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Understanding Real Estate Appraisal: Methods, Principles, and Applications

This chapter provides a thorough overview of real estate appraisal, presenting it as an opinion of value that can be documented either orally or in writing. It explores various reasons for conducting appraisals including sales, financing, taxation, and insurance. The chapter discusses three primary approaches to valuing property: the Market Approach using comparable sales data, the Cost Approach focusing on construction and land value, and the Income Approach based on potential monetary returns. Key principles of value such as scarcity, utility, transferability, and desirability are also highlighted.

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Understanding Real Estate Appraisal: Methods, Principles, and Applications

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  1. Chapter 18Real Estate Appraisal _________________________

  2. Appraisals • Appraisal: An opinion of value that is documented (it can be oral or written). [Compare with an estimate] • Reasons/Uses of Appraisals: -sale (transfer title) -financing -taxation -insurance -condemnation

  3. Three approaches to Value • Market – comparable sales data • Cost – construction cost plus land value • Income – monetary returns of property capitalized

  4. Valuing a House Market Comparison Approach +$2,960 -$2,700 -$7,560

  5. Costs Approach to Value Step 1: Estimate land as vacant $ 30,000 Step 2: Estimate new constructioncost of similar building $120,000 Step 3: Less estimated depreciation -12,000 Step 4: Indicated value of building $108,000 Step 5: Appraised property value $138,000by the cost approach

  6. Square-foot Method of Cost Estimating

  7. Income Approach Variation by Direct Capitalization Income / Rate = Value $18,000 / 0.09 = $200,000

  8. Principles of Value • scarcity • utility • transferability • desirability Note: Usually use “market value” but other values: tax, insurance, etc. Most values based on “highest and best use.”

  9. Depreciation • Physical • Functional • Economic

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