Real Estate Appraisal _______________________________________

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

Value Market value Assessed value Insurance value Loan value Estate tax value Plottage value Rental value Replacement value

Markets Buyer’s market – excess supply of housing for sale. Seller’s market – demand exceeds supply.

Principles of Value 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

HIGHEST AND BEST USE = that use that will give the property its greatest current value!

Valuing a House with Market Comparison Approach

Calculating Gross Rent Multiplier Building Sales Price Gross Annual Rents Gross Rent Multiplier 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 $196,000 $27,762 = 7.06 As a Group: $805,000 $115,002 = 7.00

Costs Approach to Value 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

Square-foot Method of Cost Estimating

Income Approach Variation by Direct Capitalization Income / Rate = Value $18,000 / 0.09 = $200,000

Projected Annual Operating Statement (Pro Forma Statement)

Direct Capitalization Using an Overall Rate Income Overall Rate = Value $45,400 0.09376 = $200,000

Overall Rates - 10-year Holding Period, 25-year Loan for 75% of the Purchase Price, 10% Investor Return

Reconciliation Final Indicated Value $186,000 Market Approach $180,000 x 75% = $138,000 Cost Approach $200,000 x 20% = $ 40,000 Income Approach $160,000 x 5% = $ 8,000 Final Indicated Value $186,000