Ch 9 Real Estate Appraisal

2 Outline I. Appraisal Regulation II. The Concept of Value III. Key Appraisal Principles IV. The Appraisal Process 1. Sales Comparison Approach 2. Cost Approach 3. Income Approach

3 I. Appraisal Regulation Financial Institutions Reform, Recovery and Enforcement Act (FIRREA) of 1989  4 Appraiser Categories: 1. Trainee Appraiser - 75 hours of classroom instruction - works under the supervision of a certified appraiser 2. Licensed appraisers (discontinued as of July 2004) 3. Certified residential appraisers hours of classroom instruction - 2,500 hours of appraisal experience - have at least an associates degree or 21 college semester credit hours - state exam at end of min of 2 years - can appraise single family homes, residential lots, res. income properties up to 4 units 4. Certified general appraisers hours of classroom instruction - 3,000 hours of appraisal experience - have at least a bachelor’s degree or 30 hours of college semester credit hours - state exam after min of 2 years - can appraise all residential properties & commercial, industrial, income properties with any # of units, apartment, & interest in real estate

4 I. Appraisal Regulation Important Changes to Appraisal Law since April 1, 2009: 1. Inclusion of the Market Conditions Addendum describes market trends 2. Home Valuation Code of Conduct -puts up a “firewall” between the and the appraiser -appraisal management companies select the appraiser

5 II. The Concept of Value  Def. of market value:.  Investment value  Price versus market value  Market value versus cost of production  Other types of value: Insurable value Assessed & Taxable value

6 Example: Taxable Value  What is the taxable value and property tax of a $180,000 property in Pinellas county, assuming 17 millage points, a $50,000 homestead exemption and a 100% assessment ratio?

7 III. Key Appraisal Principles  The following four principles affect real estate values and are essential to real estate appraisals: 1. Anticipation: The value of a property depends on to the property owner in the future. 2. Change: Economic, social, political and environmental forces are and affect real estate values. 3. Substitution: A buyer will pay no more for a property than the value of property. 4. Contribution: The value of a component part of a house depends on.

8 Source: The WSJ Complete Homeowner’s Guidebook by David Crook, p.162

9 IV. The Appraisal Process The process to create a Uniform Residential Appraisal Report (URAR):  Definition of the problem/purpose of report  Data selection and collection  Application of the three approaches to valuation: 1) Sales comparison approach 2) Cost approach 3) Income approach  Reconciliation of value indications  Report of defined value

10 The Appraisal Process: 1. Sales Comparison Approach  Comparable sales data selection  Elements of comparison - Property rights conveyed - Conditions of sale - Financing terms - Market conditions - Location characteristics - Physical characteristics  Adjustment of sales data if comparable is superior-> subtract the value of the element from the comparable’s value if comparable is inferior-> add the value of the element to the comparable’s value

11 Example: Sales Comparison Approach Given the information below, determine the subject value, assuming the value of a 1-car garage is $5,000. Subject Comp1 Comp2 Comp3 Sales Price? $105,000 $93,000 $113,000 Element of Comparison: “Garage” Adjustment Adjusted Value

12 The Appraisal Process: 2. Cost Approach  Estimate site value + estimated production cost (reproduction cost vs. replacement cost) - estimated accrued depreciation from: a) physical deterioration b) functional obsolescence c) economic obsolescence

13 Church in Seaside Baroque Altar in Paderborn, Germany

14 Example: Cost Approach An appraiser is supposed to appraise the market value of a church. She has estimated the land value to be $350,000 and the reproduction cost of the building to be $800,000. However, the current building is quite old. The estimated depreciation from normal wear and tear is $230,000 and the depreciation from functional obsolescence is 4% of reproduction cost. What is the market value of the church?

15 The Appraisal Process: 3. Income Approach  Gross income multiplier: GIM = Value/Annual Gross Income  Net income capitalization: Capitalization Rate = Annual Net Income/Value  Discounted cash flow (NPV)

16 Example: Income Approach GIM  You are trying to value your commercial property. Assume that three comparable properties have a GIM of 9.7, 9.5, and If your property has annual gross income of $125,000, what is the most probably selling price?

17 Example: Income Approach Net Income Capitalization  You are assigned to appraise the value of an office building that has an annual net income of $340,000. The two comparables you have found have a capitalization rate of 9.8% and 10.2%. At what amount would you appraise the building?

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