© 2008 by South-Western, Cengage Learning Chapter 18 Charles J. Jacobus Thomas E. Gillett

© 2008 by South-Western, Cengage Learning Georgia Real Estate An Introduction to the Profession Seventh Edition Chapter 18 Real Estate Appraisal

© 2008 by South-Western, Cengage Learning Appraisal Appraisal An estimate of value. Purpose and Use Informal Formal

© 2008 by South-Western, Cengage Learning Valuation Process USPAP Define the problem Preliminary analysis, formulate a plan, & collect date Highest & best use Land value Reconcile & arrive at an estimate Report the value

© 2008 by South-Western, Cengage Learning Characteristics of Value

© 2008 by South-Western, Cengage Learning Principles of Value Principal of Anticipation Present worth of future benefit Principal of Substitution Property is worth what one would pay for an equally desirable substitute

© 2008 by South-Western, Cengage Learning Principles of Value Principal of Competition Stabilizes prices Principal of Change Real property is always in a state of change Principal of Conformity Maximum value is achieved with homogeneity

© 2008 by South-Western, Cengage Learning Principles of Value Principal of Highest & Best Use Use that results in the greatest value Principal of Supply and Demand Value results in the relative supply in relation to demand

© 2008 by South-Western, Cengage Learning Principles of Value Principal of Increasing Returns Dollar spent adds at least a dollar to value Principal of Decreasing Returns Dollar spent does not add at least a dollar to value

© 2008 by South-Western, Cengage Learning Principles of Value Principal of Contribution Worth of an improvement is not determined by cost but by what it adds to the overall value

© 2008 by South-Western, Cengage Learning Meanings of the word Value Assessed Value Estate Tax Value Insurance Value Loan Value

© 2008 by South-Western, Cengage Learning Combining two or more parcels Assemblage with value increase

Meanings of the word Value Rental Value Replacement Value Salvage Value

© 2008 by South-Western, Cengage Learning Markets Buyer’s Market Excess supply Seller’s Market Excess demand Broad Market Many buyers & sellers Thin Market Few buyers & sellers

© 2008 by South-Western, Cengage Learning Value Approaches Market Approach Cost Approach Income Approach

© 2008 by South-Western, Cengage Learning Market Value Typically motivated Well Informed & acting in their own best interest Open market exposure Cash or cash equivalency

© 2008 by South-Western, Cengage Learning Market Comparison Approach Subject property: Residence to be appraised Comparables: Recently sold similar properties Sales Records Information needed? Where to search? Verification

© 2008 by South-Western, Cengage Learning Market Comparison Approach Number of comparables Fewest adjustments Current market conditions

© 2008 by South-Western, Cengage Learning Market Comparison Approach

© 2008 by South-Western, Cengage Learning Time Adjustments House Size Garage & Patio Building Age, Condition, & Quality Landscaping Lot Features & Location Terms & Conditions of Sale

© 2008 by South-Western, Cengage Learning

Unique Issues Condominium, Townhomes, and Cooperatives Vacant Land Competitive Market Analysis Recently Sold Active Listings Expired Listings

© 2008 by South-Western, Cengage Learning CMA Section # 1: Homes for Sale Section # 2: Similar Sales Section # 3: Expired Listings Section # 4: FHA & VA Section # 5: Buyer Appeal

© 2008 by South-Western, Cengage Learning CMA Section # 6: Marketing Position Section # 7: High & Low points Section # 8: Selling Costs Section # 9: Sales Price & Net

© 2008 by South-Western, Cengage Learning GRM Gross Rent is compared to Sales Price Annual Income vs. Monthly Income Weaknesses of GRM Sales Price Gross Rent = GRM $700,000 $100,000 = 7 GRM

© 2008 by South-Western, Cengage 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 a GRM

© 2008 by South-Western, Cengage 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

© 2008 by South-Western, Cengage Learning Cost Approach Reproduction Cost Exact replica Replacement Cost Similar utility

© 2008 by South-Western, Cengage Learning Cost Approach Square-Foot Method Current construction cost divided by number of square feet

© 2008 by South-Western, Cengage Learning Square Foot Method 20 ft Garage 20 ft X 20 ft = 400 sq ft 20 ft 45 ft Driveway 45 X 20 = 900 sq ft 20 ft 30 ft Dwelling 50 X 20 = 1000 sq ft 20 X 30 = 600 sq ft TOTAL = 1600 sq ft 40 ft 50 ft 20 ft Dwelling Value per Square Foot: Base Price$56.45 add 0.80 for shake shingles add 1.25 for air conditioning add 1.50 for carpeting Total $60.00 per square foot 25 ft 20 ft Patio 20 ft X 25 Ft = 500 sq ft 5 ft COST ESTIMATE Dwelling 1,600 $60.00 = $ 96,000 add dishwasher 700 add fireplace 4,000 Dwelling total $100,700 Garage 400 $ ,000 Driveway ,800 Patio ,000 Landscaping 2,000 Subtotal $119,500 Construction financing, real estate Taxes and title policy, add 10% 11,950 GRAND TOTAL $131,450

