©2011 Cengage Learning. Chapter 9 Real Estate Appraisal California Real Estate Principles ©2011...

Chapter 9Real Estate Appraisal

California Real Estate Principles


Chapter 91. Define appraisal and list the elements and

forces that influence value.2. Distinguish between utility value and market

value3. Define depreciation; outline the causes of

depreciation; describe how to calculate depreciation

4. Discuss the 3 approaches to value; outline the steps in each approach

5. Define gross rent multiplier and cap rate


Tax assessor

Assessed value

Insurance agent

Insured value

Realty company

Market value

Bank

Loan Value

Salvage value

What is the purpose of the appraisal?


APPRAISALAn estimate or opinion of value as of a specific date.

The accuracy of an appraisal is determined by theSkillExperienceJudgmentOf the appraiser


Licensing

A person who meets minimum statutory requirements may be licensed or certified as an appraiser by the California Office of Real Estate Appraisers (OREA) by satisfying education (courses & hours), experience (hours) and testing criteria.


Appraisal License RequirementsLicenses: Education Experience

Trainee Appraiser

Licensed Appraiser 150 hours 2,000 hours

Certified Residential 200 hours 2,500 hoursAppraiser

Certified General 300 hours 3,000 hoursAppraiser (1,500 must be

non-residential

Must have 15 hours of USPAP property) to obtain license & 7 hours to renew.


ValueValue in Use

(Utility Value = Worth to an OwnerMarket Value = Value in Exchange


“Highest price in terms of money for which a

Property would sell in an open market,

The seller not being obligated to sell,

The buyer not being obligated to buy,

Allowing for a reasonable length of time

to effect the sale”

Value affected by


4 Elements: D U S T

Demand – desire to own

Utility - usefulness

Scarcity – lack of abundance

Transferability – can transfer ownership

Subjective ValueEmotional ValueHistoric Cost

Value

P E P SForces that change Value

Economic ForcesConsumer: Income, Employment, Credit, Interest Rates


Physical ForcesNatural: Land, Climate, ResourcesMan-Made: Buildings, Roads, Utilities

Social ForcesArea: Neighborhood, Living StandardsPeople: Family Size, Lifestyle, Attitudes

Political ForcesGovernment: Zoning, Fiscal Policy, TaxesPeople: Environmental Protection, Education

DEPRECIATIONPhysical Deterioration

Worn out, run down, deferred maintenance, weatheringCurable or Incurable

Functional ObsolescenceOut of date, poor floor plan,

lack of modern appliances,out of style architecture Curable or Incurable

Economic ObsolescenceNeighborhood or Social Causes:

Traffic, noise, flood zone, crimeIncurable


DEPRECIATION: Functional Obsolescence


Kitchen Family

DiningUtility

Living

BathBedroom Bedroom

Bedroom Bedroom

This 4-bedroom, 1 bath home with no access to the back yard from the family room and utility room far from the bedrooms where kitchen becomes a hallway is an example of functional obsolescence (a floor plan that does not fit today’s needs).

The Appraisal Process

G en era l D a taR eg ion

C ityN e ig h b orh ood

S p ec ific D a taT it leS ite

Im p rovem en ts

C o llec t D a ta

P re lim in ary S u rvey an d A p p ra isa l P lan

D efin e th e P rob lem


Ind icated Value

C ost Approach

W ritten R eportLetter

Short FormN arrative

F ina l Estim ate of Va lue

R econcilia tion/C orre la tion o f Value

Ind icated Value

Market D ata Approach

Ind icated Value

Incom e Approach

D ata C lassifica tion and Analysis forH ighest and Best U se


Types of Appraisal Reports


Letter Report: Restricted Report

Short Form Report: Summary Report

Narrative Report:Self-Contained Report

Cost Approach to ValueUsed primarily for:

New constructionSpecial purpose propertyPublic buildings


To replace/reproduce the improvements on the property.

The upper limit to value.BEST used for unique properties with a

limited market appeal

COST APPROACH


Steps:1. Estimate the land value, as if it were vacant.2. Estimate the current replacement cost of the

improvements

3. Estimate and subtract depreciation of the improvements.

4. Add back the value of the land.

Sq Foot x $ per sq foot = Current replacement cost

Replacement cost

Depreciation of Improvements

Present Value of Improvements

Present Value of Improvements+Land Value Total Value

INCOME APPROACHCapitalization or Investment Approach

Value based on income produced by the property


FormulaGross Scheduled Income GSI

Less Vacancy and Bad Debt - VACEffective Gross Income EGI

Less Operation Expenses - OENet Operating Income NOI

NOI = Value

Cap Rate

BEST for income producing properties

Apartments, Commercial, Offices

Capitalization Rate

The higher the cap rate, the lower the value. $30,000 I 10% R = $300,000

$30,000 I 5% R = $600,000


I = R X V

The higher the risk,

The higher the capitalization rate.

I

= V

R

GROSS RENT MULTIPLIERDefinition:

A gross rent multiplier is a calculation of how many times the property’s rent goes into the price.

It can be based on the monthly or annual rent.


GROSS RENT MULTIPLIERComp. Sales Price Gross Monthly Rent Multiplier

Comp. Monthly Rent (GMRM)

Comp. Sales Price Gross Annual Rent Multiplier

Comp. Annual Rent (GRM)

THEN

Gross Scheduled Income (GSI) x Gross Rent Multiplier (GRM) = Estimated Value ($)

FAILS TO CONSIDER VACANCIES AND EXPENSES


=

=

Gross Rent Multiplier ExampleSales Price $350,000 = 175 gross mo. Rent

Mo. Rent $2,000 multiplier

Sales Price $350,000 = 14.58 gross annual

Annual Rent $24,000 multiplier

($2,000 X12mo.)


