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Instructor: Diana T. Jacob Home Phone: 254.582.3940 Cell Phone: 210.363.5950

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Presentation on theme: "Instructor: Diana T. Jacob Home Phone: 254.582.3940 Cell Phone: 210.363.5950"— Presentation transcript:

1 Instructor: Diana T. Jacob Home Phone: 254.582.3940 Cell Phone: 210.363.5950 Email:

2 Contrast between an Quantified Analysis and Qualified Analysis Recognize Role of Highest and Best Use in Comparable Selection Reporting the range of comparable sales and comparable listings Comprehend Verification under a regulatory perspective Perform comprehensive analysis of concessions Recognize when time adjustments is warranted Understand the Methodologies of adjusting Identify differences in location Understand Leasehold versus Leased Fee Separating Site from View Understanding how GLA and Room Count are defined

3 Result of a Sales Comparison Approach is a value conclusion based on central tendency in a Market Value opinion The form isnt the driver of the appraisal- its the communication format for which supplemental information will have to be added to ensure understanding of how the value was derived Failing to understand the intended user and the intended user proves fatal to identifying the appraisal problem and necessary Scope of Work to solve the problem identified 1-3

4 The Sales Approach to value is a process rooted in the conclusion of the Highest and Best Use of the property under a market value standard of measure Similar sales liken to the subject are adjusted for market recognized differences to dissimilar characteristics CBS-Comparable Better Subtract CIA-Comparable Inferior Add 1-4

5 Data obtained in the Sales Approach must be verified by confirmation of the facts to ensure accuracy of the reported information and the arms length characteristic that places it in a market consideration. By definition an arms length transaction is one in which buyers and sellers act independently and have no relationship to each other. Conceptually an arms length transaction intent is to ensure that both parties in the deal are acting in their own self-interest and are not subject to any pressure or duress from the other party. 1-4

6 Strangers engaging in a transaction Parties who know one another Parties who are related Short-Sale Class Discussion: Case in Point – A contract pending for $100,000 with the seller paying all allowable closing costs equals a 4% contribution. The market shows that sellers pay these types of closing costs in 95% of the transactions exchanged in this neighborhood. The pending sale price of the subject is per sq. ft. of Gross Living Area (GLA) is $62.50; the range of sale price per GLA of the most comparable sales is $61.75 -$67.25 Question:Based on the information provided does this appear to be a transaction that supports a market value behavior in this pending sale? ____YES ______NO 1-5

7 Additional Information-The appraiser notes the parties have the same last name and, finds during the research of this pending sale, the parties were formerly married and, have been divorced for the past 2 years. The property owner has had the property listed with a licensed real estate agent for the past 60 days with no offers. The seller has been relocated to another town and is anxious to sell in market that normally transacts when properties are offered at a market competitive price within 60- 120 days. The buyer has made the offer of $100,000 with seller closing costs paid as that is the best offer the buyer can make based on the pre-qualified loan approval. Question:Is this an arms-length transaction? ____ YES _____ NO Question:Once closed can this transaction be considered a comparable sale? ____YES ____ NO 1-6

8 Principle of Substitution Principle of Supply and Demand Principle of Competition Principle of Balance 1.Labor 2.Capital 3.Coordination 4.Land Principle of Externalities 1.Physical 2.Economic 3.Governmental 4.Social 1-6 thru 9

9 To quantify is to prove through comparison a difference which is the result of Paired Sales Analysis and Regression Analysis. Quantified analyses are the desired method of identifying adjustments but there are weaknesses in the analyses. Weaknesses of Quantified Analysis Rare and unlikely that two transactions will have only one point of difference that can be identified as proof positive the markets reaction for the component of dissimilarity Details about the transactions before the comparison are difficult to fully know or obtain in the normal course of business Statistical analyses have their strength based on large numbers/data sets. These are generally not seen or available in the micro defined boundaries of like housing within a neighborhood 1-9

