CHAPTER FIVE VALUATION - Career Education Corporation€¦ · · 2016-02-26Demand Transferability...
Transcript of CHAPTER FIVE VALUATION - Career Education Corporation€¦ · · 2016-02-26Demand Transferability...
Copyright 2008 by Career Education Systems, Inc. 1
VALUATION
CHAPTERFIVE
VALUATION
TABLE OF CONTENTS
1) APPRAISAL – PAGE 22) DEPRECIATION – PAGE 53) PRINCIPLES OF VALUE – PAGE 104) MARKET DATA APPROACH – PAGE 145) COST APPROACH – PAGE 186) INCOME APPROACH – PAGE 247) THE APPRAISAL PROCESS – PAGE 29
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1. PURPOSE OF APPRAISAL
1. APPRAISAL
ESTIMATE
value
WHAT DOES AN APPRAISER ACTUALLY DO?
Estimate value for lenders, owners, etc.
2. COMPENSATION OF APPRAISER
Time and effort
Based on time and effort
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3. ECONOMIC CHARACTERISTICS OF VALUE
Utility
Scarcity
Demand
Transferability
Uncle SamDemands Taxes
Must be useful
Must be a limited supply
Must be wanted
Seller must be able to give to buyer
4. REQUIREMENTS TO OBTAIN FAIR MARKET VALUEKnowledgeable buyers and sellers
No undue pressure
I must sell NOW!!!!!
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STEADYUP
STEADYDOWN
PRICEDEMANDSUPPLY
Factors affecting real estate supply and demand
1. Interest rates2. Local economic conditions
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2. DEPRECIATION
1. TAX DEPRECIATION
Investments
ARE THERE DIFFERENT TYPES OF DEPRECIATION?
To encourage investment, tax regulations allow owners of investment property to deduct a percentage of the cost of the property each year from their taxable income.
2. VALUE DEPRECIATION
Item goes down in value due to age, wear and tear, etc.
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Depreciable Base
Land NEVER depreciates
Improvements only
2. Economic Life1. Physical Life
# of years -profitability
# of years -structurally
sound
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2. Effective Age1. Chronological Age
Maintained and improved over years - looks like 20 year old property
Built 30 years ago
Actual age
Apparent age based on condition; generally less than chronological age
STRAIGHT LINE Method Depreciation
Depreciate EQUAL amounts each year
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3 STEPS:
1) Determine value of improvements (AS IF NEW)
2) Subtract depreciation
3) Add the current land value
Property Value $60,000
Land Value $10,000
Economic Life 20 years
What is the depreciated value after 5 years?????
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Depreciable Base $50,000
(improvements only)
Property Value (improvements and land)
$60,000
Less: Land value -$10,000
Depreciation per year
$50,000 ÷ 20 years = $2,500/year
Total depreciation after 5 years
$2,500 x 5 years = $12,500
Depreciated value of improvements
$50,000 - $12,500 = $37,500
Depreciated value of property
$37,500 + $10,000 = $47,500
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3. PRINCIPLES OF VALUE
1. HIGHEST AND BEST USE
WHAT ITEMS DOES AN APPRAISER CONSIDER IN ESTIMATING VALUE??
Use that provides greatest net return on land
2. SUBSTITUTION
$71,000 $70,000 $72,000
WHY PAY MORE?Property only worth what one can get another one for just like it
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3. CONFORMITY
$150,000
$150,000$200,000
$150,000
Properties should conform to neighborhood for greatest value
4. ANTICIPATION
Scheduled airport completion date - next 2 years
Look to the future for value
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5. COMPETITION
YEAR 2007
$100,000 PROFIT
SAM’S MARKET
High profits attract competition
$70,000 PROFIT
SUPER GROCERY
YEAR 2008SAM’S MARKET $30,000
PROFIT
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6. PLOTTAGE INCREMENT (ASSEMBLAGE)
$10,000
$10,000
$10,000
$50,000
Total value of combined properties exceeds total value of individual properties
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4. MARKET DATA APPROACH
1. Residential / Vacant land
HOW DOES AN APPRAISER ESTIMATE THE VALUE OF A HOUSE?
Best on these type properties
2. SUBSTITUTION
SHOULD SELL FOR $100,000
$100,000 SALE PRICE
Market data approach based on substitution
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ADJUSTMENTS TO COMPARABLES
CPA - COMPARABLE POORER, ADD
CBS - COMPARABLE BETTER, SUBTRACT
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3. COMPETITIVE MARKET ANALYSIS (CMA) – SALES COMPARISON
SOLD PROPERTIES
WHAT MARKETWILL BEAR
Used to establish list price
COMPETITIVE MARKET ANALYSIS (CMA)
FOR SALE PROPERTIES
WHAT SELLERS
WOULD LIKEMARKET TO
BEAR
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COMPETITIVE MARKET ANALYSIS (CMA)
EXPIRED PROPERTIES
WHATMARKET
WILL NOTBEAR
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5. COST APPROACH
New / Very few comparables / Special purpose properties
HOW DOES AN APPRAISER ESTIMATE THE VALUE IF THERE ARE NO COMPS?
