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# Chapter 18 RE Appraisal - PowerPoint PPT Presentation

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 18RE Appraisal

• 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

• 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

• 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)

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

• Transfer of ownership

• Financing or credit

• Compensation/Condemnation proceeding

• RE decision making

• Taxation

• Lease provisions

• Corporation to purchase employee home

• 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

• Sales Comparison (Market):

• Residential

• Cost (Replacement Value)

• Residential (if < 3 sites) /Income

• Income Capitalization

• Income/Commercial Properties

• 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)

• 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)

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

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.

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

• 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

• 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)

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

• Form: Preprinted Forms:Govt & Institutions

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