Real Estate Principles and Practices Chapter 17 The Appraisal Process © 2014 OnCourse Learning.

Real EstateReal Estate Principles and Practices Principles and Practices

Chapter 17Chapter 17

The Appraisal ProcessThe Appraisal Process

© 2014 OnCourse Learning


Key TermsKey Terms

Ad valorem tax

Appraisal

Appraisal report

Capitalization rate

Cost approach

Depreciation

Economic obsolescence

FIRREA

Functional obsolescence

Gross income multiplier (GIM)

Gross rent multiplier (GRM)

Highest and best use

Income approach

Market price


Key TermsKey Terms

Market value

Physical depreciation

Plottage

Progression

Quantity survey method

Regression

Replacement cost

Reproduction cost

Sales comparison approach

Tax assessment

USPAP

Unit-in-place cost approach method

Value


OverviewOverview

Purpose of appraisals

Steps in the appraisal process

Reporting of value

Title XI of the Financial Institutions Reform, Recovery and Enforcement Act 1989

New regulations


AppraisalAppraisal

Opinion of worth of a parcel of property

Appraisal process

1. Define the problem

2. Collect the data

Economic

Neighborhood

Property


AppraisalAppraisal

3. Apply the 3 approachesSales comparison

Cost

Income

4. Correlate data and analyze results

5. Prepare the report


The Purpose of an Appraisal: The Purpose of an Appraisal: Defining ValueDefining Value

Value: Value: present worth of future benefit

1. 1. Market value: Market value: most probable selling price for property:

No abnormal pressure

Exposed to the open market for a reasonable time

Buyer is knowledgeable

Market Price: Market Price: aactual sales price



3. Insurance value: 3. Insurance value: coverage to replace the structure

4. Estate tax value4. Estate tax value: value of the deceased’s estate

5. Lease interest: 5. Lease interest: long term lease with reappraisal clause to determine leasehold value

2. Loan value2. Loan value: greatest reason for appraisals



Assessed value X mill levy

1 Mill = 1/10 of 1 cent1 Mill = 1/10 of 1 cent

6. Tax assessment:6. Tax assessment: establishes ad valoremad valorem taxtax value

$270,000$270,000 Appraised valueAppraised value.30.30 Percentage taxedPercentage taxed

$ 81,000$ 81,000 Assessed valueAssessed value.070.070 Mill levyMill levy

$ 5,670$ 5,670 Annual taxesAnnual taxes

$2.00 per $100 = $270,000 X $2.00 = $5,400$2.00 per $100 = $270,000 X $2.00 = $5,400



8. Financial statement: 8. Financial statement: net equity

9. Third Party Companies:9. Third Party Companies: transferred employees

10. Liquidation: 10. Liquidation: forced sale

11. Divorce Cases: 11. Divorce Cases: distribution of assets

7. Eminent domain:7. Eminent domain: fair market valuePartial taking: before and after methodbefore and after method

Just compensationJust compensation


Forces Affecting ValueForces Affecting Value

Governmental (political) actions

Economic (financial) forces

Physical or environmental forces

Sociological forces

Modify, create, or destroy value



Property taxes and services

Laws and regulations

Federal control

Policies affect inflation and interest rates

Regional and local government



Inflation: values increase

Recession: values decrease

Regional and local economic conditions

More spendable money = prosperity

Future economic predictions



Elements outside the subject property

Topography

Climate

Location within the community



Population trends

Attitudes of people in the community

Cultural amenities

Value is created by: DesireDesire

UtilityUtility

ScarcityScarcity

Effective Purchasing PowerEffective Purchasing Power


Collecting the DataCollecting the Data

General dataRegion, city, and neighborhood

Property

Site

Square footage of house

Condition and extra features

Special assessments


Approaches to ValueApproaches to Value

Compares Compares subject property subject property to recently sold to recently sold similar propertiessimilar properties

Cost to rebuild plus landCost to rebuild plus land

Converts future income Converts future income to present valueto present value


Sales Comparison ApproachSales Comparison Approach

Market data approach: subject is compared to recently sold property

Minimum of 3 comparables

Adjustments made for differences

If no sales in the area – expand the search area

Time adjustments

Most common approach for residential property


Sales Comparison ApproachSales Comparison Approach

MarketMarket

AgeAge

LocationLocation

Lot sizeLot size

Quality of constructionQuality of construction

Porches, decks, and Porches, decks, and patiospatios

General conditionGeneral condition

Living areaLiving area

Number of bedroomsNumber of bedrooms

BathsBaths

BasementsBasements

GaragesGarages

Air conditioning andAir conditioning and heating systemsheating systems

Fireplaces Fireplaces

ExtrasExtras

AdjustmentsAdjustments


Cost ApproachCost Approach

1. 1. Square foot method: cost per sq ft of building a similar structure X # of sq ft.

