Unit 17: Real Property Valuation 1 Learning Objectives: - - PDF document

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Unit 17: Real Property Valuation

Licensing requirements for valuation services Multiple types of valuation and their implications Steps to the appraisal process Investment property valuation Depreciation Reconciliation The appraisal profession

Learning Objectives:

• Licensed by state
• Certified residential appraisers
• Certified general appraisers (commercial)
• Pay based on time & complexity
• not commission or appraisal amount

Appraising

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• Regulates thrift industry (S&L, Credit Unions)
• Mostly to regulate appraisers on federally related loan

transactions

• Appraisal Qualification Board
• Appraisers do not need to be real estate agents

Appraising

FIRREA – Financial Institutions Reform Recovery & Enforcement Act

Informal estimate of value by real estate brokers

• 1. Comparative market analyses are an exemption to the

North Carolina Appraisers Act if real estate brokers never represent themselves as an appraiser.

• 2. CMAs should refer to probable sales price and never to

market value.

Appraising

Broker Price Opinions

• For non-brokerage clients.
• Full brokers may perform BPOs for a fee to

non-brokerage clients.

• Must be in writing
• Probable selling price
• BPO & CMA same meaning in NC

Appraising

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Characteristics of Value

• 1. Demand
• 2. Utility DUST
• 3. Scarcity
• 4. Transferability

Value

The relationship between an object desired and a potential purchaser described as present worth of future benefits

Market Value Most probable price in a competitive &

• pen market

(1) Payment must be in cash or its equivlant (2) The buyer and seller must be unrelated and acting without undue pressure (an arm’s length transaction) Market Value Most probable price in a competitive &

• pen market

(3) A reasonable length of time must be allowed for the property to be exposed in the open market (4) Both parties must be well informed

• f property’s use and potential,

including assets and defects

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Market value versus Market price

Value

1.Market value—a value estimate based on the analysis of comparable sales and other pertinent market data; list price 2.Market price—what the property actually sold for; sales price Market value versus cost

• Cost—past expenditures on the

property

• Cost does not equal market value.
• But can be close if improvements

are new.

Value Forces and Factors Influencing Property Value

• 1. Social forces—such as marriage and

divorce rates, family size, and social activities 2. Economic forces—such as income and employment levels and interest rates

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Forces and Factors Influencing Property Value

• 3. Political forces—such as

zoning, building codes, and environmental issues

• 4. Physical Forces –

topography, location, climate, size, shape, promimity to major arterials, public transportation, jobs

• 1. Highest and Best Use – only one at a time

BASIC ECONOMIC PRINCIPLES OF VALUE

• 2. Substitution – when several

items with essentially the same amenities and utilities are available, the lowest price will affect the most demand

• 3. Supply and Demand –

value will change if supply decreases and the demand increases or remains the same

BASIC ECONOMIC PRINCIPLES OF VALUE

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• 4. Conformity—maximum value is realized

if property conforms to existing neighborhood standards BASIC ECONOMIC PRINCIPLES OF VALUE Forces and Factors Influencing Property Value

• 5. Anticipation – Value

can increase or decrease in anticipation of some future benefit or detriment affecting the property Forces and Factors Influencing Property Value

• 6. Contribution - Is the expense of improvement equal

to the increased market value? Over-Improvements

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Forces and Factors Influencing Property Value 7. Competition—excessive profits tend to attract ruinous competition 8.Change—life cycle of value includes growth, stability, decline, and renewal

Forces and Factors Influencing Property Value

Orderly set of procedures used to collect and analyze data to arrive at a value conclusion

• 1. Specific data—Subject properties & comparison

properties

• 2. General data—Neighborhood

The Appraisal Process

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8 Steps 1.State the problem: what type of value is being sought?

• 2. Determine & perform scope of work

3.Collect and analyze the data needed and the sources 4.Determine the highest and best use of the site.

The Appraisal Process

5.Estimate the land value, usually by a sales comparison analysis 6.Estimate the value by each of the three approaches 7.Reconcile the estimated values for the final value estimate 8.Report the final value estimate (see Figure 17.1) The Appraisal Process Three Approaches (techniques) to Arrive at an Accurate Estimate of Value

• 1. The sales comparison approach
• 2. The cost approach
• 3. The income capitalization approach

Approaches to Value - (Appraisal Methods)

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The Sales Comparison Approach (see Figure 17.2)

• Aka Market Data Approach
• An estimate of value is obtained by comparing the

subject property (the property under appraisal) with recently sold comparable properties (properties similar to the subject)

• Best indicator of value for residential properties

and land

Approaches to Value - (Appraisal Methods)

Comparable properties — the intent is to adjust the comparables to be identical to the subject

• a. Date of sale—The closer the sale, the more relevant the

price

• b. Location—Neighborhood differences
• c. Physical features—physical differences between the

comparable properties and the subject

• d. Terms and conditions of sale—Arm’s length transaction

Approaches to Value - (Appraisal Methods)

The Sales Comparison Approach (see Figure 17.2)

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Selecting Comparables 1.Comparable should be as similar as possible to subject 2.Comparable should have sold within the last 120 days 3.At least 3 comparables Approaches to Value - (Appraisal Methods)

The Sales Comparison Approach (see Figure 17.2)

Do not use as comparables 1.Active listings, expired listings, or under contract properties which do not have a sales price 2.Abnormal transactions such as owner- financed, non-arm’s length, or distressed property sales (i.e. foreclosures or short sales) Approaches to Value - (Appraisal Methods)

The Sales Comparison Approach (see Figure 17.2)

Adjustments are made as follows: 1.If comparable is superior or has a feature that the subject property lacks, the value of the comparable is decreased by the market value of the feature 2.If comparable is inferior or lacks a feature that the subject property has, the value of the comparable is increased by the market value of the feature Approaches to Value - (Appraisal Methods)

