Modern Real Estate Practice in Pennsylvania 12th Edition Chapter 21: Appraising Real Estate

21Real Estate Appraisal Learning objectives –Identify the different types and basic principles of value –Describe the three basic valuation approaches used by appraisers –Explain the steps in the appraisal process –Distinguish the four methods of determining reproduction or replacement cost –Define key terms 2 ©2012 Kaplan, Inc.

21Real Estate Appraisal Appraising –Regulation of appraisal activities –PA requires certification State-certified general real estate appraiser State-certified residential real estate appraiser Broker/appraiser –Competitive market analysis (not an appraisal) Real estate licensee may provide To secure listing; assist buyer –Broker’s price opinion(not an appraisal) 3 ©2012 Kaplan, Inc.

21Real Estate Appraisal Appraisal process 1. State the problem 2. List the data needed 3. Gather, record, verify, and analyze data General data, specific data, data for each approach 4. Determine the highest and best use 5. Estimate the land value 6. Estimate value by each of the three approaches 7. Reconcile the estimated values 8. Report the final value estimate 4 ©2012 Kaplan, Inc.

21Real Estate Appraisal Value –Market value Most probably price Reasonable time on market Cash or equivalent Unaffected by special financing or terms –Market value versus market price –Market value versus cost 5 ©2012 Kaplan, Inc.

21Real Estate Appraisal Basic principles of value –Anticipation –Change –Competition –Conformity –Contribution –Highest and best use 6 ©2012 Kaplan, Inc.

21Real Estate Appraisal Basic principles of value –Increasing and diminishing returns –Plottage –Regression and progression –Substitution –Supply and demand 7 ©2012 Kaplan, Inc.

21Real Estate Appraisal Three approached to value –Sales comparison Residential Raw land –Cost New construction Special properties –Income Produce income 8 ©2012 Kaplan, Inc.

21Real Estate Appraisal Sales comparison approach to value –Subject property versus comparable properties –Property rights –Financing concessions –Market conditions –Conditions of sale –Market conditions since date of sale –Location –Physical features and amenities 9 ©2012 Kaplan, Inc.

21Real Estate Appraisal Cost approach to value –Reproduction cost versus replacement cost new Square-foot method Unit-in-place method Quantity-survey method Index method –Depreciation Physical deterioration Functional obsolescence External obsolescence 10 ©2012 Kaplan, Inc.

21Real Estate Appraisal Income approach to value –Annual potential income –Effective gross income –Annual operating expenses –Capitalization rate –Gross rent multiplier (GRM) –Gross income multiplier (GIM) 11 ©2012 Kaplan, Inc.

21Real Estate Appraisal Reconciliation –Not an average of the three estimates of value –Certain approaches are more valid and reliable with some types of properties –Different weight given to each approach 12 ©2012 Kaplan, Inc.