BUSI 330: Foundations of Real Estate Appraisal Session 4 · Lesson 7, 8 and 9 – October 11, 2018 Archived • Session 4. Lesson 10 and11. Discuss Project 2 . November 1, 2018 •

Real Estate Division

BUSI 330: Foundations of Real Estate Appraisal

Session 4

Presented by Chuck Dunn

UBC Sauder School of Business Real Estate Division 3

Introduction

Welcome to the first of five sessions for the Foundations of Real Estate Appraisal

• Session 1 Introduction. Lesson 1, 2 – August 23, 2018 Archived

• Session 2 Lesson 3, 4, 5 and 6. Discuss Project 1 – September 13, 2018 Archived

• Session 3 Lesson 7, 8 and 9 – October 11, 2018 Archived

• Session 4 Lesson 10 and11. Discuss Project 2 November 1, 2018

• Session 5 Preparation for the Final Exam November 15, 2018

NOTE: Project 1 is due October 10, 2018

Project 2 is due November 14, 2018

Exam is written December 6, 2018


About Your Course Tutor

• Chuck Dunn is one of the four BUSI 330 tutors

• Graduated from the Faculty of Commerce, UBC

• Worked as a fee appraiser

• Taught real estate appraisal courses at Langara College.


About Your Course Tutor

Chuck Dunn, AAIC, Retired


Chapters 20-22 - Lesson 10


Income Approach - Overview

The Income Approach

• This approach applies to income producing properties, apartment buildings, retail stores, office buildings, etc

• The basis of this approach is to estimate the Net Operating Income (NOI) of a property and divide it by a market capitalization rate to arrive at an estimated market value

• Since this approach relies on market data it is dependent on a good selection of current sales of similar properties



Overview of the Income Approach

• Estimate the Effective Gross Income (EGI)

• Deduct the Normal Operating Expenses

• Resultant Figure is the Net Operating Income (NOI)

• Convert NOI to a Capital Value using a market capitalization rate

• And/or apply the GIM to the EGI to arrive at a Capital Value



Income and Expense Analysis

• It is important your analysis of the income and the expenses is well researched and verified. Use market rents and not contract rents

• Any significant variations in the incomes or expenses can have a significant effect on the final estimated value

• Derivation of the capitalization rate must be based on similar income type properties in similar real estate markets


Income Approach

• Review the owner’s Profit and Loss Statement and adjust the statement so it reflects the normal operating costs to operate the property to ensure a steady income flow for the year

• Remove expenses that are not operating expenses, such as Mortgage Payments, Income Taxes and Depreciation, as they are not required to operate a building. But maybe necessary when owning a building.

• Property taxes are left in as they are an operating expense.

Normalize the Profit and Loss Statement


Income Approach - Summary

Potential Gross Income $150,000 100%

Less Vacancy and Collection say 3% ($4,500) 3%

Effective Gross Income $145,500 97%

Less Normal Operating Expenses ($45,500) 30%

Net Operating Income $100,000 67%

Note: review owners expenses to make sure they fall in line with other similar buildings, ie 30% +/-.


Income Approach - Income and Expense Statement

• Appraisers must try to accurately estimate the NOI of a property and determine the appropriate capitalization rate when valuing an income producing property

• Small variations in either can translate into large amounts when capitalized

• For example every $1,000 of NOI translates into $10,000 of value using a 10% capitalization rate


Income Approach - Capitalization Rate

• Review the comparable sales to derive a capitalization rate for each of them and then reconcile these rates into a final capitalization rate to be used for the subject’s NOI

• Capitalization Rates are derived by dividing the NOI of the comparables by their selling price to arrive at a percentage figure

EXAMPLE • NOI of $100,000 divided by a sale price of $1,000,000

indicates a capitalization rate of 10%


Income Approach - Gross Income Multiplier

Gross Income Multipliers • This method involves only the Effective Gross Income and a

Selling Price • The EGI is easy to calculate as it is based on current rents

only, which can be verified from market data or current leases

• There are no expenses to consider as expenses may be difficult to verify or justify

