Course 400: Principles of Real Estate Appraisal

Welcome to the International Right of Way

Association’s

© 2014 International Right of Way Association - All Rights Reserved

400PPT.R6.2014.10.20.0.0

2

Introductions

Who we are…

What we do…

Where we do it…

How long we’ve been doing it…

Our goals for the course...

2

3© 2014 International Right of Way Association - All Rights Reserved

ObjectivesAt the conclusion of course, 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

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

4

Housekeeping

© 2014 International Right of Way Association - All Rights Reserved

The schedule will proceed as follows:

Day One8:00 - 8:15 Introductions, etc.8:15 - 9:45 Characteristics of Real Estate and Real Property.

Definitions. Documents.9:45 - 10:15 Cost, Price, and Value 10:30 - 11:00 Factors That Create and Affect Value11:00 -12:00 Value Principals1:00 - 5:00 Valuation Process

Day Two8:00 - 8:15 Recap Day One and Introduce Day Two8:15 - 2:30 Three Approaches to Value2:45 - 3:15 Partial Acquisitions3:15 - 4:00 Summary and Review4:00 - 5:00 Examination

5

Schedule

6© 2014 International Right of Way Association - All Rights Reserved

Real Estate andReal 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.

7© 2014 International Right of Way Association - All Rights Reserved

Personal Property, Fixtures, and Trade Fixtures

Tests: Manner affixed Adaptation Intent

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.

Trade fixtures are not part of the real estate

8

AppraisalAn appraisal is:

The act or process of developing an opinion of value

A written statement

Setting forth an opinion of value.

Supported by the presentation

Analysis of relevant market information

9

Controlling Documents

Uniform Standards of Professional Appraisal Practice. (USPAP)

“The Yellow Book“

The Uniform Act

10

Cost, Price, Value

Cost is the amount spent to construct improvement.

Price is the amount paid for a good or service.

Value is the worth of a good or service.

11

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.

12

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

13

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

14

Value Principles (Principle of Substitution)

• When several similar goods or services are available, the one with the lowest price will attract the greatest demand.

15

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.

16

Value Principles (Principle of Supply and Demand)

• The price of a good or service varies directly with demand and inversely with supply.

17

Value Principles (Principle of Anticipation)

• Present value is created by the expectation of future

benefits.

18

Other Principles

• Change

• Consistent Use

• Contribution

19

Valuation Process

Appraisal Problem Definition

Scope of Work

Data Collection and Analysis

Land Value Opinion

Three Approaches to Value

20

Valuation Process

Limiting conditions

Property rights to be valued

Identity and location of the subject property

Date of the value opinion

Value to be developed

Identification of the client, intended use, and users

Appraisal Problem Definition

21

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

22

Valuation ProcessData

Collection and

Selection

Market area data

Comparable property data

Subject property data

23

Valuation ProcessData Analysis

Market analysis

Highest and best use analysis

24

Valuation ProcessHighest 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?

25

Valuation Process

Land Value Opinion

Allocation

Extraction

Ground rent capitalization

Land development

26

Day One RecapToday, we...

Defined some terminology.

Discussed some controlling documents.

Examined the factors that create value and the factors that affect value.

Reviewed and discussed value principles as they relate to real estate valuation.

Started to examine the valuation process, specifically appraisal problem definition, scope of work, data collection and selection, and data analysis.

Day Two

27

Today, we will…

Complete the analysis of the valuation process.

Specifically the three approaches to value (cost, sales comparison, and income capitalization), the reconciliation of the value opinions into a final value opinion, and the report of the defined value.

Look briefly at partial acquisitions.

Complete the Case Studies and take the exam.

28

Valuation Process

Three Approaches to Value

Cost Approach

Sales Comparison

Income Capitalization

29

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

30

Valuation Process

Cost Approach

Depreciation: Age-Life Method

Depreciation Percentage = Effective Age

Total Economic Life

31

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

32

Valuation ProcessIncome Capitalization Approach

The conversion of income into value through a rate or a ratio.

Gross Rent Multipliers

Direct Capitalization

33

Valuation Process

Income Capitalization Approach

Gross Rent Multipliers

Gross Rent Multiplier = Sale Price

Gross Rent

34

Valuation ProcessIncome Capitalization Approach

Convert the net operating income into value

Develop a capitalization rate

Estimate annual property expenses and subtract the expenses from the effective gross income to arrive

at the net operating income

Subtract the vacancy and collection loss from the potential gross income

Determine a vacancy and collection loss

Estimate the subject’s annual potential gross income

35

Valuation Process

Income Capitalization Approach

Direct Capitalization

Value = Net Operating Income or Vo = NOI Capitalization Rate Ro

36

Valuation Process

Reconciliation andFinal Value Opinion

37

Valuation ProcessDefined Value Opinion Report

Appraisal Report

Restricted Appraisal Report

38

Partial Acquisitions(1)Larger parcel is the total propertybefore 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.

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.

39

Partial Acquisitions(2)

Federal (Before and After) Rule is thedifference 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 cannotbe less than zero dollars]).

40© 2014 International Right of Way Association - All Rights Reserved

ObjectivesNow 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

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

41

Thank you!