Chapter 18 RE Appraisal

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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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Presentation Transcript
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
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

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)
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
• Transfer of ownership
• Financing or credit
• Compensation/Condemnation proceeding
• RE decision making
• Taxation
• Lease provisions
• Corporation to purchase employee home
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
• Sales Comparison (Market):
• Residential
• Cost (Replacement Value)
• Residential (if < 3 sites) /Income
• Income Capitalization
• Income/Commercial Properties
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)
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)
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

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.
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

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
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
• Letter: 1-5 pages-When detail not important
• Form: Preprinted Forms:Govt & Institutions
• Narrative: Longest & Formal: When Clients need to know complete details & methods