Primary benefits that contribute to real estate value:
-Income
-Appreciation
-Use
-Tax benefits
Economic principle underlying value: TRANSFERABILITY
How readily or easily title or rights to real estate can be transferred. Buyers likely do not want an unmarketable title or one where the owners have disputes that need to be resolved
Economic principle underlying value: ANTICIPATION
The benefits a buyer expects to derive from a property over a holding period. Property can increase or decrease in value in expectation of something in the future such as appreciation or rezoning
Economic principle underlying value: SUBSTITUTION
Idea that a buyer will pay no more for a property than the buyer would have to pay for an equally desirable and available substitute property. (Comparison shopping).
ie similar properties will bring/predict similar values (foundation of Sales Comparison A
Economic principle underlying value: CONTRIBUTION
The degree to which a particular improvement affects market value of the overall property. It has little to do with how much that improvement COST.
Diminishing Marginal Return
Where costs to improve/add improvements exceed contribution (ie no longer contributes to an increase in value of the property)
Economic principle underlying value: CHANGE
Market conditions are in a state of flux over time, just as the condition of a property itself changes. This principle takes into account potential changes in the surrounding area and how it will affect a property's value
Cycle: Expansion, Stabilization,
Economic principle underlying value:
HIGHEST AND BEST USE
Theoretically, there is a single use for a property that produces the greatest income and return. A property achieves its maximum value when it is put to this use.
If the actual use is not the highest and best use, the value of the property is correspondi
Economic principle underlying value: CONFORMITY
A property's maximal value is attained when its form and use are in tune with surrounding properties and uses.
Economic principle underlying value:
PROGRESSION AND REGRESSION
The value of a property influences, and is influenced by, the values of neighboring properties.
If a property is surrounded by properties with higher values, its value will tend to rise (progression); if it is surrounded by properties with lower values, i
Economic principle underlying value: ASSEMBLAGE
The conjoining of adjacent properties, which sometimes creates a combined value that is greater than the values of the unassembled properties.
Plottage Value
An estimate of the value that the process of assemblage adds to the combined values of the assembled properties.
(ie the excess value created by assemblage)
Economic principle underlying value: SUBDIVISION
(opposite of ASSEMBLAGE)
The division of a single property into smaller properties can also result in a higher total value.
Types of Real Estate Value (14)
-Market
-Reproduction
-Replacement
-Salvage
-Plottage
-Assessed
-Condemned
-Reversionary
-Appraised
-Rental
-Leasehold
-Insured
-Book
-Mortgage
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.
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
The nominal value of a property that has reached the end of its economic life.
It 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.
Condemned Value
The value set by a county or municipal authority for a property which may be taken by eminent domain.
Depreciated Value
A value established by subtracting accumulated depreciation from the purchase price of a property.
Reversionary Value
The estimated selling price of a property at some time in the future.
This value is used most commonly in a proforma investment analysis where, at the end of a holding period, the property is sold and the investor's capital reverts to the investor.
Appraised Value
An appraiser's opinion of a property's value.
NOT to be confused with Assessed Value!
Rental Value
An estimate of the rental rate a property can
command for a specific period of time. (landlord centric??)
Leasehold Value
An estimate of the market value of a lessee's interest in a property. (occupant centric??)
Insured Value
The face amount a casualty or hazard insurance policy will pay in case a property is rendered unusable.
Book Value
The value of the property as carried on the accounts of the owner.
It is generally equal to the acquisition price plus capital improvements minus accumulated depreciation.
Mortgage Value
The value of the property as collateral for a loan.
Uses of an appraisal
-setting selling prices/rental rates
-determine level of insurance rates
-establishing investment values
-establishing value of the real estate as collateral for a loan
Appraisals are typically ordered by...
