1. Florida Real Estate Principles, Practices & Law 39th Edition
Unit 16: Real Estate Appraisal

2. Appraisal Regulation
Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA)
The Appraisal Foundation
Appraisal Qualifications Board (AQB)
Appraisal Standards Board (ASB)
State certified appraisers
Certified residential appraiser
Certified general appraiser

3. Federally Related Transaction
Real estate-related financial (loan) transaction
Sale, lease, exchange, financing, etc.
Involves federal financial regulatory agency
Requires services of an appraiser
Must be written and conform to USPAP
Also includes appraisals for Fannie Mae, Freddie Mac, FHA, and VA

4. Uniform Standards of Professional Appraisal Practice (USPAP)
Set of guidelines for appraisal services
Requires objective and impartial appraisals
Establishes recordkeeping requirements
Creates confidential appraiser-client relationship
Unethical to accept compensation based on value

5. F.S. 475 and Appraisal Services
Licensees may perform appraisals for compensation
Appraisals must abide by USPAP
Cannot perform appraisals for federally related transactions
Cannot refer to themselves as certified appraiser
CMAs and BPOs
Do not have to comply with USPAP
Are not appraisals

6. Concepts of Value Cost Price Value
Expenditure to create an improvement (labor, materials, and land)
Price
Amount paid; the contract price
Value
Worth to many buyers and sellers at certain time

7. Types of Value Assessed value Insurance value Investment value
Liquidation value
Going-concern value
Salvage value

8. Market Value
The most probable price which a property should bring in a competitive and open market under all conditions requisite to a fair sale. Assumes the buyer and seller each acting prudently and knowledgeably, and the price is not affected by undue stimulus.

9. Assumptions in Market Value
Value applies to a specific date when title is transferred
Buyer and seller are typically motivated
Both parties are well informed or well advised, acting in their own best interests
A reasonable time is allowed in the open market
Payment is made in cash in U.S. dollars or in comparable financial arrangements
Price is not affected by special financing or seller concessions

10. Characteristics of Value
Demand
Utility
Scarcity
Transferability

11. Principle of Substitution
A prudent buyer or investor will pay no more for a property than the cost of acquiring, through purchase or construction, an equally desirable alternative property
Sets upper limit of value

12. Highest and Best Use The most profitable use of a property, must be
Legally permissible (zoning)
Physically possible
Financially feasible

13. Highest and Best Use As though vacant As improved
Legal use of a site that would produce the greatest value
Potential highest and best use of a site determines its value
As improved
How a site that has improvements on it can best be used
Should improvements be demolished, renovated, or retained in present condition

14. More Principles of Value
Increasing and decreasing returns
Conformity
Assemblage and plottage
Progression and regression

15. Approaches to Estimating Real Property Value
Appraisers use all three approaches to estimate value if sufficient data are available
Sales comparison approach
Cost depreciation approach
Income approach

16. Relevance of Each Approach
Sales comparison
Vacant lots and single-family dwellings
Income approach
Income-producing properties
Cost-depreciation
New house and to cross-check other approaches
Special-purpose properties

17. Sales Comparison Approach
Value is estimated by reviewing recent sales of comparable properties (comps) similar to the subject property
Sales must have occurred recently in the same market
Comparable properties must be similar to the subject property
Adjustments are made
Transactional differences (changes in market conditions since the date of sale)
Property differences (location, square footage, and so forth)

18. Adjustments for Property Differences
Adjustments are made to each comparable property for differences between the comp and the subject
CBS
Comp Better = Subtract
CIA
Comp Inferior = Add

19. Adjustments for Transactional Differences
Financing terms
Appraiser adjusts each comparable for special financing terms like seller-paid points
Conditions of sale
Appraiser must research for abnormal pressure on the buyer or seller
Market conditions
Appraiser adjusts sale price of each comparable if market has changed since the comparable sold

20. Adjustments for Transactional Differences
Square footage
Appraiser adjusts sale price of each comparable based on whether the square footage is larger or smaller than the subject property
Landscaping
Appraiser adjusts sale price of each comparable based on the quality of landscaping

