1. 課程11: Real Estate Appraisal

2. What is an appraisal?
An estimate or opinion of market value of a property or some interest in the property.
The value that is estimated is for the average market participant.
In contrast investment value is an estimate of value to a specific investor
In estimating investment value we consider the specific situation of the investor.

3. Why do we need market value?
Transfer of ownership
Financing of property
Taxation
Compensation for eminent domain
Insurance purposes

4. Factors affecting market value
Physical forces: size, shape, location, topography
Economic forces: income, mortgage terms, general price levels, property tax rates, supply and demand
Social forces: attitude towards house household formation, population, household size, taste and preferences.
Governmental or institutional forces: zoning, subdivision regulation, building codes, real estate taxation, etc

5. What is market value
VALUE in use -- utility to specific individual, subjective
Value in exchange: supply and demand, objective
Market value
Market price: price negotiated between seller and buyer
Cost:

6. Principles of appraising
Highest and best use
anticipation
substitution
contribution or marginal productivity
conformity
change

7. Organizing and performing appraisal
defining the problem
defining market or trade area
physical and environmental data
demographic and social data
forces of supply and demand
income and expense analysis
highest and best use analysis
sales comparable
application of methods

8. Methods of appraisal Income capitalization approach
direct sales comparison approach or market approach
cost approach

9. Income capitalization approach
V = NOI/R
where V = market value
NOI= net operating income
R = capitalization rate
What is capitalization rate ?
it is not a discount rate
cap rate is net of values appreciation or depreciation

10. Deriving the capitalization rate
Market extraction approach
v 100, , , ,000
NOI = 9,500 7, ,352 8,505
NOI/R
Mean R =
Assume NOI for the property being valued is estimated to be 10,000
V = 10,000/ = $105,235

11. Deriving capitalization rate
Band of investment approach or the weighted average cost of capital
R = (L/V)(MC) + (1-L/V)(EDR)
MC = mortgage constant,
EDR = equity dividend rate
L/V = loan-to-value ratio

12. Band of investment example
L/V = 70%, interest rate = 10%
amortization period = 25 years, monthly payment
BTCF = $1,968, Equity = $31,570
EDR = 1,968/ =
R = (.7)( )(12) + (.3)( ) =
V = 10,000/ = $105,228.

13. Gross income multiplier (GIM)
Gross Income Multiplier = sales price/ Gross annual income
Sales price = Gross income X GIM
A B C D
Price $500, $800, $600, $400,000
GI $100, $150, $100, $80,000
GIM x x x x
Subject gross income = $140,000
Mean GIM = 5.3
Estimated market value = 5.3x140,000 = $742,000

14. Direct sales comparison
Principle of substitution:
Potential buyer will pay no more for a property than what has been paid for another equally desirable property
Theory:
Market value of (subject property) bears a close relationship to the prices of similar properties (comparable property) that have recently changed hands.
Adjustments:
Since no two properties are exactly alike we need to adjust the sales price of comparable property to arrive at the estimated market value for the subject property

15. Steps in direct sales approach
First, find comparable properties that have sold recently
Second, identify key features of the comparable and subject property
Third, adjust the sales price of comparable properties to reflect the differences between comparable properties and the subject property.
Fourth, estimate market value through a consolidation process that weighs the adjusted prices of comparable.

16. Factors to adjust Property characteristics: size of parcel location
square footage
number of bedrooms
type of construction
quality of construction
number of bathrooms
age of building
living area, etc

17. Factors to adjust Nonproperty characteristics date of sale sales price
financing terms
condition of sale

18. Rule for adjustment
In adjusting the comparable price for differences the subject property is the 100% property.
That is all adjustments are made from comparable to subject property
RULE:
If the comparable has an element of value that is not present in the subject subtract the value of the element from the price of comparable.
If the subject property has an element of value that is not present in the comparable property add the value of that element to sales price of comparable property.

19. Cost Approach Two cost concepts:
This approach states that the value of a property is roughly equal to:
(1) the cost of reproducing the property
(2) Minus a figure that approximate the amount of value used up in the course of property’s life.
(3) Plus the value of the land.
Two cost concepts:
Replacement cost
Reproduction cost

20. Accrued depreciation Physical depreciation incurable curable
Functional depreciation
Economic or location depreciation

21. Market value and Investment value
If the investor’s rate of discount is higher that the market rate of discount, investment value will be lower than market value, holding cash flow constant
A BAD BUY FOR THE INVESTOR
If the investor’s discount rate is lower than what the market generally requires, investment value will be higher than market value all else equal
GOOD BUY FOR THE INVESTOR
If the discount rate for investor is equal to that of the market, market value will equal investment value
NO ABNORMAL PROFIT