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APPRAISAL THEORY AND PRACTICE

APPRAISAL THEORY AND PRACTICE. WHAT IS THE OBJECTIVE OF AN APPRAISAL? - - ESTIMATE FAIR MARKET VALUE. WHAT IS FAIR MARKET VALUE?. VALUE IN CASH OR EQUIVALENT COMPETITIVE MARKET CONDITIONS USUAL FINANCING TERMS ARMS LENGTH KNOWLEDGEABLE, INFORMED BUYER AND SELLER

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APPRAISAL THEORY AND PRACTICE

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  1. APPRAISAL THEORY AND PRACTICE • WHAT IS THE OBJECTIVE OF AN APPRAISAL? • - - ESTIMATE FAIR MARKET VALUE

  2. WHAT IS FAIR MARKET VALUE? • VALUE IN CASH OR EQUIVALENT • COMPETITIVE MARKET CONDITIONS • USUAL FINANCING TERMS • ARMS LENGTH • KNOWLEDGEABLE, INFORMED BUYER AND SELLER • NO UNDUE STIMULUS OR DURESS

  3. WHO USES APPRAISALS? • IS THERE A DIFFERENCE BETWEEN INVESTMENT AND FAIR MARKET VALUE? • WHAT CREATES VALUE IN THE MARKET PLACE?

  4. AN OVERVIEW OF THE THREE METHODS OF APPRAISAL • SALES - COMPARISONS • INCOME - CAPITALIZATION • COST - REPLICATION

  5. SALES - COMPARISONS • WHAT IS IT? • WHERE IS IT MOST APPLICABLE? • WHAT ARE THE ADVANTAGES AND DISADVANTAGES?

  6. SIMPLE SALES - COMPS EXAMPLE

  7. SALES COMPARABILITY: APPRAISAL - SIMPLE ADJUSTMENT PROCESS • 1) REAL ESTATE STRATIFICATION • 2) TEMPORAL FACTOR • 3) GEOGRAPHY • 4) LAND USE / PROPERTY TYPE • 5) VALUE CLASSES • 6) TERMS OF SALES • 7) PROPERTY CHARACTERISTICS

  8. VALUATION BY STATISTICAL INFERENCE:An Extension of the Sales-Comparable ApproachThe Hedonic Method FMV Parcel Services Characteristics

  9. HEDONIC APPROACH -- STATISTICAL INFERENCE APPRAISAL AND COMPUTER ASSISTED MASS APPRAISAL • STEPS • DEFINE SALES SAMPLE • SELECT PARCEL CHARACTERISTICS • CODE PARCEL CHARACTERISTICS • ALALYZE MULTIVARIATE REGRESSION RESULTS • REFINE MULTIVARIATE REGRESSION RESULTS - REVISE SAMPLE - REVISE VARIATES • VERIFY FINDINGS AND RESULTS

  10. ESTIMATE OF THE MARKET VALUE FUNCTION(Obtained by Two-Stage Least Squares)

  11. INTERPRETATION OF VALUE ESTIMATE • TAXATION CAPITALIZATION • ACCESSIBILITY • PROPERTY CHARACTERISTICS • OTHER VARIABLES

  12. INCOME - CAPITALIZATION APPROACH • WHAT IS THE RATIONALE FOR USING AN INCOME CAPITALIZATION APPROACH? • WHARE ARE LIKELY ADVANTAGES OF THIS METHOD? • DISADVANTAGES? • HOW DOES THIS METHOD COMPARE TO THE SALES-COMP APPROACH? • WHAT INFORMATION DO YOU NEED TO CONDUCT THE INCOME-CAPITALIZATION METHOD OF APPRAISAL? 1. 2. 3. 4.

  13. ESTIMATING GROSS INCOME

  14. ESTIMATING ANNUAL OPERATING EXPENSES

  15. THE CAP RATE:WHAT IS IT AND HOW IS IT USED? INCOME APPROACH SCHEMATIC NOI Market Data? Market Data? CAP RATE FMV

  16. HOW ARE CAP RATES AND INTEREST RATES RELATED?

  17. COST - APPROACH • WHY DO WE USE THE COST APPROACH? • WHAT ARE ITS LIMITATIONS AND ADVANTAGES? • HOW DOES THE COST APPROACH COMPARE TO THE SALES AND INCOME APPROACHES? • BASIC ASSUMPTIONS: PERFECTLY COMPETITIVE MARKET! • C - D = V

  18. FOUR BASIC DATA ELEMENTS OF COST APPROACH • 1. • 2. • 3. • 4.

  19. COST APPROACH EXAMPLE

  20. WHERE IS THE COST APPROACH MOST EFFECTIVE AND WHY?

  21. REPLACEMENT COST VS. REPRODUCTION COST

  22. METHODS FOR ESTIMATING COSTS • QUANTITY SURVEY • UNITS-IN-PLACE • UNITS-COMPARISON • BASE-BUILDING METHOD / INDEX ADJUSTMENT

  23. DEPRECIATION CONSIDERATION • PHYSICAL • TECHNOLOGICAL • ECONOMIC

  24. SOME OTHER TECHNIQUES • GROSS OR NET INCOME MULTIPLIER METHODS • RESIDUAL CAPITALIZATION • MORTGAGE EQUITY CAPITALIZATION

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