected, this approach will help to indicate a value for the subject property.

The Cost Approach helps provide market value of the real property, estimates the replacement cost to build the facility, and accounts for depreciation due to the age and the physical deterioration of the improvements of the dairy. “This approach for estimating the market value of a new or relatively new dairy can be used when the land value is well supported and the improvements are new and suffer only minor depreciation” (Appraisal Report). In California it is becoming very difficult to obtain a permit to build a new dairy facility because of the environmental regulations. Because of this the Cost Approach is not the best indicator in valuing a dairy.

The Income Approach is generally not used when appraising dairy properties. “Market prices do not correlate with the income earning capabilities of the land and as such the income approach is not considered applicable to dairy properties in the valuation process” (Appraisal Report).

Appraisers must be specifically educated in the appraisal of dairies because it is a highly specialized field. “The dairy industry is facing continued challenges in its operations, expansion and relocation activities including the ability to construct new dairies. The dairy industry brings many jobs to an area and allows associated businesses to grow and flourish. This creates further conflict between local communities, governments and the environmentalists” (Dairy Farm Operating Trends). Therefore, it is important that an appraiser is highly informed of the different aspects that need to be considered when appraising dairies.

Sources:

An Appraisal Report of the”: Vander Weerd Property San Bernardino County, CA.

31.50 Acres of Irrigated Cropland w/ Dairy Facility Improvements. Date of Appraisal: January 15, 2009. By: The Ranch Co., Inc.

Frazer Frost, LLP. (2009). Dairy Farm Operating Trends: December 31, 2009.

San Joaquin Valley Ag Lenders Society. (2001). 2001 Dairy Short Course: AgTAC

Facility-Tulare, CA