-mortgage lenders
-govt agencies
-investors
-utilities companies
-real estate buyers/sellers
Uniform Residential Appraisal Report (URAR)
-most commonly used form for residential appraisals
-promoted by FNMA and FHLMC (Fannie Mae/Freddie Mac)
Steps in the Appraisal Process (7)
1. Identify the purpose/state the problem
2. Assimilate relevant data
3. Assess the highest and best use
4. Estimate the value of the land
5. Apply the three approaches to estimating value
6. Reconcile the values from the 3 approaches
7. Compile the repor
1. Identify the purpose/state the problem
- identifying the subject property by legal description
- specifying the interest to be appraised
- specifying the purpose of the appraisal
- specifying the date for which the appraisal is valid
- identifying the type of value to be estimated (market, ins
2. Assimilate relevant data
Information relevant to the property includes: notes and drawings from physical inspection of the subject, public tax and title records, and reproduction costs.
Relevant information about the market includes: environmental, demographic, and economic repor
3. Assess the highest and best use
Analyze market conditions
-Neighborhood Analysis
-Site Analysis
4. Estimate the value of the land
Compare the subject site, but not its buildings, with similar sites in the area, and make adjustments for significant differences.
Remember: Land does NOT depreciate in value
5. Apply the three approaches to estimate the value
3 approaches:
-the Sales Comparison Approach (aka Market Data)
-the Cost (or Summation) Approach
-the Income Capitalization Approach (or Income Approach)
6. Reconcile the estimate values from the 3 approaches to come to a final value estimate
-weigh the appropriateness of a particular approach to the type of property being appraised
-take into account the quality and quantity of data obtained in each method
Sales Comparison Approach (aka Market Data Approach)
-This approach is used for almost all properties, it is also the basis for Broker's CMA
-based on the principles of substitution & contribuion
-it takes into account the subject property's specific amenities in relation to competing properties
-uses curre
Steps for the Sales Comparison Approach
1. Identify comps (typically 3-6)*
2. Compare comps to the subject and make adjustments to the comps
3. Weight values indicated by adjusted comparable for final value estimate of the subject
*usually includes at least 3 in the report
Identifying Comparables
To qualify as a comparable, a property must:
- resemble the subject in size, shape, design, utility and location
- have sold recently, generally within SIX months of the appraisal
- have sold in an arm's-length transaction
Specific guidelines are set by s
Adjusting Comparables
Adjusts the sale prices (value deduction or addition) of the comparables to account for competitive differences with the subject property.
Note: the sale prices of the comparables are known, while the value/price of the subject are not. Therefore, adjustm
Adjustment Criteria
-Time of sale: An adjustment may be made if market conditions, market prices, or financing availability have changed significantly (ex: appreciation)
-Location: neighborhood desirability and appearance, zoning restrictions, and general price levels.
-Phys
Weighing Comparables
-identify which comparable values are more indicative of the subject and which are less indicative.
-relies on experience and judgment to weight comparables; There is no formula for selecting a value from within the range of all comps analyzed
3 Quantitat
Broker's CMA
(Comparative/Competitive Market Analysis)
-scaled down version of appraiser's Sales Comparison Approach
-Used to establish listing price or general range
-must be careful not presenting it as an appraisal!
Distinctions between CMA and appraisal
-the broker is NOT unbiased
-the CMA is not comprehensive (often doesn't consider the full range of data about market conditions)
Cost Approach
-most often used for RECENTLY built properties where the actual costs of development and construction are known; also for special-purpose buildings which cannot be valued by other methods due to lack of comps or income data
Estimates the REPRODUCTION or R
Depreciation
The loss of value in an improvement over time. Since land is assumed to retain its value indefinitely, this only applies to the improved portion of real property.
3 causes for depreciation
-physical deterioration (curable or incurable)
-functional obsolescence
-economic obsolescense
Curable Deterioration/Functional Obsolescence
When the costs of repair/redesign of the item are LESS THAN or equal to the resulting increase in the property's value
Functional Obsolescence
When a property has outmoded physical or design features which are no longer desirable to current users
Economic (, Environmental, or External) Obsolescence
-an INCURABLE value loss
-loss of value due to adverse changes in the surroundings of the subject property that make the subject less desirable
Ex: deteriorating neighborhood, rezoning of adj properties, bankruptcy of large employer
Steps in the Cost Approach (5)
1) Estimate land value (as if it were vacant)
2) Estimate reproduction or replacement cost of improvements
3) Estimate accrued depreciation
4) Subtract accrued depreciation from reproduction/replacement cost
5) Add land value to answer to step 4.
