Real World Appraisal

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Real World Appraisal Appraisals, Agents & the Real World

Quick PresentationLuxury Home Market

Robert C Oglesby, SRA, AI-RRS


AGENDAThe licensee will identify the ethical standards and behavior requirements for the licensed and certified appraiser: understand

the required processes for residential transactions regarding valuations working within Federal and institutional guidelines; gain knowledge on how to assist with the valuation process and inform their clients.

Uniform Appraisal Dataset, Sales Grid Refresher

1 2Neighborhood / Competitive Market for the Subject

2

Selection of Comparables3

Comparable Properties: Case Studies

4Apply Adjustments to Comparable Properties

5


7 8 9

Your Topic www.company.comRobert C Oglesby, SRA, AI-RRS

Common Challenges

1. Knowing the competitive market2. Knowledge of local building cost3. Understanding major elements of comparison 4. Interviewing market participants. 5. Land values

Common challenges for appraisers


UNIFORM APPRAISAL DATASET &SALES GRID REFRESHER


A. Condition, Quality Ratings Review

B. FNMAs Collateral Underwriter

C. Sample Sales Grid

D. USPAP refresher


Condition, Quality Ratings Review


Sample Sales Grid


Design(https://www.architecturaldesigns.com/)

https://www.architecturaldesigns.com/


Plans/Specs & PermitsMeasuring Techniques: ANSI & American Standard


NEIGHBORHOOD/COMPETITIVE MARKET FOR SUBJECT


A. Identify Neighborhood

B. Neighborhood Life Cycle

C. Supply & Demand, Market Conditions

D. Highest & Best Use


Identify Neighborhood &Competitive Market

The appraiser must know the significant attributes for the subject property; generally, they are tied to location. Since we cannot move real estate, the property’s surroundings are either an asset or a determent and cannot be changed (by the owner of the subject).

How to determine the market area of the subject, usually within the neighborhood (but may expand outside neighborhood).

Neighborhood

• Generally an area of complimentary land uses

• These land uses generally function to support the neighborhood

• Contain many land uses that function together

Market Area

• A geographic or locational depiction of a specific category of real estate, may be within the neighborhood or may expand outside the neighborhood

• Where similar properties compete within the mind of the potential buyer


Neighborhood Life CycleThe life of a neighborhood is often cyclical and is affected by many factors

Growth Stability Decline Revitalization

• Expansion

• Declining

vacancy

• Maybe short-

lived or last for

years

• Growth

continues as the

neighborhood is

perceived as

good value.

• Growth may stop,

demand for new

construction

diminishes,

supply is

restrained due to

cost, etc.

• Activity is usually

heavy

• No longer

profitable to

build, when other

neighborhoods

have become

better values or

fully developed.

• Absence of

growth or decline

• May last for a

period of time

• Homes are being

maintained, but

aging.

• Begins when a

neighborhood

can no longer

compete with a

comparable

neighborhood

• Maintenance cost

maybe too high,

due to age, etc.

• For sale signs

more frequent

• More turnover

• Tenancy

occupancy may

increase

• Properties may

fail to attract

buyers

• Decline ends,

period of renewal

begins.

• Declining values

end

• Changes in

preferences and

community

• Redevelopment

occurs

• Properties are

updated to

current trends

• Economic growth

may fuel

revitalization

• Gentrification

may occur

Source: Appraising Residential Properties 4th Edition


SELECTION OF COMPARABLES


A. Elements of Comparison

B. Highest & Best Use, Bracketing

C. Verification

D. Principle of Substitution

E. Agency Guidelines


Elements of ComparisonDefinition


Elements of comparison are characteristics of properties and transactions that cause real estate prices to vary and have the largest affect on value. They aid in explaining the variances in prices paid for real property. It is the appraiser’s responsibility to determine what the elements of comparison are for a specific appraisal assignment.


Elements of ComparisonWorksheet Completed



Elements of Comparison


Important Steps, before we dive deeper with elements of comparison.

Highest & Best Use

Comparable properties must support the subject’s highest & best use, as it assists in

delineation of the market area for the subject and its buyer and desired use.

Bracketing

A process in which an appraiser determines a probable range of values for a property by applying qualitative techniques of comparative analysis to a group of comparable sales. The comparable selection may be divided into two groups:

• Superior to the subject • Inferior to the subject• The adjusted sale prices reflected by these two groups limit the probable range of

values for the subject and identify a bracket in which the final value opinion will fall. The most comparable sales will typically fall near the middle of the range.


Elements of ComparisonThe Big 3-4 Elements of Comparison


Discussion on the elements of comparison that have the greatest impact on price?


Principle of Substitution

“The appraisal principle that states that when several similar or commensurate commodities, goods or services are available, the one with the lowest price will attract the greatest demand and widest distribution. This is the primary principle upon which the cost and sales comparison approaches are based.

Property values tend to be set by the price of acquiring an equally desirable substitute property. The Principle of Substitution recognizes that buyers and sellers of real property have options, i.e., other properties are available for similar uses.”

