Chapter 11 Real Estate Appraisal

Why Appraisals are Needed?  Sellers - property worth?  Buyers - even with market?  Banks - value >= loan?  Insurance Companies - for policy  Counties (government) - property tax

Appraisal Regulation  FIRREA of 1989  State requirements  Licensed appraisers  Certified residential appraisers  Certified general appraisers

Types of Texas Appraisers  Certified General - all types  Certified Residential residential units only  State Licensed residential (limited value) - can do non-residential properties if signed by certified general appraiser  Provisional License residential (limited value)

Certified General Appraiser Requirements  180 classroom hours  3000 hours of experience over 2.5 years least 1500 non- residential  Pass exam  $250 fee

Certified Residential Appraiser Requirements  120 classroom hours  2500 hours experience over 2 years  Pass exam  $200 fee

State Licensed Appraiser Requirements  90 classroom hours  2000 hours experience  Pass exam  $175 fee

Provisional Licensed Appraiser Requirements  90 classroom hours  Become Appraiser Trainee with at least 2 certified appraisers  Pass exam  $175 fee

What is Value?  Market value Buyer & seller typically motivated They are well informed Reasonable time for market exposure Payment in cash No special circumstances

What is Value? (continued)  Investment value worth to a particular investor based on that investor’s personal standards of investment acceptability  Other types of value Assessed value Insurable value

Key Appraisal Principles  Anticipation - future revenue streams  Change - in market conditions  Substitution - other similar properties  Contribution - how special features add/subtract value

The Appraisal Process 1) Definition of the problem 2) Data selection and collection 3) Highest and best use analysis 4) Application of the three approaches to valuation 5) Reconciliation of value indications 6) Report of defined value

The 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  Highest and best use analysis As though vacant As improved

The Appraisal Process  Application of the three approaches to valuation Sales comparison approach Cost approach Income approach  Reconciliation of value indications  Report of defined value

Sales Comparison Approach  Comparable sales data selection  Adjustment of sales data  Elements of comparison Property rights conveyed Conditions of sale Financing terms Market conditions Location characteristics Physical characteristics

Table 11.1

Cost Approach 1) Estimate site value 2) Estimate production cost Reproduction cost Replacement cost  Comparative unit method  Segregated cost method  Quantity survey method

Cost Approach (continued) 3) Estimate accrued depreciation Physical deterioration Functional obsolescence Economic obsolescence

Table 11.2

Income Approach 3 techniques  Gross income multiplier GIM = Value/Gross Income  Net income capitalization Capitalization Rate = Net Income/Value  Discounted cash flow

Table 11.3 (simple discounted cash flow)

End Chapter 11  Exam #3 info:  50 M/C questions  Bring Scantron  Chapters 8, 9, 10, 11  Questions from: Chapters PowerPoint slides Class notes