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Thomson/South-Western©2008
Real Estate Appraisal
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Thomson/South-Western©2008
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
Thomson/South-Western©2008
Value
• Market value• Assessed value• Insurance value• Loan value• Estate tax value• Plottage value• Rental value• Replacement value
Thomson/South-Western©2008
Markets
• Buyer’s market – excess supply of housing for sale.
• Seller’s market – demand exceeds supply.
Thomson/South-Western©2008
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
Thomson/South-Western©2008
HIGHEST AND BEST USE
• = that use that will give the property its greatest current value!
Thomson/South-Western©2008
Valuing a House with Market Comparison Approach
Thomson/South-Western©2008
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
Thomson/South-Western©2008
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
Thomson/South-Western©2008
Square-foot Method ofCost Estimating
Thomson/South-Western©2008
Income / Rate = Value
$18,000 / 0.09 = $200,000
Income ApproachVariation by Direct Capitalization
Thomson/South-Western©2008
Projected Annual Operating Statement (Pro Forma Statement)
Thomson/South-Western©2008
IncomeOverall Rate
= Value
$45,4000.09376
= $200,000
Direct Capitalization Using an Overall Rate
Thomson/South-Western©2008
Overall Rates - 10-year Holding Period, 25-year Loan for 75% of the Purchase Price, 10% Investor Return
Thomson/South-Western©2008
Market Approach $180,000 x 75% = $138,000
Cost Approach $200,000 x 20% = $ 40,000Income Approach $160,000 x 5% = $
8,000
Final Indicated Value $186,000
Reconciliation