• The resultant figure is a “multiplier” that can be applied to other EGI to arrive at a value

• Beware of GIM’s advantages and disadvantages


Income Approach - Gross Income Multiplier

• The Gross Income Multiplier is another method to value an income producing property

• The multiplier is derived by dividing the Selling Price of a property by its estimated Effective Gross Income

• For example a property selling for $1,000,000 with an Effective Gross Income of $145,500 the multiplier is ($1,000,000/$145,500) = 6.87. This is NOT a % or $ figure

• Just a multiplier figure


Income Approach - Valuation

• The next step is to use the subject’s Effective Gross Income and Net Operating Income to arrive at a second estimate of value

• The two values should support each other, no large differences. If so, review calculations

• Next reconcile them into a Final Estimate of Value

• Your reconciliation should explain the reasons for relying on either or both the GIM or the Capitalization method


Income Approach - Summary

Capitalization of NOI

$100,000/10% = $1,000,000

Gross Income Multiplier

$145,500 x 6.87 = $999,585, round to $1,000,000

Reconcile them into a Final Estimate of Value


Lesson 11

Chapter 25: Reconciling Value Indications

Chapter 26: The Appraisal Report



Final Reconciliation

• Write a full reconciliation as to the final estimated value of the subject property, based on the previous approaches

• This is the most important part of your report as it summarizes all your work

• Often clients will read this first to find the estimated value

• Make sure it is well written, clear and concise



Final Reconciliation, cont’d

• Indicate which approach is best and why

• If any large differences between the approaches review your analysis to narrow this range. A 5-7% value range is reasonable

• Large differences may make all the approaches unreliable as both approaches should support each other to make them reliable and believable



• Read the Court Case between Kim v. Surrey (City) on page 7.31 of the Workbook. The Trial Judge makes a few comments about the appraiser’s comments and depth of research.

[76] Mr. Hooker’s report is based on more extensive research. Mr Hooker’s report is clear and transparent.

[78] ..makes it possible to examine and question his ( Mr. Hooker) conclusions because his reasons for them are apparent.

[81] Mr. Hooker’s report states much more clearly the facts and assumptions upon which his opinion is based... Mr. Umlah did not include in his report or testimony any clear explanation for his conclusion...


Other

• Estimating the Market Value of Parking Spaces 5 types see Canadian Property Valuation published by the

Appraisal Institute of Canada Volume 58, Book 2

• Valuing Stigmatized Properties

• Strata/Condominium Depreciation Reports


Project 2 Discussion

Discussion of Project 2 Due November 1, 2018


Project 2 Introduction

Introduction: Pages Projects.9-Projects.16 • Purpose is to acquaint you with the methodology of completing

an appraisal report.

• Houses are preferred but condominiums may be used for this report. See note on page Projects.10.


Project 2 Letter

Cover Page

• Complete page with full address including province, postal code, student name and student number.


Project 2 Letter

Letter of Transmittal (BUSI 330.2) • You are to write a formal business letter to your client and

include the items listed on this page • Your letter should open with a proper salutation and date,

followed by the points mentioned and then signed by you with your typed name underneath

• Search google.ca for “formal business letter writing” to see samples of business letter formats

• Make sure all the pages in the report are numbered


Project 2 Table of Contents

Table of Contents (BUSI 330.4) • Only the 1st page number need be shown for each section • Make sure page number are aligned properly • Note: Schedules/Addenda are numbered with capital letters

Summary of Salient Facts and Conclusions (BUSI 330.5) • Address-show city, province and postal code • All dollar amounts have the dollar sign


Project 2 Definition of the Appraisal Problem

Definition of the Appraisal Problem (BUSI 330.6) • Complete as best as possible • Start to number the pages from here on in the report • Make sure your name and student number appear on all

pages in the upper right hand corner

Assumptions and Limiting Conditions (BUSI 330.7) • Mention this is not a real appraisal but a class assignment • Mention any assumed assumptions


Project 2 Description of Improvements

Description of Improvements (BUSI 330.8-10) • Complete this form so a reader has information and details

about the subject property • If dimensions are irregular refer to a house plan in the

addenda • On page BUSI 330.9 complete the sections on additional

features and any updating of the home. If space is limited then use additional pages following this page


Project 2 - Observed Depreciation

Description of Improvements: Observed Depreciation (BUSI 330.10)

• Justify the effective age with detailed comments, full sentences, if different from actual age.

