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Chapter 18: Real Estate Appraisal

An appraisal is a necessary part of most real estate transactions.

The decision to buy, sell, or grant a loan on real estate hinges on property value.

Appraisals are also used to set prices on property listed for sale, to set premiums on fire insurance policies, used by government to acquire and manage public property, & to establish property tax levels. © OnCourse Learning

PURPOSE AND USE OF APPRAISALS

An estimate of value.Three value approaches:

Market – comparable sales data Cost – construction cost plus land value Income – monetary returns of property

capitalized

APPRAISAL

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VALUING A HOUSE MARKET COMPARISON APPROACH

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MARKET VALUE DEFINED

• the most probable price that a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller each acting prudently, knowledgeably, and assuming the price is not affected by undue stimulus.

LOT FEATURES AND LOCATIONCOMPARABLESSALES RECORDSVERIFICATIONNUMBER OF COMPARABLESADJUSTMENT PROCESSTIME ADJUSTMENTSHOUSE SIZEGARAGE AND PATIO ADJUSTMENTSBUILDING AGE, CONDITION, AND QUALITYLANDSCAPINGTERMS AND CONDITIONS OF SALE © OnCourse Learning

SALES COMPARISON APPROACH

COMPETITIVE MARKET ANALYSIS

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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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Loss in value due to depreciation since construction.

Physical deteriorationFunctional obsolescenceEconomic obsolescence.

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ESTIMATING DEPRECIATION

Income / Rate = Value

$18,000 / 0.09 = $200,000

I N C O M E A P P R O A C H

Variation by Direct Capitalization

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PROJECTED ANNUAL OPERATING STATEMENT ( P R O F O R M A S T A T E M E N T )

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IncomeOverall Rate

= Value

$45,4000.09376

= $484,215

DIRECT CAPITALIZATION USING AN OVERALL RATE

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O V E R A L L R AT E S - 1 0 -Y E A R H O L D I N G P E R I O D , 2 5 -Y E A R L O A N F O R 7 5 % O F T H E

P U RC H A S E P R I C E , 1 0 % I N V E S T O R R E T U R N

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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

RE C ON C I L I AT I ON

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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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Certified General AppraiserCertified Residential AppraiserState licensed appraiserProvisional licensed real estate appraiserAppraiser trainee

APPRAISER LICENSE

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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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Market valueAssessed valueInsurance valueLoan valueEstate tax valuePlottage valueRental valueReplacement value

VALUE

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Buyer’s market – excess supply of housing for sale.

Seller’s market – demand exceeds supply.

MARKETS

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The American Institute of Real Estate Appraisers (AIREA)MAISRA

Society of Real Estate AppraisersNATIONAL Association of

Independent Fee AppraisersFarm Managers and Rural AppraisersNational Society of Real Estate

Appraisers American Society of Appraisers

PROFESSIONAL APPRAISAL SOCIETIES

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Appraisal Capitalize Comparables Cost approach Depreciation FIRREA Gross rent

multiplier (GRM)

Highest and best use Income approach Market approach Market value Operating expenses Scheduled gross

(Projected gross) USPAP

Key Terms

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