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Chapter 18 RE Appraisal. Terms. Appraisa l:Estimate of Value of Something Capitalize : Convert Future Income into PV Valuation :Appraisers’ Step by Step Process Highest & Best Use : Use of land which will produce the greatest Current Value

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Chapter 18 RE Appraisal

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Chapter 18 re appraisal

Chapter 18RE Appraisal


Terms

Terms

  • Appraisal:Estimate of Value of Something

  • Capitalize: Convert Future Income into PV

  • Valuation:Appraisers’ Step by Step Process

  • Highest & Best Use: Use of land which will produce the greatest Current Value

  • 4-3-2-1 Rule: Land @ the back of a lot is worth < front: [e.g. 50’x100’ >25’x200’]

  • CMA Estimate price via sales & prospects

    • Competitive Market Analysis


Terms1

Terms

  • Market Value aka Fair Market Value

    Most probable price which 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 knowledgeable and assuming the price is not affected by undue stimulus


Terms2

Terms

  • Principle of Anticipation:

    • Price = f(Anticipated Benefits to Buyer/Seller)

  • Principle of Substitution:

    • Price = f(Cost of Equally Desirable Substitute)

  • Principle of Competition:

    • Profits encourages Competition ... Supply

  • Plottage Value=Total > Sum(Small Lots)


Chapter 18 re appraisal

Uniform StandardsPro-Appraisal Practice

  • Define the Appraisal Problem

  • Conduct a Preliminary Analysis

  • Formulate Appraisal Plan& Collect data

  • Estimate Highest and Best Use

  • Estimate Land Value & Improvements

  • Reconcile Results =Defined Value Estimate

  • Report Conclusion of Value


Reasons for the appraisal

Reasons for the Appraisal

  • Transfer of ownership

  • Financing or credit

  • Compensation/Condemnation proceeding

  • RE decision making

  • Taxation

  • Lease provisions

  • Corporation to purchase employee home


Chapter 18 re appraisal

Principles of Appraisal

  • Highest price definition

    • The highest price in terms of money which a property will 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


Three approaches

Three Approaches

  • Sales Comparison (Market):

    • Residential

  • Cost (Replacement Value)

    • Residential (if < 3 sites) /Income

  • Income Capitalization

    • Income/Commercial Properties


Sales comparison

Sales Comparison

  • Steps

    • Identify all comparable sales

    • Gather & verify data on these sales

    • Select the most appropriate (3 is magic #)

    • Adjust comparables for time and comparability

    • Reconcile differ. values & Produce Best Est

  • Enhancements:

    • Matched pair: Find 2 properties that differ in one characteristic & calculate the difference

    • OLS: P=a+b(baths)+c(closets)+d(appliances)


Sales comparison subject house

Sales Comparison: Subject House


Sales comparison 3 comparables

Sales Comparison: 3 Comparables


Sales comparison final adjustment

Sales Comparison: Final Adjustment


Chapter 18 re appraisal

Cost Approach

  • Reproduction Cost: The current cost of constructing an exact replica (Ideal)

  • Replacement cost: Cost of constructing similar utility using current standard of material, skill, etc. (Reality)


Chapter 18 re appraisal

Direct

Construction of improvements (labor, contractor fees & materials)

Indirect

Appraiser, lawyers, accountants, financing, architect, etc

Quantity survey: Add estimates of direct & indirect

Unit in place: Estimate

cost of putting components together (e.g.. all drywall, painting, etc

Per square foot: Cost/Sq’

Estimating

Costs

Cost Approach

Methods

Types of Costs


Chapter 18 re appraisal

Cost

Approach

Subtract

Depreciation

  • Types of Depreciation

    • Physical Depreciation: Wearing out

    • Functional Obsolescence: Technology (halls, floors,etc)

    • Economic Obsolescence: Neighborhood or highway moves

  • Estimating

    • Reproduction to market value:

      • Value now=100K, Reproduce then =120K

      • 20/120 = 17% deterioration

    • Actual to Effective Life:

      • Effective life=40yrs but 20 in actual=50% deprec.


Chapter 18 re appraisal

Cost Approach: Example


Chapter 18 re appraisal

Cost Approach: Example


Chapter 18 re appraisal

Cost Approach: Example


Chapter 18 re appraisal

Income Capitalization Approach

Gross Rent Multiplier

  • Estimate economic rents on complex

    • What they should rent for now

    • Note: Some rents may be grandfather’d

  • Check GRMs in the area

    • GRM=Sales Prices(SPs)/Gross Rents (GERs)

  • Use E[GRM] to get E(Price) for property

    eg.AvgSPs= $120K & AvgGERs=$10K : E[GRM]=12

    Sbj=GER=$130 Therefore: Price=12*130=$1,560K


Chapter 18 re appraisal

Income Capitalization Approach

  • Capitalization= Conversion of NOI into estimate of PV or MV: MV=NOI/CR

  • Cap rates=Relationship: Income & Value

  • Techniques to determine Cap Rate:

    • Estimate cap rates for comparables

    • Check other investors: What do you expect?

  • Bands of Investment: Like RE WACC

    • Return on property must be enough to pay all financial claims & still give Equity E(ROR)

    • BOI=WM*RM +WE *RE


Chapter 18 re appraisal

Income Cap Approach: e.g.


Chapter 18 re appraisal

Income Cap Approach: e.g.


Information income properties

Information: Income Properties

  • Apart/Condo: Income&Expense Analysis:Apts, Condos, Coops (Chi:Inst. or RE Mgt)

  • Office BldgsOffice Building Experience Exchange Report(WashDC:Bldg Owners&MgsA)

  • ShopCtrsDollars & Cents of Shopping Centers(Wash DC: Urban Land Inst)

  • IndusPark Site Selection Hndbk (Atlnta: Conway)

  • Hotels/Leis. Trends in Hotel Industry (Houston: Pannell, Kerr & Foster)


The report

The Report

  • Letter: 1-5 pages-When detail not important

  • Form: Preprinted Forms:Govt & Institutions

  • Narrative: Longest & Formal: When Clients need to know complete details & methods


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