• Avoid point form comments • Students often mention updating or remodeling but do not

specify in detail the work done and the date, i.e., 5 years ago or recent. No dollar amounts as you are only describing

• Do not leave a section blank just fill in with “not applicable”


Project 2 - Depreciation Chart

DESCRIPTION OF IMPROVEMENTS: OBSERVED DEPRECIATION Condition of Building

Physical Depreciation – Curable (NOTE No dollar amounts in this section, only describe.)

Physical Depreciation - Incurable Short-lived: Explain if applicable Long-lived:

Age concept No. of years

Chronological age yrs.

Effective age yrs.

Economic life yrs.

Remaining economic life yrs.

Justification of Effective Age and Economic Life: Write a paragraph justifying the lower effective age, if applicable.

Functional Obsolescence External Obsolescence

DESCRIPTION OF IMPROVEMENTS: OBSERVED DEPRECIATION

Condition of Building

Physical Depreciation – Curable

(NOTE No dollar amounts in this section, only describe.)

Physical Depreciation - Incurable

Short-lived: Explain if applicable

Long-lived:

Age concept

No. of years

Chronological age

yrs.

Effective age

yrs.

Economic life

yrs.

Remaining economic life

yrs.

Justification of Effective Age and Economic Life:

Write a paragraph justifying the lower effective age, if applicable.

Functional Obsolescence

External Obsolescence


Project 2 - Highest and Best Use, Land Value

Highest and Best Use (BUSI 330.11) • Discuss all sections in some depth and detail, a paragraph,

not just one sentence.

Cost Approach - Land Value (BUSI 330.12-15) • Fill in details of the subject property on the Data Chart

regardless of the valuation method used. Students sometimes leave this blank and therefore no details about the subject site in the report. Marks deducted

• See next 2 slides for data required in the form


Project 2 - Land Data Chart

Data Comparison Chart

Item Subject Comparable no. 1

Address 1234 Main St.

City, Prov.

9876 Center St.

City, Prov.

Legal description Lot 1, Block 5,

District Lot 9

Sale date If sold recently

Instrument no.

Registration date

Vendor

Purchaser If known

Sale price If known


Project 2 - Land Data Chart

Subject Comparable no. 1

Zoning Residential

Location

Frontage/depth 60 x 120 ft

Lot area 7,200 sq. ft.

Topography Level

Utilities Fully serviced

Interior/corner lot Interior

Local Improvement Charges None

Easements/Rights of Way None


Project 2 - Land Value Adjustment Chart

Land Adjustment Chart (BUSI 330.13) • When completing the chart use only figures and not %’s • All calculations and comments should be show on a

separate page under the headings shown on the chart; ie date of sale adjustment, zoning, etc

• On the following pages, 330.14 and .15, explain the adjustments and write a complete reconciliation


Project 2 - Land Adjustment Chart

COST APPROACH - LAND VALUE (continued)

Adjustment Chart

Item Comparable no. 1

Comparable no. 2

Comparable no. 3

Sale price

Real property rights conveyed adjustment

Adjusted price

Financing adjustment

Conditions of sale adjustment

Expenses made immediately after purchase adjustment

Adjusted price

Date of sale adjustment

Adjusted price

Other adjustments as required:

COST APPROACH - LAND VALUE (continued)

Adjustment Chart

Item

Comparable no. 1

Comparable no. 2

Comparable no. 3

Sale price


Adjusted price




Adjusted price


Adjusted price



Project 2 - Cost Approach

Cost Approach Cost Analysis (BUSI 330.16) • Complete the form as required and fill in the Extras if not

included in the Base Replacement Price • Definition of Site Improvements (see BUSI 330.16 for details)

and fill in the bottom of the page with their cost and depreciation to arrive at the Depreciated Value.

