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Chapter 18 RE Appraisal

Chapter 18 RE Appraisal. Terms. Appraisa l:Estimate of Value of Something Capitalize : Convert Future Income into PV Valuation :Appraisers’ Step by Step Process Highest & Best Use : Use of land which will produce the greatest Current Value

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Chapter 18 RE Appraisal

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  1. Chapter 18RE Appraisal

  2. Terms • Appraisal:Estimate of Value of Something • Capitalize: Convert Future Income into PV • Valuation:Appraisers’ Step by Step Process • Highest & Best Use: Use of land which will produce the greatest Current Value • 4-3-2-1 Rule: Land @ the back of a lot is worth < front: [e.g. 50’x100’ >25’x200’] • CMA Estimate price via sales & prospects • Competitive Market Analysis

  3. Terms • Market Value aka Fair Market Value Most probable price which a property should bring in a competitive and open market under all conditions requisite to a fair sale the buyer and seller each acting prudently knowledgeable and assuming the price is not affected by undue stimulus

  4. Terms • Principle of Anticipation: • Price = f(Anticipated Benefits to Buyer/Seller) • Principle of Substitution: • Price = f(Cost of Equally Desirable Substitute) • Principle of Competition: • Profits encourages Competition ... Supply • Plottage Value=Total > Sum(Small Lots)

  5. Uniform StandardsPro-Appraisal Practice • Define the Appraisal Problem • Conduct a Preliminary Analysis • Formulate Appraisal Plan& Collect data • Estimate Highest and Best Use • Estimate Land Value & Improvements • Reconcile Results =Defined Value Estimate • Report Conclusion of Value

  6. Reasons for the Appraisal • Transfer of ownership • Financing or credit • Compensation/Condemnation proceeding • RE decision making • Taxation • Lease provisions • Corporation to purchase employee home

  7. Principles of Appraisal • Highest price definition • The highest price in terms of money which a property will bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller each acting prudently, knowledgeably and assuming the price is not affected by undue stimulus

  8. Three Approaches • Sales Comparison (Market): • Residential • Cost (Replacement Value) • Residential (if < 3 sites) /Income • Income Capitalization • Income/Commercial Properties

  9. Sales Comparison • Steps • Identify all comparable sales • Gather & verify data on these sales • Select the most appropriate (3 is magic #) • Adjust comparables for time and comparability • Reconcile differ. values & Produce Best Est • Enhancements: • Matched pair: Find 2 properties that differ in one characteristic & calculate the difference • OLS: P=a+b(baths)+c(closets)+d(appliances)

  10. Sales Comparison: Subject House

  11. Sales Comparison: 3 Comparables

  12. Sales Comparison: Final Adjustment

  13. Cost Approach • Reproduction Cost: The current cost of constructing an exact replica (Ideal) • Replacement cost: Cost of constructing similar utility using current standard of material, skill, etc. (Reality)

  14. Direct Construction of improvements (labor, contractor fees & materials) Indirect Appraiser, lawyers, accountants, financing, architect, etc Quantity survey: Add estimates of direct & indirect Unit in place: Estimate cost of putting components together (e.g.. all drywall, painting, etc Per square foot: Cost/Sq’ Estimating Costs Cost Approach Methods Types of Costs

  15. Cost Approach Subtract Depreciation • Types of Depreciation • Physical Depreciation: Wearing out • Functional Obsolescence: Technology (halls, floors,etc) • Economic Obsolescence: Neighborhood or highway moves • Estimating • Reproduction to market value: • Value now=100K, Reproduce then =120K • 20/120 = 17% deterioration • Actual to Effective Life: • Effective life=40yrs but 20 in actual=50% deprec.

  16. Cost Approach: Example

  17. Cost Approach: Example

  18. Cost Approach: Example

  19. Income Capitalization Approach Gross Rent Multiplier • Estimate economic rents on complex • What they should rent for now • Note: Some rents may be grandfather’d • Check GRMs in the area • GRM=Sales Prices(SPs)/Gross Rents (GERs) • Use E[GRM] to get E(Price) for property eg.AvgSPs= $120K & AvgGERs=$10K : E[GRM]=12 Sbj=GER=$130 Therefore: Price=12*130=$1,560K

  20. Income Capitalization Approach • Capitalization= Conversion of NOI into estimate of PV or MV: MV=NOI/CR • Cap rates=Relationship: Income & Value • Techniques to determine Cap Rate: • Estimate cap rates for comparables • Check other investors: What do you expect? • Bands of Investment: Like RE WACC • Return on property must be enough to pay all financial claims & still give Equity E(ROR) • BOI=WM*RM +WE *RE

  21. Income Cap Approach: e.g.

  22. Income Cap Approach: e.g.

  23. Information: Income Properties • Apart/Condo: Income&Expense Analysis:Apts, Condos, Coops (Chi:Inst. or RE Mgt) • Office BldgsOffice Building Experience Exchange Report(WashDC:Bldg Owners&MgsA) • ShopCtrsDollars & Cents of Shopping Centers(Wash DC: Urban Land Inst) • IndusPark Site Selection Hndbk (Atlnta: Conway) • Hotels/Leis. Trends in Hotel Industry (Houston: Pannell, Kerr & Foster)

  24. The Report • Letter: 1-5 pages-When detail not important • Form: Preprinted Forms:Govt & Institutions • Narrative: Longest & Formal: When Clients need to know complete details & methods

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