Chapter 19 Real Estate Appraisal (Page 379)

1. Chapter 19Real Estate Appraisal (Page 379) Appraisal (noun) ap·prais·al – an opinion of value by an individual as of a given moment in time

2. VALUE (Page 380) Demand - the need or desire Utility - usefulness Scarcity - a finite supply Transferability - transferability of ownership rights from one person to another

3. MARKET VALUE (Page 381) Most probable price that a property should bring in a fair sale. Assumptions Competitive and open market Parties are acting prudently with knowledge of the facts No unusual circumstances

4. ESSENTIAL FACTORS OFMARKET VALUE Arm’s length transaction Most probable price is not the average or median Parties are unrelated and acting without undue influence

5. ESSENTIAL FACTORS OFMARKET VALUE Parties are well informed as to the nature of the property Reasonable marketing time Payment made in cash No special financing or inducements

6. Basic Principles of Value(Page 381) Anticipation – expectation values will increase Change – nothing remains constant Competition – interaction of supply and demand Conformity – harmony & esthetics

7. Basic Principles of Value (Page 381) Contribution– improvements add value Highest and best use– only one highest and best use at a given moment in time Increasing and diminishing returns– over improvement adds value only to the max of the property value range

8. Basic Principles of Value (Page 381) Regression and progression– values impacted by proximity to higher or lower valued properties Substitution – value only equal to substitute properties Supply and demand– value impacted on number of properties available

9. Basic Principles of Value (Page 381) Assemblage – combing two or more lots into a single parcel Plottage – increase in value as a result of an assemblage 50 ft 25 ft 125 ft C C B A B D

10. 3 APPROACHES TO VALUE (Page 383) Cost Approach Income Approach Comparison Approach

11. COST APPROACH (Page 384) Cost Approach– value based upon the assumption you are constructing the subject property today using today’s construction costs then applying depreciation and finally the cost of the land

12. COST APPROACH Physical Curable or Incurable (Replacement Cost New) Functional RCN - Depreciation Improvement Value + Land Current Property Value Always incurable External

13. COST APPROACH Math

14. INCOME APPROACH (Page 389) Value is a function of the properties Net Annual Income. NAI = Net Annual Income Rate = Capitalization Rate or “Cap Rate” Value = property market value Capitalization Formula: NAI = Rate X Value

15. NAI V R X INCOME APPROACH (Page 389) Size: 25,000 sq ft Rent: $18.75 / sq ft Annual Operating Expenses: 43% of gross Investor wants a 7% rate of return $468,750 $201,563 $267,187 $267,187 NAI = Rate X Value $267,187 $3,816,957 = 7% X 7%

16. INCOME APPROACH (Page 389) Rate Rate Rate Value Value Value NAI

17. COMPARISON APPROACH (Page 383) Estimating the value of real estate by comparing the subject property to recent sales of comparable properties Basic rules for comparables: Closed within the last 6 months No more than 1 mile from subject

18. COMPARISON APPROACH

20. COMPARISON APPROACH

21. RECONCILIATION Middle High Low Based on a complete visual inspection of the interior and exterior areas of the subject property, defined scope of work, statement of assumptions and limiting conditions, and appraiser’s certification, my (our) opinion of the market value, as defined, of the real property that is the subject of this report is $______________, as of ___________________, which is the date of inspection and the effective date of this appraisal.