The Sales Comparison Approach (see Figure 17.2)

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• 3. A single value must be determined using a weighing

process called correlation, not simple averaging NEVER NEVER NEVER adjust the price

• n the subject property

Approaches to Value - (Appraisal Methods)

The Sales Comparison Approach (see Figure 17.2)

Comparative market analysis (CMA)—informal version

• f the sales comparison approach

1.Determines a range of probable sales prices 2.A client-level service

• a. A dual agent must perform a CMA for both

clients (not necessarily the same CMA)

• b. A CMA cannot be performed for a

customer/third party Approaches to Value - (Appraisal Methods)

The Sales Comparison Approach (see Figure 17.2)

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The Cost Approach (see Figure 17.3) 1.Estimate the value of the land 2.Estimate the current cost of constructing 3.Estimate the amount of accrued depreciation 4.Deduct depreciation from cost to build new 5.Add land value to depreciated cost

• f building(s)

Approaches to Value - (Appraisal Methods)

The Cost Approach (Cont.) Determining reproduction or replacement cost 1.Reproduction cost—cost of an exact duplicate at current prices; mainly historical properties 2.Replacement cost—current cost of improvements with utility or function similar to subject property; most common calculation

Approaches to Value - (Appraisal Methods)

The Cost Approach (Cont.) Methods of estimating reproduction or replacement cost (1) Square-foot method—based on the average; most widely used method (2) Unit-in-place method—based on the installed costs of components

Approaches to Value - (Appraisal Methods)

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The Cost Approach (Cont.) Methods of estimating reproduction or replacement cost (3) Quantity survey method—based the raw materials plus the cost

• f the construction labor plus

indirect costs; most exact method

Approaches to Value - (Appraisal Methods)

The Cost Approach (Cont.)

Depreciation – 3 Classes

• 1. Physical deterioration:
• Curable—normal wear and tear
• Incurable – structural components

Approaches to Value - (Appraisal Methods)

The Cost Approach (Cont.)

Depreciation – 3 Classes

• 2. Functional obsolescence:
• Curable— physical or design features than can be

replaced or remodeled.

• Incurable – features that can not be easily remedied

Approaches to Value - (Appraisal Methods)

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Approaches to Value - (Appraisal Methods)

The Cost Approach (Cont.) Depreciation – 3 Classes

• 3. Economic obsolescence—

always incurable (a.k.a. environmental or external; location issue) Note: Land does NOT depreciate

The Cost Approach (Cont.) Depreciation – Breakdown Method Usually calculated on a straight-line basis

• 1. Economic life—How long is it expected to remain useful?
• 2. Actual life—How long is it expected to remain standing?
• 3. Effective life—How old does it act?

Approaches to Value - (Appraisal Methods)

The Cost Approach (Cont.) Special-purpose properties— Cost approach most helpful in appraisals of unique buildings

Approaches to Value - (Appraisal Methods)

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Income Capitalization Approach (see Figure 17.5)

Based on the present value of the rights to future income

Steps in the income approach to value:

• a. Estimate the annual potential gross income (PGI)—

income from all sources, including rent, concessions, and vending

Approaches to Value - (Appraisal Methods)

Income Capitalization Approach Cont’d Steps in the income approach to value:

• b. Deduct for vacancies and collections losses (bad debt)

to obtain the effective gross income (EGI)

• c. Deduct the annual operating expenses to obtain the

net operating income (NOI)

Approaches to Value - (Appraisal Methods) Approaches to Value - (Appraisal Methods) R I V

• d. Estimate the price an investor would pay (cap rate)

(1) Cap rate is calculated by dividing the annual net

• perating incomes of recently-sold comparable

properties by the sales price of those properties (2) Cap rate is inversely related to market value

• as one goes up, the other comes down
• e. NOI ÷ Cap rate = Market value

Income Capitalization Approach Cont’d

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Gross Monthly Income  residential property Gross Annual Income  commercial and industrial properties

Approaches to Value - (Appraisal Methods)

Income Capitalization Approach Cont’d Gross Rent Multipliers (GRM) & Gross Income Multipliers (GIM)

• informal substitutes for income capitalization (see Fig 17.6)

Gross rent multiplier (1) Used for one- to two-family residences (2) Based on the gross monthly rent of recently-sold similar properties (3) Sales price ÷ gross monthly rent = gross rent multiplier

Approaches to Value - (Appraisal Methods)

Income Capitalization Approach Cont’d

Gross income multiplier (1) Used for non-residential income properties (2) Based on the gross annual income (from all sources) of recently-sold similar properties (3) Sales price ÷ gross annual income = gross income multiplier

Approaches to Value - (Appraisal Methods)

Income Capitalization Approach Cont’d

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• obtaining the final value estimate from multiple

approaches to value

• A. The three approaches to value usually produce three

different indications of value

• B. All three should be analyzed and

included in estimating the final value

Reconciliation

• obtaining the final value estimate from multiple

approaches to value

• C. The three indications of value should

not simply be averaged

• D. Different situations will require a

“weighing” of the indicated values

Reconciliation

A.The Appraisal Institute is one of multiple appraisal

• rganizations with attainable industry designations.

B.Most specialized branch of real estate.

• C. To become state-certified, appraisers must meet

educational, experiential, and examination

• requirements. Federally-related appraisals

must follow the guidelines as stated in the Uniform Standards of Professional Appraisal Practice (USPAP). The Profession of Appraising

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A.Working with Comparable Sales B.The Cost Approach – Depreciation

• C. The Income Capitalization Approach

– Gross rent multipliers or gross income multipliers Math Concepts

Only 3 more units to go!

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