and the community, if mortgages were made only on the immediate salable or the liquidation value of real estate. However, an appraisal must necessarily be at a figure at which, in ordinary times, with a reasonable period in which to negotiate a sale, a willing buyer could be found. CHAPTER VI THE APPRAISAL OF CITY PROPERTY By JAMES A. WEBB,1 Cleveland, Ohio The procedure to be followed in making an appraisal is to appraise: (1) the land, (2) the improvements, and (3) the total value. A building adds value to land in the same proportion in which the building represents the best use to which the land may be put. From the viewpoint of the appraiser, the improvements never add more to land value than their full present cost of replacement, less depreciation and obsolescence. The cost of replacement must include proper allowances for interest and carrying charges, contractor's profit, compensation for the owner's time in originating the project and bringing it to completion, reasonable financing charges, and the usual estimates for labor and materials. Many buildings do not add as much value to the land as their full cost of replacement, less depreciation and obsolescence, because they may be special-purpose buildings, they may not show sufficient net earnings on the investment, the character of surrounding property may show that the building in question is entirely unsuited to its location, or for other similar reasons, all of which are usually considered under the general term of "obsolescence." It is true that all classes of city property are sometimes sold for a sum higher than the value of land plus cost of replacement, because of some special need, such as expansion, or because of a purchaser's desire to secure a particularly 1 James A. Webb, Cleveland, Ohio, member of the real estate firm of J. W. S. Webb and Sons, of that city. He is a member of the Appraisal Committee of the Cleveland Real Estate Board. In 1921, he was Chairman of the Cleveland Appraisal Committee. In 1922, he was Chairman of the Appraisal Committee of the National Association of Real Estate Boards. In 1923, he was First Vice-President and Trustee of the Cleveland Real Estate Board. satisfactory and pleasing residence, or because the purchaser is willing to pay a premium for an investment, expecting future appreciation to justify such action. City property often sells on its potential earnings and future value rather than on its present earnings. Otherwise, few downtown valuations in large cities could be justified. Reasons for Appraisals and Their Purposes. 1. For the purpose of determining sale price. Frequently individuals, corporations, public officials, trustees, and administrators and executors of estates require advice as to the fair sale price or market value of property which they desire to sell. 2. For the purpose of determining valuation for a basis in making real estate loans. This type of appraisal requires a conservative valuation, so that the security of the loan may not be impaired by depreciation of the property during the life of the loan. 3. For the purpose of taxation, including assessing, inheritance tax, income tax, and other returns to the Internal Revenue Department. 4. For the purpose of determining purchase price. Frequently those persons desiring or finding it necessary to purchase real estate request an appraisal to guide them as to a fair price to pay. 5. For the purpose of accounting, fixing rentals, insurance, calculating depreciation and appreciation, audits, bank statements, determining the value of various interests in leasehold estates, condemnation, and expert testimony. 6. School boards, county commissioners, municipal authorities, public utilities, public officials, wishing to eliminate criticism of favoritism or private gain in the purchase or sale of property, and banks, attorneys, administrators, and others acting in trust capacity, often require appraisals of real estate. The appraiser must fully understand the purpose for which the valuation is required. To the man in the street it may appear that the valuation of a certain property should be the same under all circumstances, and that if the appraiser gives different figures for different purposes, this amounts to little short of juggling. It only needs stating, however, to be at once realized that the appraiser is in a very different position if he is advising as to what sum can safely be lent upon a mortgage in a property, from that when he is advising the owner as to what amount he may expect to get for the property if sold in the open market. In the first case, the appraiser has to bear in mind that foreclosure and subsequent sale may ensue at a very inopportune moment, probably with the accompaniment of accrued interest. In the latter case, however, the owner possibly may take his time and wait until he gets a good offer from a person who can make full use of the property. Take the example where property is being acquired by a body having the right of eminent domain, and empowered to take property by condemnation. In such a case the appraiser is usually required to act as an expert witness in the condemnation proceedings. Here the seller is an unwilling seller, and it is quite reasonable that he should not only be insured against all possible loss, but that he should also obtain some compensation for any inconvenience to which he may be put, and for any prospective rise in value. Thus the appraiser is quite justified in taking a somewhat liberal view of the value of the property in these circumstances.1 Major Factors of Value. 1. Location, which includes access. This factor of valuation is often measured by traffic counts, which, in turn, have to be interpreted in purchasing power as well as volume of traffic. A property must have access by street, right of way, easement, alley, or other means, to have value. 2. Utility, which includes capacity to produce. This important factor involves judgment as to the best use to which a given property may be put. Building restrictions and zoning ordinances affect utility. 3. Size. The width and depth often determine the possibilities and character of use. 4. Shape. Parcels of land of irregular shape cannot usually be developed so advantageously as rectangular lots. Minor Factors of Value. 1. Transportation. The importance of this factor is shown in the gradual decrease of values, as the distance from transportation increases. 1 From "Valuation of Real Property," by C. A. Webb, Crosby, Lockwood & Son, publishers, London, Eng. 2. Thoroughfare conditions. The width of streets, condition of pavement, and traffic congestion, all affect the value of those properties fronting any given street. 3. Action of the sun. The south and west sides of business streets are usually preferred by merchants, because the pedestrian traffic seeks the shady side of the street in warm weather, and merchandise displayed in the windows is not damaged by the sun. 4. Character of business done. The larger cities develop retail, financial, wholesale, and commission-house districts, and women's and men's shopping sections, for the cheap, medium, and high-grade trade. 5. Social atmosphere in residential districts. 6. Plottage, which is the added value of several parcels of land when brought under one ownership making possible a higher utility than could be found for the parcels considered separately. 7. Proportion of length to front. This is important in determining the best uses to which a given property may be put. A lot must be of usable width and depth to have value. 8. Absorption of value by proximity to centers. A narrow piece of property, close to the intersection of important streets, or located between two large properties, developed to their highest utility, may absorb value in excess of its normal worth. 9. Character of the soil. A factor in residential and some classes of manufacturing properties. 10. Conspicuousness. Largely a factor of publicity value, and becomes of great importance to businesses depending upon advertising. 11. Grades. properties. These vary from level land to hillside 12. Depreciation, which is physical deterioration of the improvements. 13. Obsolescence, which is the change in types of construction, style of architecture and interior arrangements for various purposes, and changes in the uses of neighboring property. 14. Appreciation. Rising costs of labor and material since 1913 have caused appreciation in nearly all cases to be more |