Estimating land value
-appraiser uses the sales comparison method: find properties which are comparable to the subject property in terms of land and adjust to account for competitive differences
-The implicit assumption is that the subject land is vacant (unimproved) and avail
Estimating reproduction or replacement cost of improvements: (Several methods)
-Unit Comparison method (aka square-foot method)
-Unit-in-place method
-Quantity survey method
-Cost indexing method
Unit Comparison method (aka square-foot cost)
Examine one or more new structures that are similar to the subject's improvements, determine a cost per unit for the benchmark structures, and multiply this cost per unit times the number of units in the subject.
The unit of measurement is most commonly d
Unit-in-place method
Cost of a structure is estimated based on the construction cost per unit of measure of individual building components, including material, labor, overhead and builder's profit.
The sum of the components is the cost of the new structure.
Quantity Survey Method
The appraiser considers in detail all materials, labor, supplies, overhead and profit, as well as indirect costs (such as permits, payroll, taxes) to get an accurate estimate of the actual cost to build the improvement.
More thorough than the unit-in-plac
Cost Indexing Method
The original cost of constructing the improvement is updated by applying a percentage increase factor to account for increases in nominal costs over time.
(Not included in slides...)
Estimate Accrued Depreciation
-using straight-line method (aka economic age-life method) which assumes that depreciation occurs at a steady rate over the economic life of the structure. Mostly relevant for depreciation from physical deterioration.
The cost of the structure is divided
Economic life (aka service life or useful life)
Estimated period where an improved property will yield a return over and above economic rent.
ie. the period which an improvement has value in excess of its salvage value
Income Capitalization Approach (aka Income Approach)
-used for income properties and sometimes for other properties in a rental market where the appraiser can find rental data
Based on the principle of ANTICIPATION and SUBSTITUTION
Steps in the Income Capitalization Approach (5)
1_Estimate POTENTIAL gross income
2_Estimate EFFECTIVE gross income
3_Estimate net operating income
4_Select a capitalization rate
5_Apply the capitalization rate
Potential Gross Income =
scheduled rent from the subject + income from misc sources (such as vending machines)
Scheduled rent
the total rent a property will produce if fully leased at the established rental rates.
Appraiser will use current market rental rates (market rents) and/or the rent specified by leases in effect on the property (contract rent)
Effective Gross Income =
Potential gross income - allowance for vacancy and credit losses*
*based on the property's history, comps in the market, and assuming typical management quality; typically estimated as a percentage of the potential gross income
Vacancy loss
an amount of potential income lost because of unrented space
Credit loss
an amount lost because of tenants' failure to pay rent for any reason
Net Operating Income =
Effective gross income - total operating expenses (fixed and variable, and annual reserve fund)
Fixed operating expenses
-Are incurred whether the property is occupied or vacant
Ex: real estate taxes and hazard insurance.
Variable operating expenses
-relate to actual operation of the building
Ex: utilities, janitorial service, management, and repairs.
Capitalization Rate
an estimate of the rate of return an investor will demand on the investment of capital in a property such as the subject
Value =
Net Operating Income (NOI) / capitalization rate
or....
I / R = V
GRM and GIM Approaches
-SIMPLIFIED income-based methods -used primarily for properties that produce or might produce income but are NOT primarily income properties (ex: single-family homes, duplexes)
-consist of applying a multiplier to the estimated gross income or gross rent
Financial Institutions Reform, Recovery and Enforcement Act of 1989
FIRREA
mandates that all state certified appraisers must meet the minimum education, experience and examination requirements promulgated by the AQB
Uniform Standards of Professional Appraisal Practie
USPAP
-a set of professional standards, guidelines and provisions for the appraisal industry.
