1. Chapter 18 RE Appraisal

2. Terms Appraisal:Estimate of Value of Something Capitalize: Convert Future Income into PV Valuation:Appraisers’ Step by Step Process Highest & Best Use: Use of land which will produce the greatest Current Value 4-3-2-1 Rule: Land @ the back of a lot is worth 25’x200’] CMA Estimate price via sales & prospects Competitive Market Analysis

3. Market Value aka Fair Market Value 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 knowledgeable and assuming the price is not affected by undue stimulus Terms

4. Principle of Anticipation:  Price = f(Anticipated Benefits to Buyer/Seller) Principle of Substitution:  Price = f(Cost of Equally Desirable Substitute) Principle of Competition:  Profits encourages Competition... Supply Plottage Value=Total > Sum(Small Lots) Terms

5. Define the Appraisal Problem Conduct a Preliminary Analysis Formulate Appraisal Plan& Collect data Estimate Highest and Best Use Estimate Land Value & Improvements Reconcile Results =Defined Value Estimate Report Conclusion of Value Uniform Standards Pro-Appraisal Practice

6. Transfer of ownership Financing or credit Compensation/Condemnation proceeding RE decision making Taxation Lease provisions Corporation to purchase employee home Reasons for the Appraisal

7. Highest price definition  The highest price in terms of money which a property will bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller each acting prudently, knowledgeably and assuming the price is not affected by undue stimulus Principles of Appraisal

8. Sales Comparison (Market):  Residential Cost (Replacement Value )  Residential (if < 3 sites) /Income Income Capitalization  Income/Commercial Properties Three Approaches

9. Steps  Identify all comparable sales  Gather & verify data on these sales  Select the most appropriate (3 is magic #)  Adjust comparables for time and comparability  Reconcile differ. values & Produce Best Est Enhancements:  Matched pair: Find 2 properties that differ in one characteristic & calculate the difference  OLS: P=a+b(baths)+c(closets)+d(appliances) Sales Comparison

10. Sales Comparison: Subject House

11. Sales Comparison: 3 Comparables

12. Sales Comparison: Final Adjustment

13. Reproduction Cost : The current cost of constructing an exact replica (Ideal) Replacement cost: Cost of constructing similar utility using current standard of material, skill, etc. (Reality) Cost Approach

14. Direct  Construction of improvements (labor, contractor fees & materials) Indirect  Appraiser, lawyers, accountants, financing, architect, etc Quantity survey: Add estimates of direct & indirect Unit in place: Estimate cost of putting components together (e.g.. all drywall, painting, etc Per square foot: Cost/Sq’ Types of Costs Methods Cost Approach Estimating Costs

15. Types of Depreciation  Physical Depreciation: Wearing out  Functional Obsolescence: Technology (halls, floors,etc)  Economic Obsolescence: Neighborhood or highway moves Estimating  Reproduction to market value: Value now=100K, Reproduce then =120K 20/120 = 17% deterioration  Actual to Effective Life: Effective life=40yrs but 20 in actual=50% deprec. Cost Approach Subtract Depreciation

16. Cost Approach: Example

19. Gross Rent Multiplier Estimate economic rents on complex  What they should rent for now  Note: Some rents may be grandfather’d Check GRMs in the area  GRM=Sales Prices(SPs)/Gross Rents (GERs) Use E[GRM] to get E(Price) for property eg.AvgSPs= $120K & AvgGERs=$10K : E[GRM]=12 Sbj=GER=$130 Therefore: Price=12*130=$1,560K Income Capitalization Approach

20. Capitalization= Conversion of NOI into estimate of PV or MV: MV=NOI/CR Cap rates=Relationship: Income & Value Techniques to determine Cap Rate:  Estimate cap rates for comparables  Check other investors: What do you expect? Bands of Investment: Like RE WACC  Return on property must be enough to pay all financial claims & still give Equity E(ROR)  BOI=W M* R M +W E *R E Income Capitalization Approach

21. Income Cap Approach: e.g.

23. Information: Income Properties Apart/Condo: Income&Expense Analysis:Apts, Condos, Coops (Chi:Inst. or RE Mgt) Office Bldgs Office Building Experience Exchange Report(WashDC:Bldg Owners&MgsA) ShopCtrs Dollars & Cents of Shopping Centers(Wash DC: Urban Land Inst) IndusPark Site Selection Hndbk (Atlnta: Conway) Hotels/Leis. Trends in Hotel Industry (Houston: Pannell, Kerr & Foster)

24. The Report Letter: 1-5 pages-When detail not important Form: Preprinted Forms:Govt & Institutions Narrative: Longest & Formal: When Clients need to know complete details & methods