Real Estate Appraisal ThomsonSouthWestern 2008 Appraisal An estimate

____________________ Real Estate Appraisal Thomson/South-Western© 2008

Appraisal • An estimate of value. • Three approaches to estimating value: – Market – comparable sales data – Cost – construction cost plus land value – Income – monetary returns of property capitalized Thomson/South-Western© 2008

Value • • Market value Assessed value Insurance value Loan value Estate tax value Plottage value Rental value Replacement value Thomson/South-Western© 2008

Markets • Buyer’s market – excess supply of housing for sale. • Seller’s market – demand exceeds supply. Thomson/South-Western© 2008

Principles of Value Principle of Anticipation Principle of Substitution Highest and best use of a property Principle of competition Principle of supply and demand Principle of change Principle of contribution Principle of conformity Thomson/South-Western© 2008

HIGHEST AND BEST USE • = that use that will give the property its greatest current value! Thomson/South-Western© 2008

Valuing a House with Market Comparison Approach Thomson/South-Western© 2008

Calculating Gross Rent Multiplier $245, 000 Gross Annual Rents $34, 900 No. 2 $160, 000 $22, 988 = 6. 96 No. 3 $204, 000 $29, 352 = 6. 95 No. 4 $196, 000 $27, 762 = 7. 06 $115, 002 = 7. 00 Building Sales Price No. 1 As a Group: $805, 000 Thomson/South-Western© 2008 = 7. 02

Costs Approach to Value Step 1: Estimate land as vacant $ 30, 000 Step 2: Estimate new construction cost of similar building $120, 000 Step 3: Less estimated depreciation Step 4: Indicated value of building $108, 000 Step 5: Appraised property value $138, 000 by. Thomson/South-Western© 2008 the cost approach -12, 000

Square-foot Method of Cost Estimating Thomson/South-Western© 2008

Income Approach Variation by Direct Capitalization Income / Rate = Value $18, 000 / 0. 09 = $200, 000 Thomson/South-Western© 2008

Projected Annual Operating Statement (Pro Forma Statement) Thomson/South-Western© 2008

Direct Capitalization Using an Overall Rate Income = Value Overall Rate $45, 400 = $200, 000 0. 09376 Thomson/South-Western© 2008

Overall Rates - 10 -year Holding Period, 25 -year Loan for 75% of the Purchase Price, 10% Investor Return Thomson/South-Western© 2008

Reconciliation Market Approach $138, 000 Cost Approach 40, 000 Income Approach $ 8, 000 $180, 000 x 75% = $200, 000 x 20% = $ $160, 000 x 5% = Final Indicated Value $186, 000 Thomson/South-Western© 2008