1. Welcome to the International Right of Way Association’s Course 400 Principles of Real Estate Appraisal

2. How long we’ve been doing it… Our goals for the course...
Introductions
Who we are…
What we do…
Where we do it…
How long we’ve been doing it…
Our goals for the course...

3. Objectives (1) At the end of the two days, you will be able to...
• Express an understanding of basic real estate terms and principles
• Demonstrate a basic knowledge of the valuation process and its components

4. Objectives (2) At the end of the two days, you will be able to...
• Discuss the definitions of and steps in each of the three (cost, sales comparison and income capitalization) approaches to value
• Solve problems that show an understanding of the three approaches to value

5. Housekeeping

6. Schedule Day One (1) 8:00 - 8:15 Introductions, Etc.
8:15 - 9:45 Characteristics of Real Estate and Real Property. Definitions. Documents.
9: :15 Cost, Price and Value

7. Schedule Day One (2)
10: :00 Factors that Create and Affect Value
11: :00 Value Principles
1:00 - 5:00 Valuation Process

8. Schedule Day Two (3) 8:00 - 8:15 Recap
8:15 - 2:30 Three Approaches to Value
2:45 - 3:15 Partial Acquisitions
3:15 - 4:00 Summary and Review
4:00 - 5:00 Exam

9. Real Estate and Real Property
Real estate is the physical land and
appurtenances to the land.
Real property is all the rights, interests
and benefits inherent in the ownership
of the real estate. It is the bundle of rights.

10. Personal Property, Fixtures and Trade Fixtures (1)
Personal property is the items that are not
affixed to the real estate.
Fixtures are items that were once personal
property but have since been permanently
attached to the real estate.

11. Personal Property, Fixtures and Trade Fixtures (2)
Tests: Manner affixed
Adaptation
Intent
Trade fixtures are not part of the real estate.

12. Appraisal An appraisal is the act or process of developing an opinion of value. An opinion of value. An appraisal is a written statement … setting forth an opinion of value … supported by the presentation and analysis of relevant market information.

13. Controlling Documents
Uniform Standards of Professional
Appraisal Practice (USPAP)
“The Yellow Book”
The Uniform Act

14. Cost, Price, Value
Cost is the amount spent to construct an improvement.
Price is the amount paid for a good or service.
Value is the worth of a good or service.

15. Market Value Market value is a type of value,
stated as an opinion, that presumes
the transfer of a property … as of
a certain date, under specific
conditions … relationship, knowledge, and motivation; terms of sale; conditions of sale).

16. D.U.S.T. (Factors that create value)
Demand: The desire or need for real estate.
Utility: Usefulness.
Scarcity: The supply of real estate in relation to demand.
Transferability: Title must be able to pass.

17. E.E.G.S. (Factors that affect value)
Economic: the relationship among demand, supply, and utility.
Environmental: the natural and developed environment.
Governmental: related to the government.
Social: related to demographics.

18. Value Principles (Principle of Substitution)
When several similar goods or services are available, the one with the lowest price will attract the greatest demand.

19. Value Principles (Highest and Best Use)
The reasonably probable and legal use that is physically possible, appropriately supported, and financially feasible, and that results in the highest value.

20. Value Principles (Principle of Supply and Demand)
The price of a good or service varies directly with demand and inversely with supply.

21. Value Principles (Principle of Anticipation)
Present value is created by the expectation of future benefits.

22. Other Principles
• Change
• Consistent Use
• Contribution

23. Valuation Process Appraisal Problem Definition Scope of Work
Data Collection and Analysis
Land Value Opinion
Three Approaches to Value
Reconciliation and Final Value Opinion
Defined Value Opinion Report

24. Appraisal Problem Definition
Valuation Process
Appraisal Problem Definition
Identification of the client, intended use, and users
Value to be developed
Date of the value opinion
Identity and location of the subject property
Property rights to be valued
Limiting conditions

25. Valuation Process Scope of Work
Degree to which the property is inspected or identified
Extent of research into physical and economic factors
Extent of data research
Type and extent of analysis applied to arrive at opinions or conclusions

26. Data Collection and Selection
Valuation Process
Data Collection and Selection
• Market area data
• Comparable property data
• Subject property data

27. Valuation Process Data Analysis Market analysis
Highest and best use analysis

28. Valuation Process Highest and Best Use
The reasonably probable and legal use that is physically possible, appropriately supported, and financially feasible, and that results in the highest value.
• Physically possible?
• Legally permissible?
• Financially feasible?
• Maximally productive?

29. Valuation Process Land Value Opinion Allocation Extraction
Ground rent capitalization
Land development
Land residual
Sales comparison

30. Recap Day One

31. Recap Yesterday and Look at Today

32. Three Approaches to Value
Valuation Process
Three Approaches to Value
• Cost Approach
• Sales Comparison
• Income Capitalization Approach

33. Valuation Process Cost Approach Develop a value opinion for the land
Estimate the cost new of the improvement
Deduct depreciation
Add land value opinion to the depreciated improvement value

34. Depreciation: Age-Life Method
Valuation Process
Cost Approach
Depreciation: Age-Life Method
Depreciation Percentage = Effective Age
Total Economic Life

35. Sales Comparison Approach
Valuation Process
Sales Comparison Approach
Research the market for comparable data
Develop relevant units of comparison
Compare the sales to the subject and adjust for dissimilarities
Reconcile the value indications into a final value opinion

36. Valuation Process Income Capitalization Approach
The conversion of income into value through a rate or a ratio.
Gross Rent Multipliers
Direct Capitalization

37. Valuation Process Income Capitalization Approach
Gross Rent Multipliers
Gross Rent Multiplier = Sale Price
Gross Rent

38. Income Capitalization Approach
Valuation Process
Income Capitalization Approach
Estimate the subject’s annual potential gross income
Determine a vacancy and collection loss
Subtract the vacancy and collection loss from the potential gross income
Estimate annual property expenses and subtract the expenses from the effective gross income to arrive at the net operating income
Develop a capitalization rate
Convert the net operating income into value

39. Valuation Process Income Capitalization Approach Direct Capitalization
Value = Net Operating Income or Vo = NOI
Capitalization Rate Ro

40. Reconciliation and Final Value Opinion
Valuation Process
Reconciliation and Final Value Opinion

41. Defined Value Opinion Report
Valuation Process
Defined Value Opinion Report
• Appraisal Report
• Restricted Appraisal Report

42. Partial Acquisitions(1)
Larger parcel is the total property before the taking.
• Contiguity
• Title
• Use
Value of the part taken is determined by multiplying the quantity taken times the before unit value of the item

43. Partial Acquisitions (2)
Damages to the remainder property represent the loss in value to the remainder property as a result of a partial acquisition
Benefits to the remainder property represent the increase in value to the remainder property as a result of a partial acquisition

44. Partial Acquisitions (3)
Federal (Before and After) Rule is the difference between the value before the acquisition and the value after the acquisition
State (Summation) Rule is the value of the part
taken plus (damages to the remainder property
minus benefits to the remainder property [the damages minus the benefits cannot be less than zero dollars])

45. Objectives (1) Right now, you should be able to...
• Express an understanding of basic real estate terms and principles
• Demonstrate a basic knowledge of the valuation process and its components

46. Objectives (2) Right now, you should be able to...
• Discuss the definitions of and steps in each of the three (cost, sales comparison and income capitalization) approaches to value
• Solve problems that show an understanding of the three approaches to value

47. Thank you!