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Real Estate Appraisal ©OnCourse Learning. All Rights Reserved. Chapter 21

©OnCourse Learning. All Rights Reserved. In This Chapter You will study the three approaches to estimating value.

Formal Appraisal “an independently and impartially prepared written statement expressing an opinion of a defined value of an adequately described property as of a specific date, that is supported by the presentation and analysis of relevant market information.” ©OnCourse Learning. All Rights Reserved.

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 ©OnCourse Learning. All Rights Reserved.

Valuing a House Market Comparison Approach ©OnCourse Learning. All Rights Reserved.

Competitive Market Analysis ©OnCourse Learning. All Rights Reserved.

BuildingSales 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 As a Group: $196,000 $805,000 $27,762 $115,002 = 7.06 = 7.00 Calculating Gross Rent Multiplier ©OnCourse Learning. All Rights Reserved.

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 ©OnCourse Learning. All Rights Reserved.

Estimating Depreciation Physical deterioration  wear and tear through Functional obsolescence  outmoded equipment, faulty or outdated design, inadequate structural facilities & overadequate structural facilities Economic obsolescence  loss of value due to external forces ©OnCourse Learning. All Rights Reserved.

Square-foot Method of Cost Estimating ©OnCourse Learning. All Rights Reserved.

Income / Rate = Value $18,000 / 0.09 = $200,000 Income Approach Variation by Direct Capitalization ©OnCourse Learning. All Rights Reserved.

Projected Annual Operating Statement ( Pro Forma Statement ) ©OnCourse Learning. All Rights Reserved.

Income Overall Rate = Value $45, = $200,000 Direct Capitalization Using an Overall Rate ©OnCourse Learning. All Rights Reserved.

Residential real estate = 27.5 years

Overall Rates - 10-year Holding Period, 25-year Loan for 75% of the Purchase Price, 10% Investor Return ©OnCourse Learning. All Rights Reserved.

Final Appraiser’s Value Reconciliation of Approaches Appraiser’s Best Estimate Choice of Approaches ©OnCourse Learning. All Rights Reserved.

Appraisal Regulations The Appraisal Foundation Federal Regulation Developing the Appraisal Appraisal Standards – USPAP Departure Provisions Appraisals Required Reporting Standards ©OnCourse Learning. All Rights Reserved.

Reporting Options  1. The self-contained Appraisal Report, which is the most detailed and encompassing of the report options.  2. The Restricted Report, there is only a minimal presentation of information and it is intended for use only by the client. ©OnCourse Learning. All Rights Reserved.

Appraisals Review Report state the identity of the client state the intended use of the appraisal review state the purpose of the appraisal review state information sufficient to identify the work under review state the effective date of the appraisal review state all extraordinary assumption and hypothetical conditions ©OnCourse Learning. All Rights Reserved.

New Appraisal Regulations appraisal management companies requiring the lenders to pay customary and reasonable fees to appraisers without specifying any amounts ©OnCourse Learning. All Rights Reserved.

1. Letter report 2. Form report 3. Narrative report 4. Review appraisals 5. Real Estate Analysis Formats of Appraisal Reports ©OnCourse Learning. All Rights Reserved.

Appraiser License Certified General Appraiser Certified Residential Appraiser State licensed appraiser Provisional licensed real estate appraiser Appraiser trainee ©OnCourse Learning. All Rights Reserved.

Texas appraiser licensing and certification board requirements ©OnCourse Learning. All Rights Reserved.

Texas Regulations TALCB – If you have not followed USPAP guidelines then include this statement:  THIS IS AN OPINION OF VALUE OR COMPARATIVE MARKET ANALYSIS AND SHOULD NOT BE CONSIDERED AN APPRAISAL.  BROKER’S PRICE OPINION  COMPARATIVE MARKET ANALYSIS ©OnCourse Learning. All Rights Reserved.

HIGHEST AND BEST USE That use that will give the property its greatest current value! ©OnCourse Learning. All Rights Reserved.

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 ©OnCourse Learning. All Rights Reserved.

Value Market value Assessed value Insurance value Loan value Estate tax value Plottage value Rental value Replacement value ©OnCourse Learning. All Rights Reserved.

Markets Buyer’s market – excess supply of housing for sale. Seller’s market – demand exceeds supply. ©OnCourse Learning. All Rights Reserved.

Professional Appraisal Societies American Institute of Real Estate Appraisers (AIREA) Society of Real Estate Appraisers Appraisal Institute - MAI National Association of Independent Fee Appraisers Farm Managers and Rural Appraisers National Society of Real Estate Appraisers American Society of Appraisers. ©OnCourse Learning. All Rights Reserved.

Key Terms Appraisal Capitalize Comparables Cost approach Depreciation FIRREA Gross rent multiplier Highest and best use Income approach Market approach market data approach Market value Operating expenses Projected gross USPAP ©OnCourse Learning. All Rights Reserved.