10 Qualified analyses are judgments of decisions based on the logic and reasoning without a specific comparison of two or more transactions. A component can be obviously different but have no history in a given market as to what the market would pay or not pay or even discount for that item. Case in Point – The subject has been renovated over the past 5 years. One of the renovations was the addition of a Safe-Room on the interior of the dwelling that served as a dual utility, large walk-in closet to the main bedroom. The clothes rack was higher than typical and was accessed by a pull-down handle so there could be a 3 foot clearance under the longest hanging clothes item. This allowed for a pull-down cot-like bed so that during the emergency seating would be allowed. There was also a safe that contained the important documents of the owner on the interior-with a built in mini-shelved closet that held non- perishable food items. Concealed in the area were emergency items (first-aid kit, batteries, radio, flash-lights, etc.). The owner spent $12,000 having this safe-room designed. There were no other houses with this dual use. 1-9

11 Question(s) Should the item of dissimilarity be considered for an adjustment? ___Y ___N Should the item be considered super-adequate when the subject is located in an area that annually comes under Tornados threats and occurrences of past storms each Spring. ___Y ___ N 1-10

12 MPMortgage Position X MCMortgage Constant X DCR Debt Coverage Ratio = RoRate Overall Therefore.90 X0.071147 X1.2 = 0.076838 or 7.7% Ro $200 yearly savings ÷ 0.077 R0 =$2,597.40 or $2,600 Chap 1-1-10 Not in Book- Adjusting an item not seen in the market

13 Additional Information – When interviewing local realtors it was discovered that newer constructed homes outside the neighborhood were being built with similar safe-rooms. The realtors said that local residents recognized the item more readily than out- of-towner buyers. The realtors stated that $5,000- $7,000 was the range they consistently saw as the price variances in the new construction of houses that had similar dual functioned areas. Question(s) Do you think this price range of new construction would be suitable as an adjustment for this item that is in the subject but not in any sales? ___Y ____N Would it be reasonable to offer one of those sales outside the neighborhood in newly constructed neighborhoods as support in the Sales Approach for the markets acceptance of this item and evidence of the contribution of the item of dissimilarity? ___Y ____N 1-10

14 Weakness of Qualified Adjustments Does not show any actual market transactions for the contribution difference There are evidentiary issues when using this method May be difficult to find agreement from peers When using qualified judgment it is critical to give a specific narrative description, even in a summarized format, that details the core logic and reasoning of how the appraiser determined 1) if there should be an adjustment and 2) how the adjustment was determined. Proof legally presented through documents and witnesses 1-10


16 When the ranges of comparable sales reported above the Sales Approach grid fall out of the range neighborhood there is something woefully wrong. Another red-flag that will call for a comment is when the concluded value falls outside the predominant price. 2-3

17 Questions to ask and data that are to be gathered include: Location of a recognized boundary for residential housing (linkages and access) Dont limit the boundaries to like housing only as the true influences of the neighborhood cant be recognized. Neighborhoods include more than like housing-they also include supporting amenities such as shopping-gas stations-dry- cleaners-schools-houses of worship. Be careful of major arteries-very often once a river or major transportation artery is crossed a different neighborhood (often non-competing), resides. Comparable Transactions for a Physical, Legal and Economic Perspective What constitutes a comparable transaction? 2-4

18 Details of the neighborhood that should have been addressed in the Neighborhood would be: How many residential districts/sub-markets were in the bounded area Level of maintenance and condition of homes Housing styles, ages, sizes, etc. (your age range was so broad it gave appearance of mixed-use Land Uses

19 Look at the various houses within the blue boundary Subject- 10 Blks West 8 Blks West 2-4


21 Can you understand why you need to comment on the land use and why within the boundaries of a neighborhood one street location may be superior to another?