© 2008 by South-Western, Cengage Learning Cost Approach Quantity Survey All inclusive cost of building item by item Unit in Place Cost of a unit X the number of units Cost Handbooks

© 2008 by South-Western, Cengage Learning Estimating Depreciation Estimating Depreciation Physical Deterioration Wear & Tear Forces of nature

© 2008 by South-Western, Cengage Learning Estimating Depreciation Estimating Depreciation Functional Obsolescence Faulty or out of date design

© 2008 by South-Western, Cengage Learning Estimating Depreciation Estimating Depreciation Economic Obsolescence Outside the property lines

© 2008 by South-Western, Cengage Learning Computing Depreciation Straight Line Method (Age/Life Method) Actual Age: Historical concept Effective Age: How old it appears Physical Life: Physically sound Economic Life: Productive life Building Cost Economic Life = Depreciation per Year Depreciation per Year X Effective Age = Accrued Depreciation

© 2008 by South-Western, Cengage Learning Depreciation Example 2,000 sq. ft bldg. x $68 per sq. ft. = $136,000 Cost New X 10 Year Effective Age $136,000 Cost New 60 Year Economic Life = $22,66.67 Depreciation per yr $2, Depreciation per year $22, rounded to $22,700.00

© 2008 by South-Western, Cengage Learning Cost Approach Final Steps Current Construction Cost Minus Deprecation Plus Land

© 2008 by South-Western, Cengage Learning Income Approach Capitalize: to convert future income to a current value Income Rate = Value $18, = $200,000

© 2008 by South-Western, Cengage Learning Income Approach Income and Expense Forecasting Projected Gross Income Scheduled Gross Vacancy & Collection losses

© 2008 by South-Western, Cengage Learning Income Approach Operating Expenses Reserves for Replacement Net Operating Income (NOI) Return on Investment Return of investment

© 2008 by South-Western, Cengage Learning Operating Statement Scheduled Gross Annual Income$84,000 Vacancy Allowance and Collection Losses 4,200 Effective Gross Income $79,800 Operating Expenses Property Taxes$ 9,600 Hazard and liability insurance 1,240 Property management 5,040 Janitorial services 1,500 Gardener 1,200 Utilities 3,940 Trash pickup 600 Repairs and maintenance 5,000 Other 1,330 Reserves for replacement Furniture & furnishings 1,200 Stoves & refrigerators 600 Furnace &/or air conditioning 700 Plumbing & electrical 800 Roof 750 Exterior painting 900 Total Operating Expenses 34,400 Net Operating Income $45,400 Operating Expense Ratio: $34,400 / $79,800 = 43.1%

© 2008 by South-Western, Cengage Learning Income Approach Operating Expense Ratio Operating Expenses Effective Gross Income = Operating Expense Ratio

© 2008 by South-Western, Cengage Learning Capitalizing Income Mortgage Equity Tables Overall Rate: mortgage equity factor Income Overall Rate = Value

© 2008 by South-Western, Cengage Learning Overall Rates - 10-year Holding Period, 25-year Loan for 75% of the Purchase Price, 10% Investor Return

© 2008 by South-Western, Cengage Learning Capitalizing Income Mortgage Equity Tables Example $45, = $484,215

© 2008 by South-Western, Cengage Learning Capitalizing Income Depreciation Accounted for in cap rate Fictional Depreciation IRS depreciation 27 ½ Years

© 2008 by South-Western, Cengage Learning Choices of Approaches All 3 approaches when possible Suitability of each approach

© 2008 by South-Western, Cengage 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 Weighted Factor: Relevance & Reliability Appraiser's Best Estimate

© 2008 by South-Western, Cengage Learning Appraisal Regulation The Appraisal Foundation Uniform appraisal standards Criteria for certification & recertification of appraisers System for certification & recertification Two Subcommittees Appraiser Qualifications Board Appraisal Standards Board

© 2008 by South-Western, Cengage Learning Appraisal Regulation Federal Regulation Title XI of the Financial Institution Reform, Recovery, and Enforcement Act of 1989 (FIRREA) Developing the Appraisal Uniform Standards of Professional Appraisal Practice

© 2008 by South-Western, Cengage Learning Appraisal Regulation Departure Provision Complete Appraisal Limited Appraisal Reporting Options Self-contained Report Summary Report Restrictive Report

© 2008 by South-Western, Cengage Learning Appraisal Regulation USPAP Required Reporting Standards Signed certification Formats of Reports Letter Report Form Report Narrative Report

© 2008 by South-Western, Cengage Learning Appraisal Regulation Review Appraisals Real Estate Analysis

© 2008 by South-Western, Cengage Learning Professional Appraisal Societies AIREA & SREA combined to form the Appraisal Institute MIA SRA National Association of Fee Appraisers Farm Managers and Rural Appraisers American Society of Appraisers

© 2008 by South-Western, Cengage Learning Key Terms Key Terms Appraisal Capitalize Comparables Cost approach Depreciation FIRREA Gross rent multiplier Highest and best use Income approach Market approach Market value Operating expenses Scheduled gross Projected gross USPAP