The Appraisal Institute. The Appraisal of Real Estate, 13th Edition. Chicago, 2008


COMPARABLE PROPERTIES CASE STUDIES


A. Custom Home

B. Premium View

C. Unique Design, Features


Custom Home

• 4,820 square feet

• Prairie/ Two Level

• Very Good quality

of construction

Q2

• Gated/HOA

neighborhood


lot size

• High-level finishes

• 2 car + RV garage

• Condition Good

C2

• Neutral views


Elements of ComparisonReference for Case Studies

Car Storage

10-20% GLA Design

Quality of

Construction

Location

4

3 3

1

2

Lot Utility Principle of

Substitution

5

Market segments can place varying levels of importance on the Elements of Comparison.

What is important in one market may not be as important in another.



Premium View


• Low Country/

Three Level

• Very Good quality

of construction

Q2

• Fully Remodeled,

Interior & Exterior


lot size

• Mid-level finishes

• 2 car garage

• Condition Good

C2

• Golf & Water View

• Possible Rental


Elements of ComparisonReference for Case Studies

Quality/Condition

GLA?

Design

Bedroom &

Bath Count

Location

2

3

4

1

4View

Principle of

Substitution

1

Market segments can place varying levels of importance on the Elements of Comparison.

What is important in one market may not be as important in another.



APPLY ADJUSTMENTS to COMPARABLE PROPERTIES


A. Rationale, Support

B. Credible Techniques

C. Paired-Sales aka Sales Comparison Approach to Value

D. Depreciated Cost aka Cost Approach to Value

E. Income Capilization Approach

F. Market Participant Interviews

G. Sample Statistical Models


Rationale, Support

Appraisers are asked to support their adjustments by lenders, lawyers, relocation companies and

other common clients of residential appraisal reports. The appraiser must provide sufficient

information to enable the client and intended users to understand the rationale of the opinions

and conclusions, including reconciliation of the data.

Before employing a credible technique to support an adjustment, the appraiser must summarize

the rationale for an adjustment (or lack of an adjustment). A reasonable theory to study, would a

predominant buyer pay $1 more for an improvement versus an equal substitute does not have?

Examples:

1. An appraiser does not adjust for an improvement. The report should contain a summary the

improvement is not a benefit in the subject’s competitive market for the following reasons.

2. An adjustment is applied for an inground pool. Buyers pay a premium in the subject’s

competitive market, due to weather, where pools are used through a majority of the year.


Credible Techniques

1. Paired-Sales aka Sales Comparison Approach

2. Depreciated Cost aka Cost Approach

3. Income Capitalization Approach

4. Market Participant Interviews

5. Statistical Models

WHAT ARE THEY? THE NEXT 5 SLIDES WILL ANSWER THIS QUESTION


Paired-SalesQualitative & Quantitative Adjustments

Match Paired Analysis

Paired-Sales Extraction

This is the adjustment technique preferred, by most appraisers. The basic premise of this analysis for extracting an adjustment requires the appraiser to find data with and without a feature, and then isolate the difference in price due to the feature by comparing gross prices.

This technique is easy to understand and use, but the data is sometimes difficult to obtain, especially in areas where it’s hard to find three sales, let alone matched data sets to support an adjustment.


Paired-Sales

A quantitative technique used to identify and measure

adjustments to the sale prices or rents of comparable properties; to

apply this technique, sales or rental data on nearly identical properties are analyzed

to isolate a single characteristic's effect on value or rent.Source: The Dictionary of Real Estate Appraisal – 6thEdition

Qualitative & Quantitative Adjustments



Depreciated Cost

Depreciated cost – this technique is based on the premise that buyers use of cost of construction as a basis for adding or subtracting value for a particular item. A typical buyer might think they want a pool, but the house they like does not have one. So, they consider buying the house and adding a pool. Does cost always equal market? No.

Cost is generally the highest form of value the market may allow and its an estimate of fact.


Extracting Cost From MarketQualitative & Quantitative Adjustments



Market Participant Interview(buyer, broker, builder, etc.)

In a lot of cases, it sets the rationale if a particular item has an affect on price. The appraiser can interview buyers, real estate brokers, property managers, builders, attorneys, other real estate professionals that are active in the market, but not involved in the current appraisal.


Statistical Model• Extremely important.

• The appraiser must understand the data and the procedures of the model they are using. Using a model as a basis for an adjustment, has risk if you don’t know the data. Does the model support all of the items or elements that affect price?

• Discussion


Market Conditions Adjustment


Sales Comparison ApproachReconciliation and Opinion of Market Value


A. Quality of Data

B. Weighting of Comparable Properties

C. Range of Adjusted Values, Variance

D. Sales Comparison Approach to Value


Determine an Opinion of Value


SOMETHNG TO

SHARE TAB

A place to include a note

to the appraiser or an

observation not included

in the other tabs.


Suggested Information & Reading

Real World Appraisal

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