1. © OnCourse Learning Chapter 18 : Real Estate Appraisal

2.  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

3.  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

4. VALUING A HOUSE MARKET COMPARISON APPROACH © OnCourse Learning

5. 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.

6.  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

7. COMPETITIVE MARKET ANALYSIS © OnCourse Learning

8. COMPETITIVE MARKET ANALYSIS © OnCourse Learning

9. 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

10. 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

11. SQUARE-FOOT METHOD OF COST ESTIMATING © OnCourse Learning

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

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

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

15. Income Overall Rate = Value $45,400 0.09376 = $484,215 DIRECT CAPITALIZATION USING AN OVERALL RATE © OnCourse Learning

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

18. 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

19. 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

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

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

22. 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

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

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

25.  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

26. 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