FIRREA
- Financial Institutions Reform, Recovery and Enforcement Act (FIRREA) enacted in 1989 to regulate appraisal practices
- requires that competent individuals whose professional conduct is properly supervised perform all appraisals used in federally-related
USPAP
Uniform Standards of Professional Appraisal Practice - competency standards established by the Appraiser Qualifications Board of the Appraisal Foundation
Supply and demand
- When demand exceeds supply, scarcity exists, values rise.
- When supply exceeds demand, surplus exists, values decline.
- When supply and demand are, the market is in balance, values stabilize.
Utility
A property's use in the marketplace contributes to the demand for it.
Transferability
How readily or easily title or rights to real estate can be transferred affects the property's value.
Anticipation
The benefits a buyer expects to derive from a property over a holding period influence what the buyer is willing to pay for it.
Substitution
A buyer will pay no more for a property than the buyer would have to pay for an equally desirable and available substitute property
Contribution
the contribution to value of an improvement is equal to the change in market value that the addition of the improvement causes
Change
Market conditions affect the benefits that can arise from the property
Highest and best use
A property achieves its maximum value when it is put to whichever use generates the greatest income and return. The highest and best use must be legally permissible, physically possible, financially feasible, and maximally productive
Conformity
A property's maximal value is attained when its form and use are consonant with surrounding properties and uses
Progression and regression
The value of a property is influenced by the values of neighboring properties
Assemblage
Conjoining adjacent properties can create a combined value in excess of the values of the unassembled properties. This excess value is called plottage value
Subdivision
The division of a single property into smaller properties can result in a higher total value
Market value
an estimate of the price at which a property will sell at a particular time. This type of value is the one generally sought in appraisals and used in brokers' estimates of value
Insured value
the face amount a casualty or hazard insurance policy will pay in case a property is rendered unusable
Reproduction value
the value based on the cost of constructing a precise duplicate of the
subject property's improvements, assuming current construction costs.
Replacement value
the value based on the cost of constructing a functional equivalent of the subject property's improvements, assuming current construction costs
Salvage value
refers to the nominal value of a property that has reached the end of its economic life. Salvage value is also an estimate of the price at which a structure will sell if it is dismantled and moved.
Assessed value
the value of a property as estimated by a taxing authority as the basis for ad
valorem taxation
Depreciated value
a value established by subtracting accumulated depreciation from the purchase price of a property
Book value
the value of the property as carried on the accounts of the owner. The value is generally equal to the acquisition price plus capital improvements minus accumulated depreciation.
Investment value
The value of an income property as indicated by the capitalized value of the cash flow the property generates
Market Value Requirements
The price willing buyer and seller would agree on given:
- a cash transaction
- reasonable market exposure
- parties have market and property use information
- there is no pressure to complete the transaction
- transaction is arm's length: parties are not
Appraisal Process
1. Identify the purpose
2. Assimilate the relevant data
3. Assess the highest and best use
4. Estimate the value of the land
5. Apply the three approaches to value
6. Reconcile the values from the approaches
7. Compile the report
Sales Comparison Approach
1. Identify comparable sales
2. Compare comps to the subject and make adjustments to the comparables
3. Weight values indicated by adjusted comparables for the final value estimate of the subject
Rules for selecting comparables
- must be physically similar
- in subject's vicinity
- recently sold in arm's length sale
Rules for adjusting comparables
- never adjust the subject!
- deduct from comparable if better than subject
- add to comp if worse than subject
- Remember: ("Subtract if Superior !")
Weighting adjustments
best indicator has fewest and smallest adjustments and smallest net adjustment from the sale price
Cost Approach
1. Estimate land value
2. Estimate replacement cost of improvements
3. Estimate total depreciation
4. Subtract: (improvements - depreciation)
5. Add: (land value + depreciated improvements)
Depreciation
loss of value from deterioration, functional obsolescence, or economic obsolescence
Deterioration
wear and tear from use and aging
Functional Obsolescence
outmoded physical or design features: curable or incurable
Economic Obsolescence
loss of value due to adverse changes in surroundings: incurable
Curability
Curable: cost to cure is less than resulting contribution to value
Incurable: cost to cure exceeds contribution to value
Income Approach
-Based on the principle of anticipation: the expected future income stream of a property underlies what an investor will pay for the property
- Also based on the principle of substitution: that an investor will pay no more for a subject property with a ce
Steps in the Income Approach
1. Estimate potential gross income
2. Estimate effective gross income (potential - vacancy)
3. Estimate net operating income (NOI) (effective income - expenses)
4. Select and apply capitalization rate (NOI � cap rate)
Gross rent multipliers
- Simplified income-based methods to estimate value
- Method consists of applying a multiplier to the estimated gross rent of the subject
- Multiplier is derived from market data on sale prices and gross rent
- Does not necessarily produce accurate value
Gross Rent Multipliers Formula
- GRM = price divided by monthly rent
- Value = GRM times monthly rent
Preparing a Comparative Market Analysis
1. Identify comparables sold, for sale properties, and expired listings
2. Compile comparison data for each comparable: price, sale date, location, age, lot size, site aspects, living area, bedrooms, etc.
3. Complete adjustments for differences; rules:
a.