© OnCourse Learning Chapter 18 : Real Estate Appraisal

 An appraisal is a necessary part of most real estate transactions.  The decision to buy, sell, or grant a loan on real estate hinges on property value.  Appraisals are also used to set prices on property listed for sale, to set premiums on fire insurance policies, used by government to acquire and manage public property, & to establish property tax levels. © OnCourse Learning PURPOSE AND USE OF APPRAISALS

 An estimate of value.  Three value approaches:  Market – comparable sales data  Cost – construction cost plus land value  Income – monetary returns of property capitalized APPRAISAL © OnCourse Learning

VALUING A HOUSE MARKET COMPARISON APPROACH © OnCourse Learning

MARKET VALUE DEFINED the most probable price that 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, knowledgeably, and assuming the price is not affected by undue stimulus.

 LOT FEATURES AND LOCATION  COMPARABLES  SALES RECORDS  VERIFICATION  NUMBER OF COMPARABLES  ADJUSTMENT PROCESS  TIME ADJUSTMENTS  HOUSE SIZE  GARAGE AND PATIO ADJUSTMENTS  BUILDING AGE, CONDITION, AND QUALITY  LANDSCAPING  TERMS AND CONDITIONS OF SALE © OnCourse Learning SALES COMPARISON APPROACH

COMPETITIVE MARKET ANALYSIS © OnCourse Learning

COMPETITIVE MARKET ANALYSIS © OnCourse Learning

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 © OnCourse Learning

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 © OnCourse Learning

SQUARE-FOOT METHOD OF COST ESTIMATING © OnCourse Learning

 Loss in value due to depreciation since construction.  Physical deterioration  Functional obsolescence  Economic obsolescence. © OnCourse Learning ESTIMATING DEPRECIATION

Income / Rate = Value $18,000 / 0.09 = $200,000 INCOME APPROACH Variation by Direct Capitalization © OnCourse Learning

PROJECTED ANNUAL OPERATING STATEMENT (PRO FORMA STATEMENT) © OnCourse Learning

Income Overall Rate = Value $45, = $484,215 DIRECT CAPITALIZATION USING AN OVERALL RATE © OnCourse Learning

OVERALL RATES - 10-YEAR HOLDING PERIOD, 25-YEAR LOAN FOR 75% OF THE PURCHASE PRICE, 10% INVESTOR RETURN © OnCourse Learning

Market Approach $180,000 x 75% = $135,000 Cost Approach$200,000 x 20% = $ 40,000 Income Approach $160,000 x 5% = $ 8,000 Final Indicated Value $183,000 RECONCILIATION © OnCourse Learning

Complete appraisal Limited appraisal Types of Appraisals Self-contained appraisal report Summary report Restrictive report Reporting Options TYPES OF APPRAISALS AND REPORTING OPTIONS UNDER USPAP © OnCourse Learning

1. Letter report 2. Form report 3. Narrative report 4. Review appraisals 5. Real estate analysis FORMATS OF APPRAISAL REPORTS © OnCourse Learning

 Certified General Appraiser  Certified Residential Appraiser  State licensed appraiser  Provisional licensed real estate appraiser  Appraiser trainee APPRAISER LICENSE © OnCourse Learning

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 © OnCourse Learning

 Market value  Assessed value  Insurance value  Loan value  Estate tax value  Plottage value  Rental value  Replacement value VALUE © OnCourse Learning

 Buyer’s market – excess supply of housing for sale.  Seller’s market – demand exceeds supply. MARKETS © OnCourse Learning

 The American Institute of Real Estate Appraisers (AIREA)  MAI  SRA  Society of Real Estate Appraisers  NATIONAL Association of Independent Fee Appraisers  Farm Managers and Rural Appraisers  National Society of Real Estate Appraisers  American Society of Appraisers PROFESSIONAL APPRAISAL SOCIETIES © OnCourse Learning

Appraisal Capitalize Comparables Cost approach Depreciation FIRREA Gross rent multiplier (GRM) Highest and best use Income approach Market approach Market value Operating expenses Scheduled gross (Projected gross) USPAP Key Terms © OnCourse Learning