Chapter 18 Appraisal D. Zaharopoulos

Appraisal  An opinion of value  A judgment based on experience Only licensed appraisers can appraise 2 types of appraisers:  Staff appraiser  Fee appraiser

License Categories in AZ  Licensed residential appraiser  Certified residential appraiser  Certified general appraiser Appraisers are bound by USPAP- ( uniform standards professional appraisal practice)

Value Monetary worth based on desirability Determine the Highest & Best Use of the site

Market Value The most probable price in a fair sale The most probable price in a fair sale  Open & competitive market  Knowledgeable buyer & seller  No unusual circumstances Market Price The price a property actually sold for The price a property actually sold for  “Sales Price”

4 Characteristics of Value  D emand  U tility  S carcity  T ransferability For maximum value, all 4 elements must be present

2 Categories of Value  Objective  Subjective

4 Kinds of Value  Insured  Assessed  Mortgage  Salvage/Residual

Influences on Value  Social  Economic  Physical  Governmental  Directional growth  Location

Special land value considerations  Soil fertility  Compaction of soil  Soil percolation  Plottage increment  Unearned increment

Economic Principles of Valuation  Anticipation  Change  Competition  Conformity  Contribution  Highest & Best use  Increasing & Diminishing Returns  Plottage  Regression & Progression  Substitution  Supply & Demand

3 Appraisal Methods  Sales comparison  Cost approach  Income approach

Sales comparison  Market data approach  Best suited for residential property

Cost Approach Terminology  Summation  Depreciation  Reproduction cost  Replacement cost  Economic life  Actual age  Effective age

Depreciation Defined as the loss of value for any reason. Types of Depreciation  Functional Obsolescence  Economic Obsolescence  Physical Obsolescence

Income Approach  CAP rate or Rate of Return  GRM – gross rents multiplier  GIM – gross income multiplier

CAP Rate  The rate of return made on capital investments  Measures the risk involved in an investment.  The higher the risk, the higher the CAP rate; the higher the CAP rate, the lower the value

CAP RATE EQUATION  Potential gross income (annualize)  Minus bad debt & vacancies  Equals adjusted or effective gross income  Minus operating expenses  Equals NOI CAP Rate = NOI divided by price NOTE: Column at left does not include  Depreciation (only on cost approach)  Debt service (P&I)  Income taxes  Capital improvements

Reconciliation  Analyzing and effectively weighing the findings from all three approaches  The final step in the appraisal process  Also known as “Correlation”

The Appraisal Process 1.State the problem 2.List the data needed & sources of data 3.Gather, record & verify necessary data 4.Determine Highest & Best Use 5.Estimate land value 6.Estimate value by each of 3 approaches 7.Reconcile the estimated values 8.Report final value estimate