Churches, hospitals, etc.
3 STEPS IN THE COST APPROACH
1. Estimate current replacement cost
2. Subtract for depreciation
3. Add the current land value
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40’ 50’
PROCESS - STEP 1
Estimate current replacement cost
Length x Width
50’ x 40’ = 2,000 square feet
2,000 square feet
x $80 per square foot
1. Square foot method (outside dimensions)
PROCESS - STEP 1
= $160,000 replacement cost
Length x width x cost per square foot
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Price items by units4. Unit-In-Place method
2. Cubic foot method
3. Quantity survey method
Length x Width x Height
Price items individually
Length x width x height x cost per cubic foot
Price rebuilding item by item; every brick, board, etc.
Price rebuilding by units; concrete, roof, etc.
1. REPRODUCTION COST - REPLICA
2. REPLACEMENT COST - SIMILAR
Exact replica cost
Cost of similar materials
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PROCESS - STEP 2
Subtract for depreciation
Three causes
1. PHYSICAL DETERIORATION
Deferred maintenance
Usually curable
e.g., peeling paint, sagging floors, etc.
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2. FUNCTIONAL OBSOLESCENCE
Curable through modernization
Original bad floor plan - INCURABLE
Problems inside property lines; does not function the way modern properties do
3. EXTERNAL (ECONOMIC) OBSOLESCENCE
Usually incurable
Problems outside property lines
HOUSE
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EXAMPLE:
$160,000 (Step 1 - NEW)
- 20,000 (Step 2 - DEPRECIATION)
+ 30,000 (Step 3 - LAND)
PROCESS - STEP 3
Add current land value
$170,000 VALUE
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INCOME PROPERTIES / APARTMENT BUILDINGS / SHOPPING CENTERS/
6. INCOME APPROACHHOW DOES AN APPRAISER ESTIMATE VALUE OF COMMERCIAL PROPERTY?
1. CAPITALIZATION APPROACHCentral business districts
EXAMPLE:
NET INCOME = 10% OF VALUE
NET INCOME = $10,000
VALUE = $100,000
SUNSET APARTMENTS
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Estimate potential GROSS INCOME
5 apartments
x $200 per month
x 12 months
PROCESS - STEP 1
= $12,000 annual GROSS INCOME
Subtract VACANCY FACTOR
$12,000 annual GROSS INCOME
- 10% VACANCY RATE
PROCESS - STEP 2
= $10,800 EFFECTIVE GROSS INCOME
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Subtract OPERATING EXPENSES
(DON’T INCLUDE DEBT SERVICE)
PROCESS - STEP 3
= $6,600 NET OPERATINGINCOME (NOI)
$ 10,800 EFFECTIVE GROSSINCOME
- 4,200 OPERATINGEXPENSES
Determine rate of return (CAPITALIZATION RATE)
PROCESS - STEP 4
Cap rate is percent NOI is of value
Appraiser determines going rate
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PoWeR Principle
NOI (PART)
÷
VALUE (WHOLE) x CAP RATE (%)
6,600 (PART)
÷
x 12% (RATE)
Capitalization rate is 12%
55,000?
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2. GROSS RENT MULTIPLIER (GRM)
6 = 3 x 2
6 ÷ 3 = 2
Income Approach
PRICE RENT GRM
PRICE RENT GRM
$62,500 = $500 x 125
$50,000 ÷ $400 = 125
PRICE RENT GRM
PRICE RENT GRM
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7. THE APPRAISAL PROCESS
STEP 1 - STATE THE PROBLEM
WHAT STEPS ARE INVOLVED IN THE APPRAISAL PROCESS?
Define purpose
STEP 2 - GATHER DATAPublic record, drive neighborhood, etc.
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STEP 3 - ANALYZE AND INTERPRET
NEIGHBORHOOD ANALYSISConsidering factors outside property lines
Die
NEIGHBORHOOD CYCLE
Born
Young
Middle
Old
Life-cycle of neighborhood; growth, stability and decline
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STEP 3 - ANALYZE AND INTERPRET
SITE ANALYSISConsidering factors inside property lines
STEP 4 - THREE APPROACHES TO VALUE
MARKET DATA APPROACHe.g., residential and vacant land
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STEP 4 - THREE APPROACHES TO VALUE
COST APPROACHe.g., churches, hospitals, etc.
STEP 4 - THREE APPROACHES TO VALUE
INCOME APPROACHe.g., commercial properties
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MARKET DATA $82,000
COST $80,000
INCOME N/A$82,000
STEP 5 (FINAL STEP) -RECONCILIATION
APPRAISAL REPORT