• Review definition of Site Improvements as students often do not complete this section correctly. See the following slides


Project 2 - Cost Estimate

COST APPROACH – COST ANALYSIS

Reproduction Cost New (RCN) Estimate

Cost Manual (name):

Marshall and Swift [ X ] Worksheet and excerpts attached

as Schedule ___

RCN estimate $ 210,000 Contractors:

Name and Address

RCN Estimate

Local Contractors Ltd., 456 White Ave., City

$ 205,000

RCN conclusion and rationale: Local contractor has built many homes in the area.

Subtotal: $ 205,000


Project 2 - Cost Estimate Extras (state source):

(not included in above RCN estimate) Attached deck/patio

$ included in above

Porches $ included in above Attached garage or car port

$ 10,000

Basement finish $ 15,000 Subtotal: $ 25,000 Total Reproduction Cost New of Building(s)

$ 230,000

Extras (state source):

(not included in above RCN estimate)

Attached deck/patio

$ included in above

Porches

$ included in above

Attached garage or car port

$ 10,000

Basement finish

$ 15,000

Subtotal:

$ 25,000

Total Reproduction Cost New of Building(s)

$ 230,000


Project 2 - Cost Estimate


Project 2 - Depreciation

Cost Approach – Depreciation (BUSI 330.17) • The Total at the bottom of the chart is your RCN from page

BUSI 330.16 • Use the Age-Life Method and the figures from the previous

section, page BUSI 330.10, are used to calculate the accrued depreciation.

• Age is the Effective Age, not Actual Age


Project 2 - Depreciation

COST APPROACH – DEPRECIATION

Age-Life Method Item RCN Effective Age Economic Life % Dep. Accrued

Depreciation

Improvements Garage

$220,000 10,000

6 6

60 40

10 15

$22,000 1,500

Total $230,000 $ 23,500

COST APPROACH – DEPRECIATION

Age-Life Method

Item

RCN

Effective Age

Economic Life

% Dep.

Accrued Depreciation

Improvements

Garage

$220,000

10,000

6

6

60

40

10

15

$22,000

1,500

Total

$230,000

$ 23,500


Project 2 - Cost Summary

Cost Approach Summary (BUSI 330.18)

• All figures on this page come from your previous sections in this report. Do not use any depreciation figures from Marshall and Swift.

• Arrive at your Estimated Market Value and round the figures to the nearest $100 or $500, whatever seems reasonable

• Before leaving this section do a quick review to make sure the figures are correct and appear reasonable


Project 2 - Cost Summary COST APPROACH – SUMMARY

REPRODUCTION COST NEW (from previous page)

$ 230,000

Less Total Depreciation (from previous page) $ 23,500

DEPRECIATED COST OF BUILDING(S) $ 206,500

Plus Depreciated Site Improvements (from previous page)

$ 9,333

Plus Site Value $ 100,000

VALUE INDICATED BY COST APPROACH $ 315,833 Rounded to: $ 316,000

Cost Approach Conclusion: Market Value = $ 316,000

All figures from previous pages in the report

COST APPROACH – SUMMARY

REPRODUCTION COST NEW (from previous page)

$ 230,000

Less Total Depreciation (from previous page)

$ 23,500

DEPRECIATED COST OF BUILDING(S)

$ 206,500

Plus Depreciated Site Improvements (from previous page)

$ 9,333

Plus Site Value

$ 100,000

VALUE INDICATED BY COST APPROACH

$ 315,833

Rounded to:

$ 316,000

Cost Approach Conclusion: Market Value =

$ 316,000


Project 2 - Direct Comparison

Direct Comparison Approach (BUSI 330.19/23)

• Complete the two Data Charts for the subject and Comparables. Use only figures in the chart

• Adjustment Chart has the order of adjustments so it is easy to follow. Remember all “Other Adjustments” are based on the new Adjusted Price just above it

• Note you are required to make at least two adjustments, one being time, and they must be justified with market evidence. See Workbook for detailed instructions.

