1. Thomson/South-Western©2008 Real Estate Appraisal _______________________________________

2. Thomson/South-Western©2008 Appraisal An estimate of value. Three approaches to estimating value: –Market – comparable sales data –Cost – construction cost plus land value –Income – monetary returns of property capitalized

3. Thomson/South-Western©2008 Value Market value Assessed value Insurance value Loan value Estate tax value Plottage value Rental value Replacement value

4. Thomson/South-Western©2008 Markets Buyer’s market – excess supply of housing for sale. Seller’s market – demand exceeds supply.

5. Thomson/South-Western©2008 Principle of Anticipation Principle of Substitution Highest and best use of a property Principle of competition Principle of supply and demand Principle of change Principle of contribution Principle of conformity Principles of Value

6. Thomson/South-Western©2008 HIGHEST AND BEST USE = that use that will give the property its greatest current value!

7. Thomson/South-Western©2008 Valuing a House with Market Comparison Approach

8. Thomson/South-Western©2008 BuildingSales Price Gross Annual Rents Gross Rent Multiplier No.1$245,000 $34,900= 7.02 No.2$160,000 $22,988= 6.96 No.3$204,000 $29,352= 6.95 No.4 As a Group: $196,000 $805,000 $27,762 $115,002 = 7.06 = 7.00 Calculating Gross Rent Multiplier

9. Thomson/South-Western©2008 Step 1: Estimate land as vacant $ 30,000 Step 2: Estimate new construction cost of similar building $120,000 Step 3: Less estimated depreciation -12,000 Step 4: Indicated value of building $108,000 Step 5: Appraised property value $138,000 by the cost approach Costs Approach to Value

10. Thomson/South-Western©2008 Square-foot Method of Cost Estimating

11. Thomson/South-Western©2008 Income / Rate = Value $18,000 / 0.09 = $200,000 Income Approach Variation by Direct Capitalization

12. Thomson/South-Western©2008 Projected Annual Operating Statement ( Pro Forma Statement )

13. Thomson/South-Western©2008 Income Overall Rate = Value $45,400 0.09376 = $200,000 Direct Capitalization Using an Overall Rate

14. Thomson/South-Western©2008 Overall Rates - 10-year Holding Period, 25-year Loan for 75% of the Purchase Price, 10% Investor Return

15. Thomson/South-Western©2008 Market Approach $180,000 x 75% = $138,000 Cost Approach$200,000 x 20% = $ 40,000 Income Approach $160,000 x 5% = $ 8,000 Final Indicated Value $186,000 Reconciliation