22 Questions to ask and data that are to be gathered include: Identification of specific property type (detached, attached, single-family, townhome, condo, garden home) What do you do when the definition of the property is a condo (owner does not own the land in severalty but as a tenant in common) but its a detached building? What do you do when the Townhome (which is the subject) is detached based on a local neighborhood renewal program and the space between the dwellings are less than 8? Is a patio home a suitable comparable? Is an attached Townhome comparable? Comparable Transactions for a Physical, Legal and Economic Perspective What constitutes a comparable transaction? 2-4

23 Questions to ask and data that is to be gathered represent comparative units for which bracketing can become a focus for identifying sales of the most similar features. RURAL RESIDENTIAL MARKETS Mixed acreages and land use defy the Principle of Conformity. Focus on the same elements other rural residential properties offer Size of GLA-,# Bedrooms, #baths Age is often not a factor nor is design style but condition and quality of construction and CONDITION OF WELL and SEPTIC is a factor Land area will often be recognized as a factor in the increment range of 1-5 acres, 6-10, 15-20. In general once you go beyond 20 the increments increase such as 20-40. Comparable Transactions for a Physical, Legal and Economic Perspective What constitutes a comparable transaction? 2-4

24 Users of appraisal services must understand that although a comparable can be a sale or a listing - not all sales or listings are comparable. Sales are transactions of exchanges between sellers and buyers that occur when the property transfers the title in exchange for something of value such as cash. The transactions are most often characterized as either 1) arms-length or 2) distressed. The greater the similarity to the subject the more comparable it becomes. 2-5

25 Bracketing is a methodology that affords appraisers the ability to create criteria for identifying sales which can be used in the Sales Comparison Approach due to their characteristics of similarity. In developing a credible Sales Approach the data gathering and selection of most comparable transactions is accomplished best when criteria is established for recognized units of comparison and then identifying those sales that sandwich below and above those comparative units. 2-5

26 If you do a word search in the Uniform Standards of Professional Appraisal Practice (USPAP) for verify you will not find the word. If you type in verification you do not find the word until you reach Statement 6 whose subject is Exposure Time. Note the use of the word verification in USPAP in Statement 6. 2-6

27 Its not until the Secondary Market Assignment Conditions that the word verify or verification becomes specific. From Fannie Mae…. Single or multiple sources for data and verifications are acceptable provided the appraiser adequately verifies the comparable sales. Examples of data sources include, but are not limited to, a multiple listing service, deed records, tax records, realtors, builders, appraisers, appraisers files, and the Internet. NOTE: It didnt say you must contact the seller or buyer but it does go on to state…. Regardless of the source(s) used, there must be sufficient data to understand the conditions of sale, existence of financing concessions, physical characteristics of the subject property, and whether it was an arms-length transaction. FHA is more specific 2-7

28 Item 10 of the Certification Statement is of course impossible to perform. This is especially true in non-disclosure states such as Texas. I verified, from a disinterested source, all information in this report that was provided by parties who have a financial interest in the sale or financing of the subject property. Its recommended you clean up this certification statement with clarification about how you proceeded to comply under the statutory limitations of your state laws. 2-10

29 Look at the DO NOTS and DOs of FHA when it comes to verification of Sales Enter verification source(s), the document or party from which the additional proof was obtained. MLS by itself is not considered a verification source. Contacting someone with first-hand knowledge of the transaction (agent, broker, buyer, seller, etc.), especially where it involves confirmation of seller concessions, is the preferred method of verification. A single source may be used if the quality of data is such that sales data are confirmed and verified by settled transactions. Information provided should permit the reader of the report to locate the data from the sources cited. Do not use, as market data, sales that are not verified and adjusted to reflect the terms and conditions of sale. 2-11

30 Most often the difficulty in identifying adjustments is the lack of practice in the analytical comparison of sales. This is due to what most appraisers will state is a theory that is for the most part impractical in day to day practice. This reasoning is problematic on three basic levels, 1) the appraiser has signed a statement of certification promising in writing their ethical obligations to comply with USPAP, 2) USPAP requires the appraiser to support their approaches to value and 3) most Assignment Conditions of the financial secondary market as well as other government agencies take great strides in defining what each adjustment should represent and how it must be documented in the appraisal process 2-13

31 Most appraisers will agree the Sales Approach should be weighed the heaviest in residential valuation yet they perform that approach with no real quantitative or qualitative evidence. This is a most dangerous bad practice which can lead to conclusions and judgment of misleading, incompetent malpractice. 2-13

