Real Estate Principles Tenth Edition Real Estate An

Real Estate Principles Tenth Edition Real Estate: An Introduction to the Profession Tenth Edition

Chapter 18 Real Estate Appraisal _____________ 2

Appraisal l An estimate of value. l Three approaches to estimating value: Market – comparable sales data l Cost – construction cost plus land value l Income – monetary returns of property capitalized l 3

Valuing a House Market Comparison Approach -$7, 560 +$2, 960 -$2, 700 4

Competitive Market Analysis 5

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 = 7. 02 6

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 -12, 000 Step 4: Indicated value of building $108, 000 Step 5: Appraised property value $138, 000 by the cost approach 7

Square-foot Method of Cost Estimating 8

Income Approach Variation by Direct Capitalization Income / Rate = Value $18, 000 / 0. 09 = $200, 000 9

Projected Annual Operating Statement (Pro Forma Statement) Operating expense ratio: $31, 070 / $79, 800 = 38. 9% 10

Direct Capitalization Using an Overall Rate Income = Value Overall Rate $45, 400 = $484, 215 0. 09376 11

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Overall Rates - 10 -year Holding Period, 25 -year Loan for 75% of the Purchase Price, 10% Investor Return 13

Reconciliation Market Approach $135, 000 Cost Approach 40, 000 Income Approach $ 8, 000 $180, 000 x 75% = $200, 000 x 20% = $ $160, 000 x 5% = Final Indicated Value $183, 000 14

Types of Appraisals and Reporting Options under USPAP Types of Appraisals • Complete appraisal • Limited appraisal Reporting Options • Self-contained appraisal report • Summary report • Restrictive report 15

Formats of Appraisal Reports 1. Letter report 2. Form report 3. Narrative report 4. Review appraisals 5. Real estate analysis 16

Appraiser License l Certified General Appraiser l Certified Residential Appraiser l State licensed appraiser l Provisional licensed real estate appraiser l Appraiser trainee 17

Principles of Value l Principle of Anticipation l Principle of Substitution l Highest and best use of a property l Principle of competition l Principle of supply and demand l Principle of change l Principle of contribution l Principle of conformity 18

Value l Market value l Assessed value l Insurance value l Loan value l Estate tax value l Plottage value l Rental value l Replacement value 19

Markets l Buyer’s market – excess supply of housing for sale. l Seller’s market – demand exceeds supply. 20

Professional Appraisal Societies l The American Institute of Real Estate Appraisers (AIREA) l l MAI SRA Society of Real Estate Appraisers NATIONAL Association of Independent Fee Appraisers l Farm Managers and Rural Appraisers l National Society of Real Estate Appraisers l American Society of Appraisers l l 21

Key Terms l l l l Appraisal Capitalize Comparables Cost approach Depreciation FIRREA Gross rent multiplier l l l l Highest and best use Income approach Market value Operating expenses Scheduled gross, Projected gross USPAP 22