MARKET VALUE APPROACH

The most probable price that real estate would bring in an arm’s length transaction, under normal market conditions, on the open market.


BEST used for existing one-to-four unit residential property, vacant land and condominiums

Comparison Approach “If comparable homes sold for $XXX, then subject home should sell for $XXX”

1. Select 3 to 5 comparable or similar properties with similar architectural style and character which have recently sold under reasonable market conditions in the same neighborhood

2. Make adjustments for the different between the comps and subject property for amenities by adding or subtracting from their sales prices.

- + - + - + - +

3. The result gives a value range for the subject property. From the value range, select the probably market value of the subject property.


MARKET DATA ANALYSISItem Subject Property Comparables

1 2 3

Address

Sales Price

Data Source

Date of Sale

Location

Site/View

Design/Appeal

Constr. Quality

Age

Condition

# of Rooms

# Bedrooms

# Baths

Liv. Area (sq ft)

Garage/Carport

Patio, pool, etc.

412 Acme Drive

$335,000

Sales contract

9/1/00

Hi-qual suburb

Inside lot

Rambler/exc

Good

7 yrs

Good

8

4

2 ½

2,700

2-car att

15 x 21 patio

131 Skip Rd

$353,000

Present owner

6/29/00

Same

Corner lot

Same

Good

6 yrs

Good

7

4

2 ½

3,300

Same

15 x 26 patio

221 Sutter St

$333,500

MLS

7/14/00

Same

Corner lot

Same

Good

8 yrs

Good

7

3

2

2,350

Same

18 x 16 patio

168 Bow Rd

$318,500

Selling broker

5/17/00

Same

Inside lot

Same

Good

8 yrs

Good

6

3

2

2,150

Same

15 x 17 patio

Additional Data 2 fireplaces

Range, oven

D/W disposal

Central air

2 fireplaces

Range, oven

D/W

Central air

1 fireplace

Range, oven

D/W

Central air

1 fireplace

Range, oven

D/W

Comments Subject has superior energy efficiency to comps 2 and 3 and is at least equal in this respect to comp 1. Principal difference between comps 1 and 2 is square footage.


Arm’s Length TransactionNeither party is under duress

The property is on the market for a reasonable time.

Both parties have full knowledge of the property’s assets and defects.

No unusual circumstances exist.The price was not affected by special

financing.


Chapter 9 Question


Subject Comp #1 Comp #2

Value : ? Sale: $400,000 Sale: $350,000

Bedroom: 3 4 2

Bathroom: 2 3 1

A bedroom in this area is valued at $10,000

A bathroom in this area is valued at $15,000

What is the indicated value for Subject Property?

A. $325,000 C. $375,000

B. $350,000 D $425,000

Chapter 9 Answer

Comp # 1 Comp #2

$400,000 $350,000

- $10,000 + $10,000

-$15,000 + $15,000

$375,000 ( C ) $375,000


The range of value for subject property is $375,000

Review Quiz Chapter 9


1. The most important consideration in an appraisal is the:a. methods usedb. experience and knowledge of the appraiserc. data gatheredd. inspection of the title records

2. Which of the following is a physical force that influences value?a. rate of changes in populationb. income levelsc. size and shape of the parceld. zoning changes

Review Quiz Chapter 9 3. The appraisal principle that states that the value of a

property is dynamic, not static is called:

a. principle of supply and demand

b. principle of highest and best use

c. principle of substitution

d. principle of change


4. A loss in value because of busy street is an example of:

a. economic obsolescence

b. accrual for depreciation

c. functional obsolescence

d. physical deterioration

Review Quiz Chapter 9

5. The market approach would be given the most weight if appraising a:

a. New homeb. New apartmentc. Five year old homed. Special purpose property


Review Quiz Chapter 9 6. Find the value by use of the income

approach (round to the nearest $100)(1) an older 3-unit apartment rents for $1,000 per month per unit(2) vacancy factor of 5%(3) annual operating expenses $10,000(4) capitalization rate of 8%

a. $302,500b. $288,000c. $276,500d. $275,000


Review Quiz Chapter 9 7. With a gross annual multiplier of 150, a duplex that

rents one unit for $575 per month and the other for $625, should have an estimated value of:

a. $173,000

b. $176,000

c. $180,000

d. $197,000


8. Licensed by the Office of Real Estate Appraisers to do the most complex property appraisal is the:a. real estate agentsb. certified residential appraiserc. certified general appraiser

c. licensed appraiser

Review Quiz Chapter 9 9. The type of appraisal report required by most lenders

is the:

a. loan report

b. narrative report

c. short form report

d. letter form report


10.Regarding the sales comparison approach, which is false?

a. the comps are adjusted to the subject property

b. 3 is the minimum number of comps to use

c. the subject property is adjusted to the comps

d. this approach is best for valuating residential homes

Answers to Review Quiz Chapter 91. B 6. A

2. C 7. C

3. D 8. C

4. A 9. C

5. C 10. C


©2011 Cengage Learning. Chapter 9 Real Estate Appraisal California Real Estate Principles ©2011...

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Transcript of ©2011 Cengage Learning. Chapter 9 Real Estate Appraisal California Real Estate Principles ©2011...