-"Competence" provision: requires appraisers to assess whether they have the necessary knowledge and competence to perform a specific assignment. If they do not,
The Appraisal Foundation (TAF)
-private, not for profit corp
-HQ in DC
-Directed by a 24 member Board of Trustees
-3 independent boards: the Appraisal Practices Board (APB), Appraiser Qualifications Board (AQB) and Appraisal Standards Board (ASB)
T/F: Appraisal practice is regulated by each state
True
The Appraiser Qualifications Board (AQB)
-Establishes the qualification criteria for state licensing, certification and recertification of appraisers
-Developed voluntary criteria for personal property appraisers
The Appraisal Standards Board (ASB)
-Establishes the rules for developing an appraisal and reporting its results.
-Promotes the use, understanding and enforcement of the Uniform Standards of Professional Appraisal Practice (USPAP)
The Appraisal Practices Board (APB)
-Identifies and issues opinions on recognized valuation methods and techniques, which may apply to all disciplines within the appraisal profession.
-Offers voluntary guidance in topic areas in which appraisers and users of appraisal services feel are the
FL Appraisal License Types (3) + Reqs
-Registered Trainee Appraiser: 100 classroom hours
-Certified Residential Appraiser: 200 classroom hours (including 15 hrs on USPAP); Bachelor's degree
-Certified General Appraiser: 300 classroom hours (15 hrs USPAP); Bachelor's degree (with specific cour
Record-keeping for Appraisal Reports
Certified reports of value which comply with current USPAP requirements must be retained for 5 years after the appraisal and up to two years after a court appearance (whichever is longer).
(Review) Comparative Price Analysis (CMA)
-It may not be referred to as an appraisal!
-Used by real estate professionals to provide the seller with a range of prices to list a property for sale OR provide the buyer a range of prices to use in giving an offer
-Can also inform the seller on market
(Review) Broker's Price Opinion (BPO)
-a property valuation provided to a lending institution for distressed properties on the market
-Uses: determining short sale approval prices and, in some cases, foreclosure sale prices during the housing crisis from 2008-2012.
-not considered appraisals,
Impact Fees
Developers may be required to pay these fees to the community to fund major - off-site development.
Developments of Regional Impact (DRIs)
Large-scale development that is likely to have regional effects beyond the local government. It may exceed the jurisdiction of one entity and therefore requires communication between 2+ governments.
-Purpose: define large scale develop issues before confl
Appraiser's Ground Rules/Assumptions:
1) Payment must be in cash or its equivalent - the appraiser assumes the buyer is either paying cash for the property or is in the process of obtaining a loan.
2) Buyer and seller must be unrelated and acting without undue influence, menace or duress. - T
Types of Appraisal Reports (2)
-Appraisal Report
-Restricted Appraisal Report
Appraisal Report contains...
-at minimum, a summary of the required items in the report
-may also have a more extensive presentation of detail
Restricted Appraisal Report
Contains...
-same required items as an appraisal report
-BUT many of them may be simply "Stated" instead of summarized or presented in more detail
Has only ONE intended user, the client
-much of the information relied on by the appraiser is maintained in
Formats for Appraisal Reports (3)
-Oral Report
-Form Report (ex: URAR)
-Narrative Report ("term paper", sometimes 100+ pages, typically for commercial, industrial or large investment properties)
Differences b/w Value, Price, Cost
Value- the amount brought in an open market with certain assumptions
Price-the amount the buyer will actually pay
Cost-how much cash it takes to build and improve property. Cost may also be historical.
Characteristics of Value
(similarly stated in Ch 15..)
-Demand
-Utility
-Scarcity
-Transferability
-Situs: Location
Economic principle underlying value: COMPETITION
When one business attracts another business of similar type; together they may make more money than they would have singularly.
Ex: Shopping areas in large cities attract shoppers every day because they draw the consumer to the area. Too little shopping d
Effective Age
Differs from the actual age (chronological age) by such variable factors as depreciation, quality of maintenance, and the like. Remodeling can extend the economic life of a structure by reducing or mitigating the impact of actual age and increasing the st
Chronological Age
Actual age in years of the building, based on building date. Cannot be changed.
Economic Rent (aka Market Rent)
The amount of rental income a property can generate in an open, free market at any given time.
Compare this to contract rent which is the rent agreed to by the parties.