32 2-14 Site – A physical fact that cannot always be tied to a size. There are cases when the site shape may have more to do with the dollars of difference paid. For example often you will find Cul-de-Sac lots having less site area especially in the building envelop after setbacks are defined. However the demand for the privacy is often more valuable the size difference by comparison of an interior site that is rectangular. View- Its a physical measure that is very often difficult to measure when analyzing a market reaction for the view from the sites location or to distinguish from the site area. The demand is connected to a physical eye-appeal that can be merged into a buyers consideration of the location, the shape and the size of the site area when the property was purchased. Limited data in the marketplace can make the discernment of market reaction for the view alone a difficult item to isolate.

33 When considering these two line items the appraiser must determine if both can be so well defined that the market will distinguish between the two or possibly consider that the most credible defining difference is between the values of each site. The appraiser needs to spend time summarizing for the client and other intended users how he/she studied the market with the focus on the site, in that specific location. That summary needs to include its comparative differences inclusive of any view attractions or detractions. 2-15

34 Design (Style) – This line item is a Physical factor that will rarely become so visibly distinguishable in the market when viewing sales suitable for comparable consideration. Generally the age of the neighborhood will promote a traditional history of styles that although different, will be harmonious. Quality of Construction – This is another Physical Factor line item that is very often confusing to distinguish. The Uniform Appraisal Dataset (UAD) sets forth the criteria for measuring and reporting the differences. In those instances when there is a mixture the appraiser must decide between one or the other and then adjust with a comment as to why possible adjustments were made when the line item was concluded to be the same. Example: The line item of Quality of Construction, noted as being the same across the board was based on the requirement to conclude one absolute versus the other absolute rating. However, the verification of the sales did show some slight differences which were recognized by the buyer in both price and shorter Days on the Market. The comparative differences confirmed by the agents involved with the sales were the basis for the adjustment. 2-15

35 Quality of Construction –Example: The line item of Quality of Construction, noted as being the same across the board was based on the requirement to conclude one absolute versus the other absolute rating. However, the verification of the sales did show some slight differences which were recognized by the buyer in both price and shorter Days on the Market. The comparative differences confirmed by the agents involved with the sales were the basis for the adjustment. 2-15

36 Actual Age – This line item since the UAD has rarely been considered an item to be adjusted based on how properties are maintained and how they are renovated. It is a physical influence that will periodically shift as maintenance and renovations take place. The guidance of the UAD states The appraiser must report the actual age of the subject property and each comparable property. For new construction that is less than one year old, enter the numeral zero (0). Do not enter any additional information such as years or other descriptors. If the actual age is unknown, enter the estimated age. Given that directive, unless the appraiser has evidence there is a market reaction any adjustment may appear suspicious if the sales are close in age. When there is a broad distance between ages of comparables and the subject then some type of adjustment is most often expected due to long-term items having differences of remaining contribution. For example a 5 year old house and a 15 year old house that has been recently renovated will still have some type of wear and tear difference in the overall structure and foundation. 2-16

37 Room Count and Gross Living Area (GLA) These major items of Physical difference are market driven by both demographics as well as functional utility. In many cases there will be no distinguishable difference to the market if a dwelling has both a formal living room and a den or a breakfast room and a formal dining room as long as the room is of sufficient size to provide the activity. Not so when the comparison was made between 2 Bedroom Dwellings and 3 Bedroom Dwellings. Although there may not be a significant difference between a 3 bedroom versus a 4 bedroom there would typically be a difference between a 3 bedroom and a 5 bedroom. Its the job of the appraiser to narratively communicate what the demographic support is for the room count, number of bathrooms and bedrooms and whether or not there are recognized market reactions to those physical differences. Chapter 8 will show methods of defining when room count becomes distinguishable from the GLA 2-17


39 One thing is certain-there is no consensus on how a concession is to be treated in a Sales Approach-only that it must be identified in each transaction as well as the contract pending and that its influence, if any, should be reflected in the appraisal. 3-2