• Do not use your comparables, use other independent sales to calculate adjustments.


Project 2 - DCA Adjustment Chart BUSI 330.20

DIRECT COMPARISON APPROACH (continued)

Adjustment Chart Item Comparable

no. 4 Comparable

no. 5 Comparable

no. 6 Sale price $300,000 Real property rights conveyed adjustment 0 Adjusted price $300,000 Financing adjustment 0 Conditions of sale adjustment 0 Expenses made immediately after purchase adjustment

0

Adjusted price $300,000 Date of sale adjustment 4,500 Adjusted price $304,500 Other adjustments as required: - Location -Other adjustments as necessary Total Other Adjustments say $10,500 Final Adjusted Sale Price $315,000 $320,000 $308,000 -----------------------------------------------------------------------------------------------

----------------------

-----------------------

------------------------

Total Adjustment $15,000 Total adjustment as % of Sale Price

5%

DIRECT COMPARISON APPROACH (continued)

Adjustment Chart

Item

Comparable no. 4

Comparable no. 5

Comparable no. 6

Sale price

$300,000


0

Adjusted price

$300,000


0


0


0

Adjusted price

$300,000


4,500

Adjusted price

$304,500


- Location

-Other adjustments as necessary

Total Other Adjustments say

$10,500

Final Adjusted Sale Price

$315,000

$320,000

$308,000

-----------------------------------------------------------------------------------------------

----------------------

-----------------------

------------------------

Total Adjustment

$15,000

Total adjustment as % of Sale Price

5%


Project 2 - Market Condition Adjustments

Market Condition Adjustment (Time) 1st pairing • Sale A sold April 1, 2011 for $300,000 • Sale B sold October 1, 2011 for $318,000. Very similar to sale A • Price difference of $18,000/$300,000= 6%. Time period between the

sales is 6 months indicating a 1% a month increase

2nd pairing • Sale C sold June 15 2011 for $315,000 • Sale D sold October 15 2011 for $330,000. Very similar to sale C • Price difference of $15,000/$315,000= 4.76%. Time period between the

sales is 4 months indicating a 1.2% a month increase

Based on the present market activity a rate of 1% per month is considered reasonable


Project 2 - Market Condition Adjustments

Sale 4 Adjustment

• This property sold September 1 for $300,000. Since the valuation date is October 15 the time difference is 1.5 months. Applying the above rate of 1% to the sale for 1.5 months indicates an adjusted price of $304,500. (1% x 1.5 months x $300,000= $4,500)

• Repeat for Sales 5 and 6, if applicable

• Other required adjustment-students choice


Project 2 - DCA Other Adjustments

Direct Comparison Approach

• If other adjustments are made then briefly explain why and how the figure was calculated

• Write a reconciliation based on all the comparables and explain how they all assisted in determining the final estimated value

• Base you conclusions on the best one/two, supported by the other(s)

• Avoid taking an average.


Project 2 - DCA Reconciliation

Final Reconciliation (BUSI 330.24)

• Write a full reconciliation as to which approach is the best and why

• Mention how the other approach helps support the final value

• If the two major approaches are very far apart in their values then review all your data

• The differences should be in the range of 5-7%


Project 2 - Final Estimate of Value

RECONCILIATION OF VALUE INDICATIONS AND FINAL ESTIMATE OF VALUE

Indicated value by Cost Approach

$ 312,000

Indicated value by Direct Comparison Approach

$ 315,000

Write a full reconciliation as to how you arrived at the Final Estimate of Value. Refer to both approaches as to their strengths and weaknesses. The Market Value, as defined, for the subject property as of ( date of value ) estimated to be $315,000


Project 2 - Certification

Certification (BUSI 330.25)

• Complete Certification Page and make sure you date and sign it

• If you have an interest in the property then modify the wording to indicate such


Project 2 - Addenda

Addenda

• Number the pages with letters, i.e. A, B, etc • Cross reference these pages to the report itself • Ensure maps are large enough to read and are clear • Show the subject on map. Use an arrow pointing to

subject’s location • All addenda pages should have a Title at the top • All sketches of the house should be clearly labeled • Keep photos to a minimum, label them, are photos sharp?


