1. ©2011 Cengage Learning

2. California Real Estate Principles
Chapter 9
Real Estate Appraisal
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3. Chapter 9
Define appraisal and list the elements and forces that influence value.
Distinguish between utility value and market value
Define depreciation; outline the causes of depreciation; describe how to calculate depreciation
Discuss the 3 approaches to value; outline the steps in each approach
Define gross rent multiplier and cap rate
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4. What is the purpose of the appraisal?
Salvage value
Insurance agent
Realty company
Tax assessor
Bank
Assessed value
Market value
Insured value
Loan Value
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5. APPRAISAL Skill Experience Judgment Of the appraiser
An estimate or opinion of value as of a specific date.
The accuracy of an appraisal is determined by the
Skill
Experience
Judgment
Of the appraiser
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6. Licensing
A person who meets minimum statutory requirements may be licensed or certified as an appraiser by the California Office of Real Estate Appraisers (OREA) by satisfying education (courses & hours), experience (hours) and testing criteria.
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7. Appraisal License Requirements
Licenses: Education Experience
Trainee Appraiser
Licensed Appraiser 150 hours 2,000 hours
Certified Residential 200 hours 2,500 hours
Appraiser
Certified General hours 3,000 hours
Appraiser (1,500 must be
non-residential
Must have 15 hours of USPAP property)
to obtain license & 7 hours to renew.
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8. Value (Utility Value = Worth to an Owner
Value in Use
(Utility Value = Worth to an Owner
Market Value = Value in Exchange
“Highest price in terms of money for which a
Property would sell in an open market,
The seller not being obligated to sell,
The buyer not being obligated to buy,
Allowing for a reasonable length of time
to effect the sale”
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9. Value affected by Value Demand – desire to own Utility - usefulness
4 Elements: D U S T
Demand – desire to own
Utility - usefulness
Scarcity – lack of abundance
Transferability – can transfer ownership
Subjective Value
Emotional Value
Historic Cost
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10. P E P S Forces that change Value
Political Forces
Government: Zoning, Fiscal Policy, Taxes
People: Environmental Protection, Education
Economic Forces
Consumer: Income, Employment, Credit, Interest Rates
Physical Forces
Natural: Land, Climate, Resources
Man-Made: Buildings, Roads, Utilities
Social Forces
Area: Neighborhood, Living Standards
People: Family Size, Lifestyle, Attitudes
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11. PRINCIPLES OF VALUATION
Highest and Best Use
Change
Balance
Supply and Demand
Contribution
Substitution
Progression – Regression
Competition
Conformity
Anticipation
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12. DEPRECIATION Physical Deterioration Functional Obsolescence
Worn out, run down, deferred maintenance, weathering
Curable or Incurable
Functional Obsolescence
Out of date, poor floor plan,
lack of modern appliances,
out of style architecture
Economic Obsolescence
Neighborhood or Social Causes:
Traffic, noise, flood zone, crime
Incurable
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13. DEPRECIATION: Functional Obsolescence
Kitchen
Family
Dining
Utility
Living
Bath
Bedroom
This 4-bedroom, 1 bath home with no access to the back yard from the family room and utility room far from the bedrooms where kitchen becomes a hallway is an example of functional obsolescence (a floor plan that does not fit today’s needs).
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14. The Appraisal Process
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15. ©2011 Cengage Learning

16. Types of Appraisal Reports
Letter Report:
Restricted Report
Short Form Report:
Summary Report
Narrative Report:
Self-Contained Report
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17. Cost Approach to Value Used primarily for: New construction
Special purpose property
Public buildings
To replace/reproduce the improvements on the property.
The upper limit to value.
BEST used for unique properties with a
limited market appeal
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18. + COST APPROACH Steps: Estimate the land value, as if it were vacant.
Estimate the current replacement cost of the improvements
Sq Foot x $ per sq foot = Current replacement cost
Estimate and subtract depreciation of the improvements.
Replacement cost
Depreciation of Improvements
Present Value of Improvements
Add back the value of the land. +
Present Value of Improvements
Land Value
Total Value
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19. INCOME APPROACH Capitalization or Investment Approach
Value based on income produced by the property
Formula
Gross Scheduled Income GSI
Less Vacancy and Bad Debt - VAC
Effective Gross Income EGI
Less Operation Expenses - OE
Net Operating Income NOI
BEST for income producing properties
Apartments, Commercial, Offices
NOI = Value
Cap Rate
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20. Capitalization Rate I = R X V = V R
The higher the risk,
The higher the capitalization rate.
The higher the cap rate, the lower the value.
$30,000 I
10% R = $300,000
5% R = $600,000
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21. GROSS RENT MULTIPLIER Definition:
A gross rent multiplier is a calculation of how many times the property’s rent goes into the price.
It can be based on the monthly or annual rent.
