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© 2010 by Cengage Learning
Chapter 18
________________ Real Estate Appraisal
© 2010 by Cengage Learning
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
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Valuing a House Market Comparison Approach
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Competitive Market Analysis
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Building Sales Price GrossAnnualRents
Gross RentMultiplier
No.1 $245,000 $34,900 = 7.02
No.2 $160,000 $22,988 = 6.96
No.3 $204,000 $29,352 = 6.95
No.4
As a Group:
$196,000
$805,000
$27,762
$115,002
= 7.06
= 7.00
Calculating Gross Rent Multiplier
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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
Costs Approach to Value
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Square-foot Method of Cost Estimating
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Income / Rate = Value
$18,000 / 0.09 = $200,000
Income Approach
Variation by Direct Capitalization
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Projected Annual Operating Statement (Pro Forma Statement)
Operating expense ratio: $31,070 / $79,800 = 38.9%
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IncomeOverall Rate
= Value
$45,4000.09376
= $484,215
Direct Capitalization Using an Overall Rate
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Overall Rates - 10-year Holding Period, 25-year Loan for 75% of the Purchase Price, 10% Investor Return
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Market Approach $180,000 x 75% = $135,000
Cost Approach $200,000 x 20% = $ 40,000Income Approach $160,000 x 5% = $ 8,000
Final Indicated Value $183,000
Reconciliation
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• Complete appraisal• Limited appraisal
Types of Appraisals
• Self-contained appraisal report• Summary report• Restrictive report
Reporting Options
Types of Appraisals andReporting Options under USPAP
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1. Letter report
2. Form report
3. Narrative report
4. Review appraisals
5. Real estate analysis
Formats of Appraisal Reports
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Appraiser License Certified General Appraiser Certified Residential Appraiser State licensed appraiser Provisional licensed real estate appraiser Appraiser trainee
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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
Principles of Value
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Value Market value Assessed value Insurance value Loan value Estate tax value Plottage value Rental value Replacement value
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Markets Buyer’s market – excess supply of housing
for sale. Seller’s market – demand exceeds supply.
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Professional Appraisal Societies The American Institute of Real Estate
Appraisers (AIREA)◦ MAI◦ SRA
Society of Real Estate Appraisers NATIONAL Association of Independent
Fee Appraisers Farm Managers and Rural Appraisers National Society of Real Estate
Appraisers American Society of Appraisers
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Appraisal Capitalize Comparables Cost approach Depreciation FIRREA Gross rent multiplier
Highest and best use Income approach Market approach Market value Operating expenses Scheduled gross,
Projected gross USPAP
Key Terms