AKA: Replacement Cost or Summation ApproachAKA: Replacement Cost or Summation Approach

$90,000 to build 1500 sq ft $90,000 to build 1500 sq ft

$90,000 ÷ 1500 = $60 per sq ft$90,000 ÷ 1500 = $60 per sq ft

Cost to build X # of square feetCost to build X # of square feet

1500 sq ft X $60 = $90,0001500 sq ft X $60 = $90,000



2. 2. Cubic foot method: considers volume

3. Unit in place cost approach 3. Unit in place cost approach method: method: cost of component parts

4. Quantity survey method: 4. Quantity survey method: detailed breakdown including cost of all material plus labor and profit




Replacement cost: Replacement cost: similar design and style using current costs and materials

Reproduction cost: Reproduction cost: cost of constructing an exact duplicate




Steps in cost approachSteps in cost approach1. Estimate site value as vacant

2. Estimate cost to replace improvement

3. Deduct depreciation

4. Subtract depreciation from replacement cost

5. Add land value



Income ApproachIncome Approach

Income Approach: Income Approach: value determined by future net income net income

Gross rent multiplier (GRM) (GMRM): Gross rent multiplier (GRM) (GMRM): 1 – 4 family residential properties

Gross income multiplier (GIM): Gross income multiplier (GIM): ccommercial or industrial properties



Comps sales price ÷ gross monthly income

1. Comps: recently sold rented properties

2. Sales price ÷ gross monthly income = GRM

Gross Rent MultiplierGross Rent Multiplier



CompsComps DateDate PricePrice IncomeIncome GRMGRM

11 12-0712-07 $168,000$168,000 $900$900 210.00210.00

22 1-081-08 171,000171,000 850850 201.18201.18

33 2-082-08 173,500173,500 900900 192.78192.78

44 3-083-08 174,750174,750 950950 183.95183.95

SubjectSubject TodayToday ?? 900900 ??



3. Greatest consideration to most similar comps

4. Multiply subject’s gross rent by the GRM

Gross Rent MultiplierGross Rent Multiplier

$ 900.00$ 900.00 gross rentgross rent

X 190.00X 190.00 GRMGRM

$171,000$171,000 Subject’s Subject’s valuevalue



Net income is used to determine present value

1. Estimate PPotential GGross IIncome (PGI)

EEffective GGross Income (EGI): PGI minus vacancy and rent loss

2. EGI minus operating costs = NNet OOperating IIncome (NOI)

Income-Producing PropertiesIncome-Producing Properties



3. Capitalization rate: Net income of comp ÷ sales price of comp

4. Apply formula: NOI ÷ cap rate = value

Capitalizing: Capitalizing: converts future income to present value


Capitalization rate:Capitalization rate: return of and on capital invested




IncomeIncome

RateRate= Value= Value

$15,000$15,000

10%10%= $150,000= $150,000



Analyze rental history: quality & durability 1. Contract rent high and short duration?

2. Long-term, below market rent leases?

3. Responsibly managed and maintained?

4. Past rental history?

5. If a regional shopping mall:


National chain? Surrounding market? Household income?

6. Location?


The Appraisal ReportThe Appraisal Report

Appraisal report: Appraisal report: Oral, letter, form, narrative

Minimum requirements:Identification of property

Purpose

Date of valuation

Data used

Limiting conditions / assumptions

Indication of value

Appraiser’s certification

Appraiser’s signature



Oral report: used when time is of the essence

Letter report: letter form without pertinent information or data analysis

Form report: check boxes and comments sections

Required by Fannie Mae and Freddie Mac

Narrative report: includes verification and substantiation of the value opinion



1. title page

2. letter of transmittal

3. table of contents

4. summary of the facts

5. objectives of the report

6. identification of the property

7. definition of value

8. property rights appraised

9. city data

10. neighborhood data

Outline of Narrative ReportOutline of Narrative Report



11. taxes, zoning, and utilities

12. site description and value

13. building description & land improvements

14. analysis & interpretation

15. approaches to value used

16. reconciliation

17. certification

18. conclusion of value

19. limiting conditions & contingencies

20. appraiser’s qualification

Outline of Narrative ReportOutline of Narrative Report


The Professional AppraiserThe Professional Appraiser

Most specialized division of real estate business

Disinterested 3rd party who follows an orderly process in determining property value


The Uniform Standards of The Uniform Standards of Professional Appraisal Practice Professional Appraisal Practice

1. 2,000 hours experience

2. 60 hours education

3. 15 hours USPAP

4. Pass examination

Requirements for State Requirements for State CertificationCertification



1. appraise federally related commercial transactions in excess of $250,000

2. appraise residential properties in excess of $1 million

3. appraise complex residential properties in excess of $250,000

4. appraise residential properties in excess of 4 units

5. must pass examination

State Certification required to:State Certification required to:



1. 1,000 hours of residential experience + 1,000 hours of commercial education

2. 150 hours course work

3. 15 hours USPAP

4. pass an examination

General Certification General Certification Requirements:Requirements:

Real Estate Principles and Practices Chapter 17 The Appraisal Process © 2014 OnCourse Learning.

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Transcript of Real Estate Principles and Practices Chapter 17 The Appraisal Process © 2014 OnCourse Learning.