課程11: Real Estate Appraisal

What is an appraisal? An estimate or opinion of market value of a property or some interest in the property. The value that is estimated is for the average market participant. In contrast investment value is an estimate of value to a specific investor In estimating investment value we consider the specific situation of the investor.

Why do we need market value? Transfer of ownership Financing of property Taxation Compensation for eminent domain Insurance purposes

Factors affecting market value Physical forces: size, shape, location, topography Economic forces: income, mortgage terms, general price levels, property tax rates, supply and demand Social forces: attitude towards house household formation, population, household size, taste and preferences. Governmental or institutional forces: zoning, subdivision regulation, building codes, real estate taxation, etc

What is market value VALUE in use -- utility to specific individual, subjective Value in exchange: supply and demand, objective Market value Market price: price negotiated between seller and buyer Cost:

Principles of appraising Highest and best use anticipation substitution contribution or marginal productivity conformity change

Organizing and performing appraisal defining the problem defining market or trade area physical and environmental data demographic and social data forces of supply and demand income and expense analysis highest and best use analysis sales comparable application of methods

Methods of appraisal Income capitalization approach direct sales comparison approach or market approach cost approach

Income capitalization approach V = NOI/R where V = market value NOI= net operating income R = capitalization rate What is capitalization rate ? it is not a discount rate cap rate is net of values appreciation or depreciation

Deriving the capitalization rate Market extraction approach 1 2 3 4 v 100,000 80,000 120,000 90,000 NOI = 9,500 7,680 11,352 8,505 NOI/R .095 .096 .0946 .0945 Mean R = 9.5025 Assume NOI for the property being valued is estimated to be 10,000 V = 10,000/.095025 = $105,235

Deriving capitalization rate Band of investment approach or the weighted average cost of capital R = (L/V)(MC) + (1-L/V)(EDR) MC = mortgage constant, EDR = equity dividend rate L/V = loan-to-value ratio

Band of investment example L/V = 70%, interest rate = 10% amortization period = 25 years, monthly payment BTCF = $1,968, Equity = $31,570 EDR = 1,968/31570 = 6.2337 R = (.7)(.009087)(12) + (.3)(.062337) = .095031 V = 10,000/.095031 = $105,228.

Gross income multiplier (GIM) Gross Income Multiplier = sales price/ Gross annual income Sales price = Gross income X GIM A B C D Price $500,000 $800,000 $600,000 $400,000 GI $100,000 $150,000 $100,000 $80,000 GIM 5.00x 5.33x 6.00x 5.00x Subject gross income = $140,000 Mean GIM = 5.3 Estimated market value = 5.3x140,000 = $742,000

Direct sales comparison Principle of substitution: Potential buyer will pay no more for a property than what has been paid for another equally desirable property Theory: Market value of (subject property) bears a close relationship to the prices of similar properties (comparable property) that have recently changed hands. Adjustments: Since no two properties are exactly alike we need to adjust the sales price of comparable property to arrive at the estimated market value for the subject property

Steps in direct sales approach First, find comparable properties that have sold recently Second, identify key features of the comparable and subject property Third, adjust the sales price of comparable properties to reflect the differences between comparable properties and the subject property. Fourth, estimate market value through a consolidation process that weighs the adjusted prices of comparable.

Factors to adjust Property characteristics: size of parcel location square footage number of bedrooms type of construction quality of construction number of bathrooms age of building living area, etc

Factors to adjust Nonproperty characteristics date of sale sales price financing terms condition of sale

Rule for adjustment In adjusting the comparable price for differences the subject property is the 100% property. That is all adjustments are made from comparable to subject property RULE: If the comparable has an element of value that is not present in the subject subtract the value of the element from the price of comparable. If the subject property has an element of value that is not present in the comparable property add the value of that element to sales price of comparable property.

Cost Approach Two cost concepts: This approach states that the value of a property is roughly equal to: (1) the cost of reproducing the property (2) Minus a figure that approximate the amount of value used up in the course of property’s life. (3) Plus the value of the land. Two cost concepts: Replacement cost Reproduction cost

Accrued depreciation Physical depreciation incurable curable Functional depreciation Economic or location depreciation

Market value and Investment value If the investor’s rate of discount is higher that the market rate of discount, investment value will be lower than market value, holding cash flow constant A BAD BUY FOR THE INVESTOR If the investor’s discount rate is lower than what the market generally requires, investment value will be higher than market value all else equal GOOD BUY FOR THE INVESTOR If the discount rate for investor is equal to that of the market, market value will equal investment value NO ABNORMAL PROFIT