Project 2

Addenda

• Only insert other material as required to support comments in the report itself

• Finally review the report. - Is the letter of transmittal a formal business letter - Are all the pages numbered - Are addenda pages cross referenced to the body of the

report


Turnitin - Submissions

• Please note that Turnitin (Tii) will only accept one submission from the students.

• Please combine all material into one report - text, photographs and other addenda items.

• If a problem inform you tutor first to see if it can be corrected.

• Remember you are allowed four (4) late assignments/projects but please submit on time to avoid any grading delays.


Introduction

Welcome to the first of five sessions for the Foundations of Real Estate Appraisal

• Session 1 Introduction. Lesson 1, 2 – August 23, 2018 Archived

• Session 2 Lesson 3, 4, 5 and 6. Discuss Project 1 – September 13, 2018 Archived

• Session 3 Lesson 7, 8 and 9 – October 11, 2018 Archived

• Session 4 Lesson 10 and11. Discuss Project 2 November 1, 2018

• Session 5 Preparation for the Final Exam November 15, 2018

NOTE: Project 1 is due October 10, 2018

Project 2 is due November 14, 2018

Exam is written December 6, 2018

Real Estate Division UBC Sauder School of Business 57

Feedback and Questions

For further questions related to the course content presented in this session, contact your tutor (please include the course number in the subject line):

[email protected] For all other feedback about the webinar please contact the Real Estate Division (please include the course number in the subject line):

[email protected]

mailto:[email protected]:[email protected]

Slide Number 1BUSI 330: Foundations of �Real Estate Appraisal ��Session 4IntroductionAbout Your Course TutorAbout Your Course TutorChapters 20-22 - Lesson 10Income Approach - Overview Income Approach - Overview Income Approach - Overview Income ApproachIncome Approach - SummaryIncome Approach - Income and Expense StatementIncome Approach - Capitalization RateIncome Approach - Gross Income MultiplierIncome Approach - Gross Income MultiplierIncome Approach - ValuationIncome Approach - SummaryLesson 11Chapters 25-26 - Lesson 11Chapters 25-26 - Lesson 11Chapters 25-26 - Lesson 11OtherProject 2DiscussionProject 2IntroductionProject 2LetterProject 2LetterProject 2Table of ContentsProject 2Definition of the Appraisal ProblemProject 2Description of ImprovementsProject 2 - Observed DepreciationProject 2 - Depreciation ChartProject 2 - Highest and Best Use, Land ValueProject 2 - Land Data ChartProject 2 - Land Data ChartProject 2 - Land Value Adjustment ChartProject 2 - Land Adjustment ChartProject 2 - Cost ApproachProject 2 - Cost EstimateProject 2 - Cost EstimateProject 2 - Cost EstimateProject 2 - DepreciationProject 2 - DepreciationProject 2 - Cost SummaryProject 2 - Cost SummaryProject 2 - Direct ComparisonProject 2 - DCA Adjustment Chart BUSI 330.20Project 2 - Market Condition AdjustmentsProject 2 - Market Condition AdjustmentsProject 2 - DCA Other AdjustmentsProject 2 - DCA ReconciliationProject 2 - Final Estimate of ValueProject 2 - CertificationProject 2 - AddendaProject 2Turnitin - SubmissionsIntroductionSlide Number 57

Documents

BUSI 330: Foundations of Real Estate Appraisal Session 4 · Lesson 7, 8 and 9 – October 11, 2018 Archived • Session 4. Lesson 10 and11. Discuss Project 2 . November 1, 2018 •