40 Sale Price Comp 1 $250,000 Land Ratio 20% 10 acres site size Land Value = $250K x 20% $50,000 Sales Price Comp 2 $160,000 Land Ratio 25% 2 acres site size Land Value = $160K x 25% $40,000 Difference Land Value$10,000 Difference Acreage ÷ 8 Market Reaction per Acre$1,250 Chap 3-pg 3-14 NIB-

41 ¼ 40 % 2/4 30 % 3/4 20 % 4/4 10 % Chap 3-pg 3-14 NIB-

42 Interested party contributions (IPCs) are costs that are normally the responsibility of the property purchaser that are paid directly or indirectly by someone else who has a financial interest in, or can influence the terms and the sale or transfer of, the subject property. IPCs are either financing concessions or sales concessions. 3-3

43 Financing concessions that are paid on the borrowers behalf are subject to Fannie Maes IPC limits. Financing concessions are: financial contributions from interested parties that provide a benefit to the borrower in the financing transaction; payments or credits related to acquiring the property; and payments or credits for financing terms, including pre-paids. 3-6

44 Financing concessions typically include: origination fees, discount points, commitment fees, appraisal costs, transfer taxes, stamps, attorneys fees, survey charges, title insurance premiums or charges, real estate tax service fees, and funds to subsidize a temporary or permanent interest rate buydown (if these fees are not considered common and customary fees or costs based on local custom, as described above). 3-6

45 Financing concessions can also include prepaid items, such as: interest charges (limited to no more than 30 days of interest); real estate taxes covering any period after the settlement date (only if the taxes are being impounded by the servicer for future payment); hazard insurance premiums (limited to no more than 14 months); homeowner association (HOA) assessments covering any period after the settlement date (limited to no more than 12 months); initial and/or renewal mortgage insurance premiums; and escrow accruals required for renewal of borrower-purchased mortgage insurance coverage. 3-6

46 LOOK AT THE DIRECTIVE TO THE LENDER OF THE CONVENTIONAL SECONDARY MARKET! Ensure that any and all IPCs have been identified and taken into consideration. How does an appraiser accomplish identifying ALL IPCs? Would an assumption be called for? Provide the appraiser with all appropriate financing data and IPCs for the subject property granted by anyone associated with the transaction. Ensure that the property value is adequately supported. 3-8

47 If an appraiser identifies and confirms that concessionary items were included in a transaction and if the normal consideration or contract price was impacted by the concession, an appraiser should make an adjustment to approximate the markets reaction to the concessions impact on the comparable sales contract price. The existence of concessions will be dictated by the type and definition of value used in the appraisal assignment. According to USPAP, value is an economic concept that is an opinion, based on a specific given time, and must be qualified. 3-11

48 1.What percent of the sales have concessions? ______ 2.What was the range of percent of concessions when measured against the sale price ___-___ 3.Was there a dominant percent of financial concessions paid? _______ 4.Was personal property typical of the majority of sales? _______ 3-15

49 1.What percent of the sales have concessions?__58%__ 2.What was the range of percent of concessions when measured against the sale price _0%_-_6%_ 3.Was there a dominant percent of financial concessions paid? __No-majority were > 5%__ 4.Was personal property typical of the majority of sales? _Yes-8 out of 12 sales had some personal property in the sale__

50 The Appraiser recognized that personal property exchanged in many of the sales. Such property did not in the appraisers opinion affect the price. Personal property such as refrigerator, fireplace equipment, curtains are gifts of the seller to the buyer that had no value to the seller at the time of the exchange. The lack of these items would not have affected or prevented the sale thus the appraiser found no reason to deduct for those items.


52 The block of time needs to be cognizant of any anomalies such as a season or an event which may have a temporary frictional impact. Based on that effective date time being a factor would be a probability for any sale that was greater than six months because the market is showing a Stable – Property Value and projected future marketing time of no greater than six months. 4-1 Effective Date is 07/21/12 Question-What is the projected time of year 3-6 months is stating?

