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©2011 Cengage Learning.

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Presentation on theme: "©2011 Cengage Learning."— Presentation transcript:

1 ©2011 Cengage Learning

2 California Real Estate Principles
Chapter 9 Real Estate Appraisal ©2011 Cengage Learning

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 ©2011 Cengage Learning

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 ©2011 Cengage Learning

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 ©2011 Cengage Learning

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. ©2011 Cengage Learning

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. ©2011 Cengage Learning

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” ©2011 Cengage Learning

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 ©2011 Cengage Learning

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 ©2011 Cengage Learning

Highest and Best Use Change Balance Supply and Demand Contribution Substitution Progression – Regression Competition Conformity Anticipation ©2011 Cengage Learning

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 ©2011 Cengage Learning

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). ©2011 Cengage Learning

14 The Appraisal Process ©2011 Cengage Learning

15 ©2011 Cengage Learning

16 Types of Appraisal Reports
Letter Report: Restricted Report Short Form Report: Summary Report Narrative Report: Self-Contained Report ©2011 Cengage Learning

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 ©2011 Cengage Learning

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 ©2011 Cengage Learning

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 ©2011 Cengage Learning

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 ©2011 Cengage Learning

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. ©2011 Cengage Learning

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 = = ©2011 Cengage Learning

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.) ©2011 Cengage Learning

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 ©2011 Cengage Learning

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. ©2011 Cengage Learning

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. ©2011 Cengage Learning

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. ©2011 Cengage Learning

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 ©2011 Cengage Learning

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 ©2011 Cengage Learning

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 ©2011 Cengage Learning

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 ©2011 Cengage Learning

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 ©2011 Cengage Learning

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 ©2011 Cengage Learning

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 ©2011 Cengage Learning

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 ©2011 Cengage Learning

36 Answers to Review Quiz Chapter 9
B A C C D C A C C C ©2011 Cengage Learning

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