So ... what do you do?

I'm an appraiser. I get paid to form opinions about property values. Right about at that point is where people start to get confused about what I do.

To most people, the mention of property, or real estate, brings up an association with lands and houses. That is true to a degree, but in all honesty, my job is not to put a value on either land or houses. (To some extent, I am a unique valuator, since I have a background in real estate sales, and part of the requirements for a sales license in Ohio includes a course in Real Estate. That may be a no-brainer for most people, but the typical appraiser has NO background in real estate. Hopefully, with the new licensing requirements put forward by the Appraisal Qualifications Board, which go into effect 1-1-2008, that will change.)

Before we can even begin to discuss the value of real estate, we have to ask a few vital questions. Question number 1 is, "Who owns the real estate?". That may seem like a silly question at first glance, because the ordinary idea would be that the value of the property does not depend on who owns it. In actuality, it is a critical concept.

We must differential between realty, real property, and real estate. Realty is comprised of lands and any improvements that are attached ("running with the land") upon them. Real property is the right to own realty, and real estate is the combination of realty and real property. The concept of ownership is basic to forming an opinion of the value of real estate.

In a pure socialist economy, such as existed in the USSR, Mao's China, and certain other "communist" countries, the government owns all lands, all improvements on the land, and, in short, all the real estate. If a house were built for 20,000,000 rubles on a hectare of land in the center of Moscow in 1965, what would it be worth in the market? The answer is, nothing. Because the government owned the land, and the building, and dictated its use, and the right to use the realty could not be bought or sold, the real estate had no market value, regardless where it was located or how much the improvements cost. (In actuality, because the commissars could bestow favors on their stooges, its value probably depended on how much one could do for whom, even though there was no open market. Socialism is more degrading to human dignity than capitalism in most instances.)

Ah, you say, that has nothing to do with real estate in a market economy. Think again -- who owns the land under your house? You may say that you do, but by what right do you own it? If you die without heirs, who will own it? It will escheat to the government, which ultimately granted you the right to "own" it in the first place. (This can be thought of in some ways as a theological argument : "the Earth is the LORD's", ultimately, and He gives the land to "nations" by various means, and sometimes takes it away by similar means.)

The right to real estate is called the "fee". That is an Old English word, at the basis of the concept of "fealty". The king owned all the land in the kingdom. By swearing fealty, the people obtained the fee. The king's real estate was said to be ownership in "fee simple absolute"; in other words, if he wanted to, he could take the fee back, or restrict it in some way. The fee consists of the rights that go with fealty, and specifically in this matter, the rights to use of the land.

In the United States, nobody owns real estate in fee simple absolute. The states own the land, and can deed it to individuals, but only in subordination to the US Government, which granted them statehood and with it a place to have a state. The government(s) -- at all levels -- retain four rights : taxation, police power, eminent domain, and escheat. All the rest of the rights in a real estate compose what is called a fee simple estate, and may be sold to the people.

The fee simple estate is the maximum bundle of rights to the land which is appraised by a real estate appraiser. It can be reduced by selling or giving away some of the rights to other people. Two houses, built side-by-side on the same size lots by the same builder from the same blueprints, can have wildly different market values. If the owner of House A leases it to Tenant A for five years, and the owner of House B does not do anything similar, on any given day during the time of the lease the market value of the fee simple interest held by the owner of House B will be higher than the market value of the fee simple interest held by the owner of House A, since the owner of House A has sold a leasehold estate to Tenant A. Buyer C, who is looking for a house to live in, will not pay as much for House A as he will for House B, because he would have to wait until the end of the lease to move in. (Which is part of the reason banks charge different interest rates for loans on owner-occupied homes than on homes which are investor-owned and will be tenant-occupied! If the lease was in place before the purchase and mortgage, and the bank has to foreclose, it has to honor the lease.)

If House A and House B are out in the country, and the owner of House B sells the water rights under his land to Investor D, and the owner of House A does not, then the value of the fee simple interest in House B has been reduced by whatever it will cost to get water to the occupants of House B.

An appraisal must state (1) what property rights -- the real estate -- are being appraised, and (2) what type of value opinion is being developed. There are many types of value, such as market value, investment value, salvage value, and even sentimental value (ask an attorney sometime about the value of "pain and suffering"). The appraisal report must contain the definition of the kind of value being sought. In almost every case, where a fee simple estate is the subject of the valuation, somebody at some time has sold or given away part of the rights; perhaps an easement, perhaps mineral rights, or perhaps even an agreement to deed restrictions.

The appraiser of the market value of real estate must determine if the absence of those rights makes any difference to the typical buyer. His job is to form an opinion regarding what the typical buyer and the typical seller will agree to as the price of the rights that are left. A cardboard shack beside the railroad tracks could be more valuable than a mansion on a hilltop, if the shack comes with more rights and privileges.