21. Reconciliation of the Comparables
Each comp’s sale price is adjusted for differences between the comp compared with the subject
Each comp is rated in terms of its similarity to subject property
Rating is reflected in giving weight to each comparable
The weighed comps determine the indicated value using the sales comparison approach

22. Cost-Depreciation Approach
A knowledgeable purchaser will pay no more for a property than the cost of acquiring a similar site and constructing an acceptable substitute structure (principle of substitution)
The maximum value can be measured by determining the cost to acquire an equivalent site and to reproduce a structure as if new, and subtract for depreciation

23. Cost-Depreciation Approach Formula
Reproduction Cost of Structure − Accrued Depreciation =
Depreciated Value of Structure + Estimated Value of Site =
Indicated Value of Property

24. Step 1: Estimate Reproduction Cost
Cost to duplicate a structure exactly
Replacement cost
Cost to build structure with same use and function but not exact copy
Estimate cost using
Comparative square-foot
Comparative unit or unit comparison
Cost estimation handbook
Cost estimate based on current cost to construct a building of same size, design and quality

25. Step 2: Subtract Accrued Depreciation
Accrued depreciation represents the loss in value between the subject and an exact new replica
Land is not depreciated
A defect is curable if it is cost-effective to correct

26. Types of Depreciation Physical deterioration Functional obsolescence
Loss in value due to ordinary wear and tear
Caused by use, lack of maintenance, exposure to elements
Functional obsolescence
Loss due to operational inadequacies, poor design, or changing tastes
Overimprovement is also functional obsolescence
External obsolescence
Loss in value due to something outside of property lines

27. Age-Life Method
Majority of appraisers take into account the observed condition of the subject property
Based on a ratio of property’s effective age (age indicated by structure’s condition and utility) to its economic life (total years a structure is profitably useful)

28. Accrued Depreciation Formula
Effective age ÷ Total economic life × Reproduction cost new = Accrued depreciation
Alternative method
Reproduction cost new ÷ Total economic life = Annual depreciation
Annual depreciation × Effective age = Accrued depreciation

29. Steps 3 and 4: Cost-Depreciation Approach
Estimate land value using sales comparison approach (include non-structural site improvements)
Add land value to arrive at a final value

30. Income Approach Measures a flow of income projected into the future
Market value is estimated based on the present worth of future income

31. Types of Income Potential gross income Effective gross income
Annual income if fully rented, no collection loss
Effective gross income
PGI less vacancy and collection losses (plus non-rental income)
Net operating income
EGI less operating expenses

32. Operating Expenses Expenses that contribute to operation of property
Fixed expenses
Property taxes & hazard insurance
Variable expenses
Maintenance, utilities, supplies, etc.
Reserve for replacements
Allowance for future replacement of building components

33. Operating Expenses Not included in operating expenses Depreciation
Costs of mortgage
Personal expenses
Income taxes
Any expense that does not contribute to the operation of the property

34. Formulas Effective Gross Income (EGI) Net Operating Income (NOI)
Potential Gross Income (PGI) – losses + other income = EGI
Net Operating Income (NOI)
Effective Gross Income (EGI) – operating expenses = NOI

35. IRV Formula I = Net Operating Income (NOI) R = Capitalization Rate
V = Value (or sale price)
Rate × Value = NOI
NOI ÷ Value = Rate
NOI ÷ Rate = Value

36. Reconciliation of Final Values
The appraiser gives weight to each approaches value (usually a percentage)
An appraiser who used all three approaches for a single-family house may give a higher percentage to the sales comparison approach than to the other two approaches because the actual sales of comps are a better indicator of the property’s value.

37. Gross Multipliers
Gross rent multiplier (GRM) is the ratio between a property’s gross monthly rent and its selling price
Gross income multiplier (GIM) uses annual income; includes income from rent and other sources

38. GRM Steps Estimate gross monthly rent for subject property
Calculate a market-derived GRM by taking sale price of comparable properties and dividing by gross monthly rent, then calculate average market-area GRM
Multiply gross monthly rent of subject by GRM to estimate value of subject property

39. Comparative Market Analysis (CMA)
Licensees prepare CMAs to help buyers and sellers make informed decisions
Not appraisal reports
Based on properties
Recently sold
Currently on the market
Recently expired listings