53 4-6


55 4-5 1. Which sale(s) appear to be over 6 months? _______________________________ 2. Based on the One-Unit Housing Trends stated the market would a time adjustment be warranted? ___________

56 1. Which sale(s) appear to be over 6 months? ____Sale #3 is 8 months old_____ 2. Based on the One-Unit Housing Trends stated the market would a time adjustment be warranted? __Yes___ 4-5

57 Case Study of Decline using the Equity Yield Rate Sale Price (based on 2000 prices) $175,000.00 Cost of Sale (estimated at 7%) - 12,250.00 Less Equity Invested - 10,000.00 Less Balance - 157,027.13 Equals Net Income ($ 4,277.13) Divided by the Equity ÷ 10,000 Divided by the years of holding ÷ 5 Equals the Equity Yield of the Investment = - 8.5543% 4-8

58 Since the decline is measurable the appraiser must then consider if the decline is continuing over the past 12 months in order to accurately make time adjustments for comparable sales. If the local trends show that the prices have remained unchanged for the last year but the concessions have risen from a dominant 1% to a current 4% then the net value to the seller has decline. Example: Median Sale Price unchanged past 12 months $175,000 Seller Concessions @4% of Sale Price - 7,000 Net to Seller $168,000 One Year Ago Median Sale Price unchanged past 12 months $175,000 Seller Concessions @1% of Sale Price - 1,750 Net to Seller $173,250 Decline annual rate3.03% Please keep in mind this is the study of a statistical point- the better study would include the study of several comparable transactions to ensure more than one behavior was studied.

59 -0.03 ÷ 12 months = 0.0025 monthly change Sale = 14 months 0.0025 x 14 months = -0.035 + 1 equals a multiplier 0.965 factor Sale Price $125,000 Time Adjusted Sale 0.965 x Sale Price = Current Time Adjusted Value $120,625 adjustment = (4,375)

60 The increase in seller concessions over the past year has given the appraiser reason to believe than any sale greater than 6 months requires a time/market condition adjustment. The annual percentage of decline is -3.6% (0.0030 per month). The effective date of the appraisal is 02/10/13. Any finance concession above 2% was considered excessive and required deduction proportionate to the excessive amount of difference (i.e. 3% would have a 1% deduction). 4-9

61 Sale #2 was 7 months old therefore 0.003 x 7 x 290,000 = $5,460 Sale #3 was 8 months old, thus 0.003 x 8 x $265,000 - $6,360 4-9


63 5-4 Cul-de-Sac Market 1 clearly sells for less and takes longer to market-those lots that back up to the parking lot of the apartment complex. If the size and shape are similar and most cul-de-sac lots have similar irregular pie-shape configuration, the difference can be attributable to the location. The difference in the location between the two markets is:27.7% The difference in Market 1 between the left side and right is:5.8%

64 5-3Class Discussion Case Study: Lot 35 recently sold four months ago for $173,000 and Lot 15 sold last month for $168,000. On the premise that there is a similar design and style of dwelling and all other physical characteristics are similar what is the indicated location adjustment? Lot 35Lot 15 Sale Price$173,000$168,000 Location Adjustment $5,000 or 9.5% 5-5

65 Residential Leasehold land is seen throughout the U.S.-its usually a long-term set up after the land has been harvested or quarried. The four most important types of leasehold estates are: 1.Estate for Years 2.Estate from Period to Period 3.Estate at will and 4.Estate at Sufferance Only an Estate for Years is suitable for residential development as the term of the ground lease needs to be greater than the economic life of the improvement. 5-6

66 Step 1- identify sales of similar properties Step 2- develop adjustments for varied lease terms Step 3- develop a capitalization rate Step 4- deduct the capitalized value from the fee simple interest conclusion of similar land uses for the leasehold value Go to bottom of page 5-27 for mathematical example 5-15 and 5-16


68 Before you can value the site you must first identify the characteristics of the site and the forces that create the value. Demand is based on Utility Scarcity Affordability/Transferability Land Area is viewed both in its dimensions and its size: Acre Front Foot Square Foot Waterfront Feet Recognizing Relevant Land Characteristics 6-3

