Real Estate Financial and Investment Analysis APPRAISAL THEORY

Real Estate Financial and Investment Analysis APPRAISAL THEORY AND PRACTICE WHAT IS THE OBJECTIVE OF AN APPRAISAL? - - ESTIMATE FAIR MARKET VALUE 1

Real Estate Financial and Investment Analysis WHAT IS FAIR MARKET VALUE? • • • VALUE IN CASH OR EQUIVALENT COMPETITIVE MARKET CONDITIONS USUAL FINANCING TERMS ARMS LENGTH KNOWLEDGEABLE, INFORMED BUYER AND SELLER NO UNDUE STIMULUS OR DURESS 2

Real Estate Financial and Investment Analysis 3 WHO USES APPRAISALS? • IS THERE A DIFFERENCE BETWEEN INVESTMENT AND FAIR MARKET VALUE? • WHAT CREATES VALUE IN THE MARKET PLACE?

Real Estate Financial and Investment Analysis AN OVERVIEW OF THE THREE METHODS OF APPRAISAL • SALES - COMPARISONS • INCOME - CAPITALIZATION • COST - REPLICATION 4

Real Estate Financial and Investment Analysis SALES - COMPARISONS • WHAT IS IT? • WHERE IS IT MOST APPLICABLE? • WHAT ARE THE ADVANTAGES AND DISADVANTAGES? 5

Real Estate Financial and Investment Analysis SIMPLE SALES - COMPS EXAMPLE 6

Real Estate Financial and Investment Analysis SALES COMPARABILITY: APPRAISAL SIMPLE ADJUSTMENT PROCESS 1) 2) 3) 4) 5) 6) 7) REAL ESTATE STRATIFICATION TEMPORAL FACTOR GEOGRAPHY LAND USE / PROPERTY TYPE VALUE CLASSES TERMS OF SALES PROPERTY CHARACTERISTICS 7

8 Real Estate Financial and Investment Analysis VALUATION BY STATISTICAL INFERENCE: An Extension of the Sales-Comparable Approach The Hedonic Method FMV Parcel Services Characteristics

Real Estate Financial and Investment Analysis HEDONIC APPROACH -STATISTICAL INFERENCE APPRAISAL AND COMPUTER ASSISTED MASS APPRAISAL STEPS • DEFINE SALES SAMPLE • SELECT PARCEL CHARACTERISTICS • CODE PARCEL CHARACTERISTICS • ALALYZE MULTIVARIATE REGRESSION RESULTS • REFINE MULTIVARIATE REGRESSION RESULTS - REVISE SAMPLE - REVISE VARIATES • VERIFY FINDINGS AND RESULTS 9

Real Estate Financial and Investment Analysis ESTIMATE OF THE MARKET VALUE FUNCTION (Obtained by Two-Stage Least Squares) 10

Real Estate Financial and Investment Analysis 11

Real Estate Financial and Investment Analysis INTERPRETATION OF VALUE ESTIMATE • • TAXATION CAPITALIZATION ACCESSIBILITY PROPERTY CHARACTERISTICS OTHER VARIABLES 12

Real Estate Financial and Investment Analysis INCOME - CAPITALIZATION APPROACH • WHAT IS THE RATIONALE FOR USING AN INCOME CAPITALIZATION APPROACH? • WHARE LIKELY ADVANTAGES OF THIS METHOD? • DISADVANTAGES? • HOW DOES THIS METHOD COMPARE TO THE SALES-COMP APPROACH? • WHAT INFORMATION DO YOU NEED TO CONDUCT THE INCOME-CAPITALIZATION METHOD OF APPRAISAL? 1. 2. 3. 4. 13

Real Estate Financial and Investment Analysis ESTIMATING GROSS INCOME 14

Real Estate Financial and Investment Analysis ESTIMATING ANNUAL OPERATING EXPENSES 15

16 Real Estate Financial and Investment Analysis THE CAP RATE: WHAT IS IT AND HOW IS IT USED? INCOME APPROACH SCHEMATIC NOI Market Data? CAP RATE Market Data? FMV

Real Estate Financial and Investment Analysis HOW ARE CAP RATES AND INTEREST RATES RELATED? 17

Real Estate Financial and Investment Analysis 18 COST - APPROACH • WHY DO WE USE THE COST APPROACH? • WHAT ARE ITS LIMITATIONS AND ADVANTAGES? • HOW DOES THE COST APPROACH COMPARE TO THE SALES AND INCOME APPROACHES? • BASIC ASSUMPTIONS: PERFECTLY COMPETITIVE MARKET! • C-D=V

Real Estate Financial and Investment Analysis FOUR BASIC DATA ELEMENTS OF COST APPROACH 1. 2. 3. 4. 19

Real Estate Financial and Investment Analysis COST APPROACH EXAMPLE 20

Real Estate Financial and Investment Analysis WHERE IS THE COST APPROACH MOST EFFECTIVE AND WHY? 21

Real Estate Financial and Investment Analysis 22 REPLACEMENT COST VS. REPRODUCTION COST

Real Estate Financial and Investment Analysis METHODS FOR ESTIMATING COSTS • • QUANTITY SURVEY UNITS-IN-PLACE UNITS-COMPARISON BASE-BUILDING METHOD / INDEX ADJUSTMENT 23

Real Estate Financial and Investment Analysis DEPRECIATION CONSIDERATION • PHYSICAL • TECHNOLOGICAL • ECONOMIC 24

Real Estate Financial and Investment Analysis SOME OTHER TECHNIQUES • GROSS OR NET INCOME MULTIPLIER METHODS • RESIDUAL CAPITALIZATION • MORTGAGE EQUITY CAPITALIZATION 25