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22. GROSS RENT MULTIPLIER
Comp. Sales Price Gross Monthly Rent Multiplier Comp. Monthly Rent (GMRM) Comp. Sales Price Gross Annual Rent Multiplier Comp. Annual Rent (GRM) THEN Gross Scheduled Income (GSI) x Gross Rent Multiplier (GRM) = Estimated Value ($) FAILS TO CONSIDER VACANCIES AND EXPENSES = =
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23. Gross Rent Multiplier Example
Sales Price $350,000 = 175 gross mo. Rent Mo. Rent $2,000 multiplier Sales Price $350,000 = gross annual Annual Rent $24,000 multiplier ($2,000 X12mo.)
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24. MARKET VALUE APPROACH
The most probable price that real estate would bring in an arm’s length transaction, under normal market conditions, on the open market.
BEST used for existing one-to-four unit residential property, vacant land and condominiums
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25. Comparison Approach “If comparable homes sold for $XXX, then subject home should sell for $XXX”
Select 3 to 5 comparable or similar properties with similar architectural style and character which have recently sold under reasonable market conditions in the same neighborhood
Make adjustments for the different between the comps and subject property for amenities by adding or subtracting from their sales prices.
3. The result gives a value range for the subject property. From the value range, select the probably market value of the subject property.
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26. MARKET DATA ANALYSIS Item Subject Property Comparables 1 2 3
Address
Sales Price
Data Source
Date of Sale
Location
Site/View
Design/Appeal
Constr. Quality
Age
Condition
# of Rooms
# Bedrooms
# Baths
Liv. Area (sq ft)
Garage/Carport
Patio, pool, etc.
412 Acme Drive
$335,000
Sales contract
9/1/00
Hi-qual suburb
Inside lot
Rambler/exc
Good
7 yrs 8 4
2 ½
2,700
2-car att
15 x 21 patio
131 Skip Rd
$353,000
Present owner
6/29/00
Same
Corner lot
6 yrs 7
3,300
15 x 26 patio
221 Sutter St
$333,500
MLS
7/14/00
8 yrs
2,350
18 x 16 patio
168 Bow Rd
$318,500
Selling broker
5/17/00 6
2,150
15 x 17 patio
Additional Data
2 fireplaces
Range, oven
D/W disposal
Central air
D/W
1 fireplace
Comments Subject has superior energy efficiency to comps 2 and 3 and is at least equal in this respect to comp 1. Principal difference between comps 1 and 2 is square footage.
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27. Arm’s Length Transaction
Neither party is under duress
The property is on the market for a reasonable time.
Both parties have full knowledge of the property’s assets and defects.
No unusual circumstances exist.
The price was not affected by special financing.
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28. Chapter 9 Question Subject Comp #1 Comp #2
Value : ? Sale: $400,000 Sale: $350,000
Bedroom:
Bathroom:
A bedroom in this area is valued at $10,000
A bathroom in this area is valued at $15,000
What is the indicated value for Subject Property?
$325,000 C. $375,000
$350,000 D $425,000
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29. Chapter 9 Answer
Comp # 1 Comp #2
$400,000 $350,000
- $10, $10,000
-$15, $15,000
$375,000 ( C ) $375,000
The range of value for subject property is $375,000
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30. Review Quiz Chapter 9
The most important consideration in an appraisal is the:
a. methods used
b. experience and knowledge of the appraiser
c. data gathered
d. inspection of the title records
Which of the following is a physical force that influences value?
a. rate of changes in population
b. income levels
c. size and shape of the parcel
d. zoning changes
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31. Review Quiz Chapter 9
3. The appraisal principle that states that the value of a property is dynamic, not static is called: a. principle of supply and demand b. principle of highest and best use c. principle of substitution d. principle of change
A loss in value because of busy street is an example of:
a. economic obsolescence
b. accrual for depreciation
c. functional obsolescence
d. physical deterioration
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32. Review Quiz Chapter 9
5. The market approach would be given the most weight if appraising a:
New home
New apartment
Five year old home
Special purpose property
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33. Review Quiz Chapter 9
Find the value by use of the income approach (round to the nearest $100)
(1) an older 3-unit apartment rents for $1,000 per month per unit
(2) vacancy factor of 5%
(3) annual operating expenses $10,000
(4) capitalization rate of 8%
a. $302,500
b. $288,000
c. $276,500
d. $275,000
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34. Review Quiz Chapter 9
With a gross annual multiplier of 150, a duplex that rents one unit for $575 per month and the other for $625, should have an estimated value of:
a. $173,000
b. $176,000
c. $180,000
d. $197,000
Licensed by the Office of Real Estate Appraisers to do the most complex property appraisal is the:
a. real estate agents
b. certified residential appraiser
c. certified general appraiser
c. licensed appraiser
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35. Review Quiz Chapter 9
The type of appraisal report required by most lenders is the:
a. loan report
b. narrative report
c. short form report
d. letter form report
Regarding the sales comparison approach, which is false?
a. the comps are adjusted to the subject property
b. 3 is the minimum number of comps to use
c. the subject property is adjusted to the comps
d. this approach is best for valuating residential homes
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36. Answers to Review Quiz Chapter 9
B A
C C
D C
A C
C C
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