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Chapter 18 RE Appraisal

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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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  • 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
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
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)
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)

Construction of improvements (labor, contractor fees & materials)


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’



Cost Approach


Types of Costs





  • 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
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