Real Estate Appraisal Understanding the Appraisal Profession –FIRREA –State requirements Licensed appraisers Certified residential appraisers Certified general appraisers
Real Estate Appraisal What is Value? –Investment value The value of property to a specific investor
Real Estate Appraisal Market Value –The most probable price which a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller, each acting prudently and knowledgeably, and assuming the price is not affected by undue stimulus. Implicit in this definition is the consummation of a sale as of a specified date and the passing of title from seller to buyer under conditions whereby:
Real Estate Appraisal Market Value (Cont’d) 1. Buyer and seller are typically motivated; 2. Both parties are well informed or well advised, and acting in what they consider their own best interest; 3. A reasonable time is allowed for exposure in the open market; 4. Payment is made in terms of cash in U.S. Dollars or in terms of financial arrangements comparable thereto; and 5.The price represents the normal consideration for the property sold unaffected by special or creative financing or sales concessions granted by anyone associated with the sale.
Real Estate Appraisal What is Value? –Price versus market value –Market value versus cost of production –Other types of value Assessed value Insurable value (Improvements Only)
Real Estate Appraisal Key Appraisal Principles –Change - Four Forces Physical (location) Economic (financial) Social Political
Real Estate Appraisal The Traditional Appraisal Process –Definition of the problem Type of value-purpose Description of property Specific property rights Effective date –Data selection and collection General market analysis Specific property analysis
Real Estate Appraisal The Traditional Appraisal Process –Highest and best use analysis As though vacant Land with improvements –Application of the three approaches to valuation Sales comparison approach Cost approach Income approach
Real Estate Appraisal The Traditional Appraisal Process –Reconciliation of value indications –Certification and Report of Estimated Value
Real Estate Appraisal Sales Comparison Approach –Comparable sales data Selection (how similar are they?) How many comparables?
Real Estate Appraisal Sales Comparison Approach –Adjustment of sales data Elements of comparison –Property rights conveyed –Conditions of sale –Financing terms –Market conditions –Locational characteristics –Physical characteristics –Applicability of the sales comparison approach
Real Estate Appraisal Cost Approach –Estimating site value –Estimating production cost Reproduction cost Replacement cost –Estimating accrued depreciation Physical deterioration Functional obsolescence Economic obsolescence –Applicability of the cost approach
Real Estate Appraisal Income Approach –Gross income multiplier –Net income capitalization –Discounted cash flow Applicability of the income approach