69 Other factors relevant to valuing land Location in the development (is it considered a Prime Location?) Cleared or is it Raw? Topography Linkages and Access-a key factor in marketability which is preliminarily discussed in the Neighborhood View FEMA Flood Zone Utilities Recognizing Relevant Land Characteristics 6-4

70 The site analysis is critical to understanding the land value of the subject and the competing sites. Unlike the Sales Approach where adjustments are made downward for superior characteristics this analysis identifies the competing sites characteristics as being favorable, inferior or similar to the subject through the mathematical directors Conducting a Site Analysis 6-6 Comparative positionSymbol of Impact when compared with subject site Favorable Competing Site+ A plus sign shows the position of the comparable Inferior Competing Site- A minus sign shows the position of the comparable Similar Competing Site= The equal sign signifies similarity of comparable to subject

71 The Sales Approach of vacant land is the preferred method For Built – Up areas the remaining two best methods are: Allocation and Extraction For Income Properties the Land Residual Method is also available Site Valuation Methodologies 6-12

72 You can also use the Allocation method to identify market reaction differences. Note Page 6-13 where land value has been reconciled at 19%. Compare Sale 2 to Sale 3. Sale No. 2Sale No. 4 Land V.$23,750$21,660 Dollar Difference$2,090 Sq. Ft.7,3005,100 SF Difference2,200 $ Difference $2,090 ÷ Sq. Ft. Difference 2,200 Equals Market Reaction to Size $0.95 per Sq.Ft. 6-13

73 ¼ 40 % 2/4 30 % 3/4 20 % 4/4 10 % Pg. 6-16


75 Consider the overall quality is the same but there is a slight variance that the market recognized for upgrade in quality of a floor cover The Contribution Rate is the same 92.2% RCN House 1RCN House 2 $175,000$167,000 Floor Cover % x 12%x 8% Floor Cover New$ 21,000$ 13,360 Contributesx 92.2% x 92.2% Contribution$ 19,362$12,317.92 Value Adjustment$7,044 Rounded to $7,000 7-3 & 7-4

76 Age of Improvements (Year Built) When adjustments are made to the appraisal for the year built, whether those adjustments are made for the actual age or for the effective age of the subject property, the appraiser must provide an explanation for the adjustments. 7-6

77 One method for adjusting for age or effective age differences involves a method that employs a depreciation rate. 7-6 Sale #1Sale #2Sale #3 Cost New$108,500.00$109,200.00$120,000.00$110,000.00 less Present Worth$90,000.00$97,200.00$102,000.00$100,500.00 equals Dollars of Depreciation$18,500.00$12,000.00$18,000.00$9,500.00 Dollars of Depreciation$18,500$12,000$18,000$9,500 divide Cost New$108,500.00$109,200.00$120,000.00$110,000.00 equals percent accrued depreciation0.1705070.1098900.1500000.086363636 divide by Acual Age128116 equals ave. annual dep. Rate0.0142089090.0137362640.0136363640.014393939 Depreciation Rate Reconciled0.014

78 Comparable 1Comparable 2 Sale Price$112,500$119,200 Land Value - $ 22,000-$ 22,000 Improvement$ 90,500$ 97,200 Actual Age128 Market Depreciationx 0.014x 0.014 Accrued Depreciation 0.1680.112 Economic Lifex 60 yearsx 60 years Effective Age10.08 years6.72 years Rounded EA10 years EA7 years EA Differences Improvement Value Difference $6,700 Divided by Older Comparable÷ $90, 500 Equals Percent of Total Difference =0.074033 ÷ Divide by Effective Age Difference3 years Per year EA Adjustment=0.024678 7-7


80 Although room count appears on most residential forms prior to the Gross Living Area (GLA)- you must first identify what the adjustment is for GLA in order to determine if there is a market that chooses to pay in addition to the GLA for the additional functional utility of additional rooms. 8-9

