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©2011 Cengage Learning
Chapter 9 Real Estate Appraisal California Real Estate Principles ©2011 Cengage Learning
Chapter 9 1. Define appraisal and list the elements and forces that influence value. 2. Distinguish between utility value and market value 3. Define depreciation; outline the causes of depreciation; describe how to calculate depreciation 4. Discuss the 3 approaches to value; outline the steps in each approach 5. Define gross rent multiplier and cap rate ©2011 Cengage Learning
Tax assessor Assessed value Insurance agent Insured value Realty company Market value Bank Loan Value Salvage value What is the purpose of the appraisal? ©2011 Cengage Learning
APPRAISAL 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
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
Appraisal License Requirements Licenses:EducationExperience Trainee Appraiser Licensed Appraiser150 hours2,000 hours Certified Residential 200 hours2,500 hours Appraiser Certified General 300 hours3,000 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
Value Value in Use (Utility Value = Worth to an Owner Market Value = Value in Exchange ©2011 Cengage Learning “ 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 ”
Value affected by ©2011 Cengage Learning 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 Value
P E P S Forces that change Value E conomic Forces Consumer: Income, Employment, Credit, Interest Rates ©2011 Cengage Learning P hysical Forces Natural: Land, Climate, Resources Man-Made: Buildings, Roads, Utilities S ocial Forces Area: Neighborhood, Living Standards People: Family Size, Lifestyle, Attitudes P olitical Forces Government: Zoning, Fiscal Policy, Taxes People: Environmental Protection, Education
PRINCIPLES OF VALUATION Highest and Best Use Change Balance Supply and Demand Contribution Substitution Progression – Regression Competition Conformity Anticipation ©2011 Cengage Learning
DEPRECIATION Physical Deterioration 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 Curable or Incurable Economic Obsolescence Neighborhood or Social Causes: Traffic, noise, flood zone, crime Incurable ©2011 Cengage Learning
DEPRECIATION: Functional Obsolescence ©2011 Cengage Learning 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).
The Appraisal Process ©2011 Cengage Learning
Types of Appraisal Reports ©2011 Cengage Learning Letter Report: Restricted Report Short Form Report: Summary Report Narrative Report: Self-Contained Report
Cost Approach to Value Used primarily for: New construction Special purpose property Public buildings ©2011 Cengage Learning To replace/reproduce the improvements on the property. The upper limit to value. BEST used for unique properties with a limited market appeal
COST APPROACH ©2011 Cengage Learning Steps: 1.Estimate the land value, as if it were vacant. 2.Estimate the current replacement cost of the improvements 3.Estimate and subtract depreciation of the improvements. 4.Add back the value of the land. Sq Foot x $ per sq foot = Current replacement cost Replacement cost Depreciation of Improvements Present Value of Improvements + Land Value Total Value
INCOME APPROACH Capitalization or Investment Approach Value based on income produced by the property ©2011 Cengage Learning Formula Gross Scheduled Income GSI Less Vacancy and Bad Debt- VAC Effective Gross Income EGI LessOperation Expenses- OE Net Operating Income NOI NOI = Value Cap Rate BEST for income producing properties Apartments, Commercial, Offices
Capitalization Rate The higher the cap rate, the lower the value. $30,000 I 10% R = $300,000 $30,000 I 5% R = $600,000 ©2011 Cengage Learning I = R X V The higher the risk, The higher the capitalization rate. I = V R
GROSS RENT MULTIPLIER Definition: A gross rent multiplier is a calculation of how many times the property’s rent goes into the price. It can be based on the monthly or annual rent. ©2011 Cengage Learning
GROSS RENT MULTIPLIER Comp. Sales PriceGross Monthly Rent Multiplier Comp. Monthly Rent(GMRM) Comp. Sales PriceGross Annual Rent Multiplier Comp. Annual Rent(GRM) THEN Gross Scheduled Income (GSI) x Gross Rent Multiplier (GRM) = Estimated Value ($) FAILS TO CONSIDER VACANCIES AND EXPENSES ©2011 Cengage Learning = =
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 $24,000multiplier ($2,000 X12mo.) ©2011 Cengage Learning
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. ©2011 Cengage Learning BEST used for existing one-to-four unit residential property, vacant land and condominiums
Comparison Approach “If comparable homes sold for $XXX, then subject home should sell for $XXX” 1. 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 2. Make adjustments for the different between the comps and subject property for amenities by adding or subtracting from their sales prices 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
MARKET DATA ANALYSIS ItemSubject PropertyComparables 123 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 Good ½ 2,700 2-car att 15 x 21 patio 131 Skip Rd $353,000 Present owner 6/29/00 Same Corner lot Same Good 6 yrs Good ½ 3,300 Same 15 x 26 patio 221 Sutter St $333,500 MLS 7/14/00 Same Corner lot Same Good 8 yrs Good ,350 Same 18 x 16 patio 168 Bow Rd $318,500 Selling broker 5/17/00 Same Inside lot Same Good 8 yrs Good ,150 Same 15 x 17 patio Additional Data2 fireplaces Range, oven D/W disposal Central air 2 fireplaces Range, oven D/W Central air 1 fireplace Range, oven D/W Central air 1 fireplace Range, oven D/W 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
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
Chapter 9 Question ©2011 Cengage Learning SubjectComp #1Comp #2 Value:? Sale: $400,000Sale: $350,000 Bedroom: Bathroom:231 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? A.$325,000C. $375,000 B.$350,000D $425,000
Chapter 9 Answer Comp # 1Comp #2 $400,000 $350,000 - $10,000+ $10,000 -$15,000+ $15,000 $375,000( C )$375,000 ©2011 Cengage Learning The range of value for subject property is $375,000
Review Quiz Chapter 9 ©2011 Cengage Learning 1.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 2.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
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 ©2011 Cengage Learning 4.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
Review Quiz Chapter 9 5. The market approach would be given the most weight if appraising a: a.New home b.New apartment c.Five year old home d.Special purpose property ©2011 Cengage Learning
Review Quiz Chapter 9 6.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
Review Quiz Chapter 9 7.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 ©2011 Cengage Learning 8.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
Review Quiz Chapter 9 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 ©2011 Cengage Learning 10.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
Answers to Review Quiz Chapter 9 1.B6. A 2.C7. C 3.D8. C 4.A9. C 5.C10. C ©2011 Cengage Learning
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