1. Revised 7-30-08 Chapter 19 Slide # 1 Copyright – David A. McGowan All rights reserved Chapter 19 Real Estate Appraisal (Page 379) Appraisal (noun) ap·prais·al – an opinion of value by an individual as of a given moment in time

2. Revised 7-30-08 Chapter 19 Slide # 2 Copyright – David A. McGowan All rights reserved VALUE (Page 380) Demand - the need or desire Utility - usefulness Scarcity - a finite supply Transferability - transferability of ownership rights from one person to another

3. Revised 7-30-08 Chapter 19 Slide # 3 Copyright – David A. McGowan All rights reserved MARKET VALUE (Page 381) Most probable price that a property should bring in a fair sale. Assumptions Competitive and open market Parties are acting prudently with knowledge of the facts No unusual circumstances

4. Revised 7-30-08 Chapter 19 Slide # 4 Copyright – David A. McGowan All rights reserved ESSENTIAL FACTORS OF MARKET VALUE Arm’s length transaction Most probable price is not the average or median Parties are unrelated and acting without undue influence

5. Revised 7-30-08 Chapter 19 Slide # 5 Copyright – David A. McGowan All rights reserved Parties are well informed as to the nature of the property Reasonable marketing time Payment made in cash No special financing or inducements ESSENTIAL FACTORS OF MARKET VALUE

6. Revised 7-30-08 Chapter 19 Slide # 6 Copyright – David A. McGowan All rights reserved Anticipation – expectation values will increase Change – nothing remains constant Competition – interaction of supply and demand Conformity – harmony & esthetics Basic Principles of Value (Page 381)

7. Revised 7-30-08 Chapter 19 Slide # 7 Copyright – David A. McGowan All rights reserved Contribution – improvements add value Highest and best use – only one highest and best use at a given moment in time Increasing and diminishing returns – over improvement adds value only to the max of the property value range Basic Principles of Value (Page 381)

8. Revised 7-30-08 Chapter 19 Slide # 8 Copyright – David A. McGowan All rights reserved Regression and progression – values impacted by proximity to higher or lower valued properties Substitution – value only equal to substitute properties Supply and demand – value impacted on number of properties available Basic Principles of Value (Page 381)

9. Revised 7-30-08 Chapter 19 Slide # 9 Copyright – David A. McGowan All rights reserved Assemblage – combing two or more lots into a single parcel Plottage – increase in value as a result of an assemblage Basic Principles of Value (Page 381) 25 ft 125 ft A B C D B C 50 ft

10. Revised 7-30-08 Chapter 19 Slide # 10 Copyright – David A. McGowan All rights reserved 3 APPROACHES TO VALUE (Page 383) Cost Approach Income Approach Comparison Approach

11. Revised 7-30-08 Chapter 19 Slide # 11 Copyright – David A. McGowan All rights reserved COST APPROACH (Page 384) Cost Approach – value based upon the assumption you are constructing the subject property today using today’s construction costs then applying depreciation and finally the cost of the land

12. Revised 7-30-08 Chapter 19 Slide # 12 Copyright – David A. McGowan All rights reserved COST APPROACH RCN - Depreciation Improvement Value + Land Current Property Value Physical Functional External Curable or Incurable Always incurable (Replacement Cost New)

13. Revised 7-30-08 Chapter 19 Slide # 13 Copyright – David A. McGowan All rights reserved Math COST APPROACH

14. Revised 7-30-08 Chapter 19 Slide # 14 Copyright – David A. McGowan All rights reserved INCOME APPROACH (Page 389) Value is a function of the properties Net Annual Income. Capitalization Formula: NAI = Rate X Value NAI = Net Annual Income Rate = Capitalization Rate or “Cap Rate” Value = property market value

15. Revised 7-30-08 Chapter 19 Slide # 15 Copyright – David A. McGowan All rights reserved INCOME APPROACH (Page 389) Size: 25,000 sq ft Rent: $18.75 / sq ft Annual Operating Expenses: 43% of gross Investor wants a 7% rate of return GAI Expenses NAI NAI = Rate X Value NAI R V X $468,750 $201,563 $267,187 7% $3,816,957 = X $267,187 7%

16. Revised 7-30-08 Chapter 19 Slide # 16 Copyright – David A. McGowan All rights reserved INCOME APPROACH (Page 389) NAI Rate Value Rate Value Rate Value

17. Revised 7-30-08 Chapter 19 Slide # 17 Copyright – David A. McGowan All rights reserved COMPARISON APPROACH (Page 383) Estimating the value of real estate by comparing the subject property to recent sales of comparable properties Basic rules for comparables: Closed within the last 6 months No more than 1 mile from subject

18. Revised 7-30-08 Chapter 19 Slide # 18 Copyright – David A. McGowan All rights reserved COMPARISON APPROACH SubjectComp #1Comp #2Competent #3 Address1329 Golden1035 Williams811 Crest Hill7650 Plaque Rd Proximity to Subject2 Blocks South4 Blocks West3 Blocks East Sales Price475,000480,000490,000470,000 ConcessionsNone$4,000None ViewSimilar Properties ParkSimilar Properties Designed / Appeal2-Story Colonial Quality of Construction Typical / Aluminum Vinyl / Brick Age2022735 ConditionGoodExcellentGoodAverage Above Grade Rm Count810 8 Bedrooms4454 Bathrooms2.5 3.02.5 Gross Living Area2,1922,3022,4452,120 Heating / CoolingGFA / CAHW / CAGFA / CA ZonedGFA / CA

19. Revised 7-30-08 Chapter 19 Slide # 19 Copyright – David A. McGowan All rights reserved SubjectComp #1 Address1329 Golden Drive1035 Williams Street Proximity to Subject2 Blocks South Sales Price475,000480,000 Sales or Finance ConcessionsNone$4,000 ViewSimilar Properties Designed / Appeal2-Story Colonial Quality of ConstructionTypical / Aluminum Age2022 ConditionGoodExcellent Above Grade Room Count810 Bedrooms44 Bathrooms2.5 Gross Living Area2,1922,302 Heating / CoolingGFA / CAHW / CA Garage2 car2.5 Car Porch / Patio / DeckDeckConcrete Pad Fireplace / Location1 - LR1 – Family Room Fence / PoolNoneFence BasementFull FinishedFull finished

20. Revised 7-30-08 Chapter 19 Slide # 20 Copyright – David A. McGowan All rights reserved COMPARISON APPROACH Sales Price $480,000 Total Adjustments $ Adjusted Sales Price $

21. Revised 7-30-08 Chapter 19 Slide # 21 Copyright – David A. McGowan All rights reserved RECONCILIATION High Middle Low Based on a complete visual inspection of the interior and exterior areas of the subject property, defined scope of work, statement of assumptions and limiting conditions, and appraiser’s certification, my (our) opinion of the market value, as defined, of the real property that is the subject of this report is $______________, as of ___________________, which is the date of inspection and the effective date of this appraisal.