81 Example: Comparable Sale 1VersusComparable Sale 3 Sale Price$150,000$142,000 Land Value- 45,000- 40,000 Improvement VB$105,000$102,000 GLA1,700 sq. ft.1600 sq. ft. Adj. sq. ft. GLA- $ 3,500 -0- Adj. VB$101,500$102,000 Room Count9/4/28/3/2 VB means Value of the Building In this paired sales analysis the additional bedroom would be seen as a functional super- adequacy 8-9

82 Example: Comparable Sale 4 Versus Comparable Sale 5 Sale Price $155,500$149,000 Land Value - 45,000- 40,000 Improvement $110,500$109,000 GLA1,825 sq. ft.1850 sq. ft. Adj. sq. ft. GLA-0- (25 sq. ft. not adjusted) -0- Adj. VB$110,500$109,000 Room Count9/4/2 8/3/2 In this pairing the additional bedroom is recognized as being worth $1,500.00. 8-9

83 Paired sales analysis is not always available due to the insufficient quantity of sales in the area. When no credible conclusion can be extracted from the pairing of sales an alternative is to utilize the depreciation rate from the market, deducting for the items in the replacement cost new such as plumbing and electrical fixtures to derive at a net value. The difference between the comparable sales net value and square footage will indicate an adjustment for the difference in the per square foot unit of measure. How to Adjust for the Gross Living Area 8-10

84 Comp. 1Comp. 2Comp. 3Comp. 4 GLA sq. ft.1,9002,2001,7001,800 RCN per sq. ft.$70$69.40$71.50$70.25 Total RCN$133,000$152,680$121,550$126,450 Items not part of GLA in RCN = % of RCN per sq. ft. X 45% ($59,850) X 45% ($68,706) X 45% ($54,697.50) X 45% ($56,902.50) Net RCN for GLA$73,150$83,974$66,852.50$69,547.50 Depreciation - 10,972.50 (15%) - 12,596.10 (15%) -10,027.88 (15%) -10,432.13 (15%) Net Value$62,177.50$71,377.90$56,824.63$59,115.38 How to Adjust for the Gross Living Area 8-10

85 How to Adjust for the Gross Living Area 8-10 Comparison 1 Comp. 1versusComp. 2Difference Net Value$62,177.50$71,377.90$9,200 GLA1,9002,200÷ 300 sq. ft. Indicated Adjustment Per Square Foot for GLA Difference$30.67

86 Reactionx % Weight =$ Adj Comparison 1$30.67 15%$ 4.60 Comparison 2$26.76 30%$ 8.03 Comparison 3$30.62 40%$12.25 Comparison 4$29.11 10%$ 2.91 Comparison 5$30.66 5%$ 1.53 100%$29.32 Adjustment for GLA 8-12


88 Increasingly Quest Quarters are becoming part of the real property improvement. In part our culture is changing which has placed a demand on these living areas as the baby boomers now become a sandwich generation finding they are still assisting grown-children and also assuming responsibility for their parents. These changes in times bring about changes in the design of the residential properties which will often have attached or semi-attached or even detached quest-quarters. The function of the additional space is seen as having function for the privacy of those who are sharing their residence with other dependent family members. 9-8

89 ItemSale #1AdjustmentSale #2Adjustment Sale Price$350,000 $275,000 Less Land Value - 50,000 Improvemen t $300,000 $225,000 Sq. Ft. GLA2,700-13,5002400 Adjusted Value $286,500 $225,000 Quest Quarter Yes No Dollar Difference $61,000 for the 1,200 sq. ft. 2-Bed/2Bath Guest Quarter 9-8

90 Consult with local licensed property managers and real estate agents to get their input on the contribution of the area and Perform a depreciated cost approach for the contribution 9-8

91 Sometimes when there are no clear sales an alternative to concluding a value contribution is to research Return On Investment (ROI) studies and based on the physical condition of the amenity the ROI study can then be applied. Example: Outdoor Kitchen Cost New$18,000 Installed 3 yr.s w/15 yr life- 3,600 20% depreciated (3÷ 15) Net Remaining$14,400 Multiplied by the ROIx 50% Contribution$ 7,200 9-8


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