Florida Real Estate Brokers Guide Sixth Edition Linda

Unit 6 Overview of Real Estate Valuation

Introduction to Appraisal • An opinion of value or the process of developing an opinion of value • Purpose of an appraisal is to determine the problem to be solved and the type of value to be estimated 3 © 2017 Kaplan, Inc.

Purpose of an Appraisal • Appraiser must identify – Client – Intended user –

Comparative Market Analysis vs. Appraisal • A marketing tool prepared for a potential buyer or seller • CMAs are NOT required to conform to USPAP standards • May NOT be referred to or be represented as an appraisal 5 © 2017 Kaplan, Inc.

Broker’s Price Opinion vs. Appraisal • Written opinion of value • Real estate licensees may prepare a BPO for compensation – Sales associate must be supervised by broker – Compensation must be paid to broker • May not be referred to or be represented as an appraisal • BPOs NOT required to conform to USPAP 6 © 2017 Kaplan, Inc.

Relationship Between Brokers and Appraisers • Real estate licensees may perform appraisal for compensation – They may NOT represent themselves as certified or licensed appraisers – Must conform to USPAP standards – May NOT prepare appraisals that require a state-certified or licensed appraiser 7 © 2017 Kaplan, Inc.

The Appraisal Foundation • Federally related transaction – Real estate-related financial transaction – Involves federal financial regulatory agency • Office of Thrift Supervision, Office of Comptroller of Currency, the FED, FDIC, or National Credit Union Administration – Requires an appraisal – Transaction value exceeds $250, 000 • Fannie Mae, Freddie Mac, HUD, and VA require appraisals be completed by state-certified or licensed appraisers, regardless of transaction value 8 © 2017 Kaplan, Inc.

Federal Regulation • Appraiser Qualifications Board (AQB) – Establishes qualifications for state-certified and licensed appraisers • Appraiser education and appraisal experience • Appraisal Standards Board (ASB) – Sets forth rules for developing an appraisal and reporting its results – Promotes the use, understanding, and enforcement of USPAP 9 © 2017 Kaplan, Inc.

Uniform Standards of Professional Appraisal Practice (USPAP) • Standards of practice – Standard 1 – development of real property appraisal – Standard 2 – Reporting assignment – Standard 3 – Reviewing existing appraisal report 10 © 2017 Kaplan, Inc.

Appraisal Certification and Licensure • • Registered trainee appraiser Licensed appraiser Certified residential appraiser

Price, Cost, and Value • Price - the amount paid; the contract price • Cost - the expenditure to create an improvement (labor, materials, and land) • Value - ability to command goods and services in exchange 12 © 2017 Kaplan, Inc.

Types of Value • • Assessed value Going-concern value Insurable value Investment value Liquidation

Market Value • The consensus of the interactions of many buyers and sellers in a particular market • Three broad categories 1. Relationship, knowledge, and motivation of the buyer and seller 2. Terms of the sale (cash, cash equivalent, or other terms) 3. Conditions of sale (exposure in a competitive market for a reasonable time) 14 © 2017 Kaplan, Inc.

Conditions Implicit in Market Value Definition • Buyer and seller are typically motivated • Both parties are well informed or well advised, acting in their own best interests • A reasonable time is allowed in the open market • Payment is made in cash in U. S. dollars or in comparable financial arrangements • Price is not affected by special financing or seller concessions 15 © 2017 Kaplan, Inc.

Principles of Value: Supply and Demand • Supply is the amount and type of real estate available for sale or rent at different price levels in a given market • Variables that influence supply are – Availability of skilled labor – Availability of construction loans and financing – Availability of land – Availability of materials 16 © 2017 Kaplan, Inc.

Principles of Value: Supply and Demand • Demand is the desire and ability to purchase or rent goods and services • Variables that influence demand are – Price of real estate – Population numbers and household composition – Income of consumers – Availability of mortgage credit – Consumer taste or preferences 17 © 2017 Kaplan, Inc.

Principles of Value • Anticipation • Substitution – Sales comparison approach – Cost approach – Income approach • Increasing and decreasing returns – Overimprovement • Conformity • External economies and diseconomies © 2017 Kaplan, Inc. 18

Highest and Best Use • The probable and legal use of real property that is physically possible, defendable, and financially feasible and that results in the highest value • Two types – Highest and best use as though vacant – Highest and best use as improved 19 © 2017 Kaplan, Inc.

Highest and Best Use as Though Vacant • Legal use that brings the greatest value • If vacant, what type of structure should be erected? • Appraiser compares alternative uses – Net operating incomes and capitalization rates to derive total value – Minus development costs – One with highest residual land value is highest and best use as though vacant 20 © 2017 Kaplan, Inc.

Highest and Best Use as Improved • Compares alternative uses – Total acquisition costs • Existing structure vs. demolition and construction costs – Net operating incomes divided by total costs gives rate of return for each use – Use with highest rate of return is highest and best use as improved 21 © 2017 Kaplan, Inc.

The Appraisal Process 1. Identify the problem to be solved, including identifying the • Client • Intended users • Use of the appraisal 2. Determine the scope of work necessary to develop a credible appraisal 3. Develop the appraisal according to the scope of work 22 © 2017 Kaplan, Inc.

Identify the Problem to be Solved • Identify the client – Anonymous client must document identity of the client in the work file but omit the client’s identity in the appraisal report – Report must state the client’s identity is withheld at client’s request • Identify the intended users by name or type, as users of the appraisal • Identify the intended use of the appraisal to determine appropriate scope of work 23 © 2017 Kaplan, Inc.

Determine Scope of Work • Type and extent of research and analyses, including – Extent to which the property is identified – Extent to which tangible property is inspected – Type and extent of data researched – Type and extent of analyses applied to arrive at opinions or conclusions 24 © 2017 Kaplan, Inc.

Develop the Appraisal According to the Scope of Work • Include sufficient information to allow intended users to understand the scope of work performed – Identify client and other intended users – Identify the intended use of opinions and conclusions – Type and definition of value – Effective date of the appraisal – Identify the subject property and relevant characteristics – Extraordinary assumptions and hypothetical 25 conditions © 2017 Kaplan, Inc.

Develop the Appraisal According to the Scope of Work (continued) – Land-use regulations, economic supply and demand, and market-area trends – Opinion of the highest and best use – Collect, verify, and analyze information – Type of value estimated – Reconcile the approaches – Report the appraisal 26 © 2017 Kaplan, Inc.

Types of Appraisal Reports • Appraisals are either oral or written • Written report options – Appraisal report – Restricted appraisal reports may be provided when the intended user is exclusively the client • Appraisal report formats – Form report – Narrative report 27 © 2017 Kaplan, Inc.