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Chapter 18 ________________ Real Estate Appraisal

Chapter 18 ________________ Real Estate Appraisal. Appraisal. An estimate of value. Three approaches to estimating value: Market – comparable sales data Cost – construction cost plus land value Income – monetary returns of property capitalized.

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Chapter 18 ________________ Real Estate Appraisal

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  1. Chapter 18________________ Real Estate Appraisal

  2. Appraisal • An estimate of value. • Three approaches to estimating value: • Market– comparable sales data • Cost – construction cost plus land value • Income – monetary returns of property capitalized

  3. Valuing a House Market Comparison Approach

  4. Competitive Market Analysis

  5. Calculating Gross Rent Multiplier Building Sales 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 $196,000 $27,762 = 7.06 As a Group: $805,000 $115,002 = 7.00

  6. Costs Approach to Value Step 1: Estimate land as vacant $ 30,000 Step 2: Estimate new constructioncost 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 $138,000by the cost approach

  7. Square-foot Method of Cost Estimating

  8. Income Approach Variation by Direct Capitalization Income / Rate = Value $18,000 / 0.09 = $200,000

  9. Projected Annual Operating Statement (Pro Forma Statement) Operating expense ratio: $31,070 / $79,800 = 38.9%

  10. Direct Capitalization Using an Overall Rate Income Overall Rate = Value $45,400 0.09376 = $484,215

  11. cost recovery

  12. Overall Rates - 10-year Holding Period, 25-year Loan for 75% of the Purchase Price, 10% Investor Return

  13. Reconciliation 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

  14. Types of Appraisals andReporting Options under USPAP Types of Appraisals • Complete appraisal • Limited appraisal Reporting Options • Self-contained appraisal report • Summary report • Restrictive report

  15. Formats of Appraisal Reports • Letter report • Form report • Narrative report • Review appraisals • Real estate analysis

  16. Appraiser License • Certified General Appraiser • Certified Residential Appraiser • State licensed appraiser • Provisional licensed real estate appraiser • Appraiser trainee

  17. Principles of Value • 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

  18. Value • Market value • Assessed value • Insurance value • Loan value • Estate tax value • Plottage value • Rental value • Replacement value

  19. Markets • Buyer’s market – excess supply of housing for sale. • Seller’s market – demand exceeds supply.

  20. Professional Appraisal Societies • 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

  21. 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

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