Comparative Market Analysis
price comparison of similar properties to determine a listing, selling or rental price
Broker's Price Opinion
opinion of value given by a licensee to seek a listing agreement
If you have not followed USPAP guidelines then include this statement:
THIS IS AN OPINION OF VALUE OR COMPARATIVE MARKET ANALYSIS AND SHOULD NOT BE CONSIDERED AN APPRAISAL.
TALCB
www.talcb.state.tx.us
Certified General RE Appraiser
Appraiser License
Certified Residential RE Appraiser
Appraiser License
State Licensed RE Appraiser
Appraiser License
Letter report
1-5 page informal report where appraisal details are not needed
Formats of Appraisal Reports
Form report
appraisal on preprinted form with checklists
Formats of Appraisal Reports
Narrative report
longest and most formal appraisal report
Formats of Appraisal Reports
Review appraisals
report on an existing appraisal's adequacy and appropriateness
Formats of Appraisal Reports
Real Estate Analysis
provides information, recommendations and conclusions about subject property, but does NOT indicate value
Formats of Appraisal Reports
The Appraisal Foundation
establishes and approves uniform appraisal standards and appraiser qualifications
Appraisal Regulations
Federal Regulation
relies on The Appraisal Foundation for appraisal standards and appraiser qualifications
Appraisal Regulations
Developing the Appraisal
created following uspap standards
Appraisal Regulations
Appraisal Licensing Requirements
must use State certified or licensed appraiser for all RE related financial transactions
Appraisal Regulations
Reporting Standards (12)
set forth by USPAP (pp. 505)
Appraisal Regulations
Unrelated to 27.5 / 39 year straight-line depreciation
Accrued Depreciation Categories
Physical Deterioration
Curable - immediate (deferred maintenance)
Incurable
Short-lived items
Long-lived items
Accrued Depreciation Categories
Functional Obsolescence
Curable
Incurable
Accrued Depreciation Categories
External Obsolescence
Locational
Economic
Accrued Depreciation Categories
Five Steps of the Cost Approach
Step 2
Estimate improvements' reproduction and replacement costs new
Reproduction
Step 2
a replica with construction materials identical to the subject
Replacement
Step 2
an improvement with utility equal to the subject
Costs Approach to Value
Step 1
Estimate land as vacant
Costs Approach to Value
Step 2
Estimate new construction
cost of similar building
Costs Approach to Value
Step 3
Less estimated depreciation
Costs Approach to Value
Step 4
Depreciated value of building
Costs Approach to Value
Step 5
Appraised property value by the cost approach
Difficult to measure costs accurately
Limitations of the Cost Approach
Difficult to measure land values in built-up areas
Limitations of the Cost Approach
Depreciation estimates are subjective
Limitations of the Cost Approach
Cannot be used for raw land or older improved properties
Limitations of the Cost Approach
over-values distressed properties
Limitations of the Cost Approach
Cost Approach
Indicated value of the subject property equals:
The value of the land as though vacant, plus the depreciated value of the improvements
Cost Approach
Based on the Principle of contribution
The value of a component part equals how much it contributes to overall value
Cost Approach
Method of Last Resort
when MCA and Income approach are not indicated
Band-of Investment Example
You borrow 80% of the purchase price for 25 years at 12%. Forecast BTCF = $5,880 and your down payment is $42,000. Calculate the overall cap rate using the BOI approach.
Recall: Ro = (LTV x AMC) + (ETV x EDR)
LTV = 80%, so ETV = 20%
AMC (Mortgage Constant
The most reliable method of estimating cap rates
Three Methods of Calculating Ro
Band-of-Investment Approach (cont.)
Tailored to the the investor
Three Methods of Calculating Ro
Band-of-Investment Approach (cont.)
Most commonly used method because easy to apply and explain
Three Methods of Calculating Ro
Band-of-Investment Approach (cont.)
Identical to WACC (WEIGHTED AVG COST OF CAPITAL) in finance:
Ro = (wd x kd) + (we x ke)
Three Methods of Calculating Ro
Band-of-Investment Approach (cont.)
In real estate, the BOI equation is:
Ro = (LTV x AMC) + (ETV x EDR)
Three Methods of Calculating Ro
Band-of-Investment Approach (cont.)
Cap rate equals the average of other investors' cap rates on comps within close proximity
Three Methods of Calculating Ro
Market Extraction Approach
Extract comps' cap rates from the market
Three Methods of Calculating Ro
Market Extraction Approach
Very low search costs
Three Methods of Calculating Ro
Market Extraction Approach
Not emphasized by appraisers because it assumes the investor is "average
Three Methods of Calculating Ro
Market Extraction Approach
Ro= r(f) + In(p) + ? + r(r)
? r(f) = risk-free rate
? In(p) = inflation premium
? ?(standard dev) = cash flow risk premium
? r(r) = reinvestment risk premium
Three Methods of Calculating Ro
Theoretical Approach
Ro: Capitalization = conversion of future income into value
Reflects an investor's return "on" investment and return "of" investment
Overall Capitalization Rate
Assumes no debt and no taxes
Overall Capitalization Rate
A before-tax calculation
Overall Capitalization Rate
V = NOI / Ro
NOI = V x Ro
Ro = NOI / V
Direct Capitalization
NOI = PGI - VBD + MI - OE = EGI - OE
Equation 1 of the EVM
Direct Capitalization
OER = OE1/ EGI1
Direct Capitalization
Cannot be used for non-income producing properties
Limitations of the Income Approach
Forecasting cash flows can be subjective and inaccurate
Limitations of the Income Approach
Formulating cap rate inaccurately can cause large variations in the indicated value
Limitations of the Income Approach
Indicated value of the subject property equals:
PV of the anticipated future income stream
Income Approach
Value is a function of the present worth of the anticipated income stream produced by the property
Based on the Principle of anticipation
Based on past trends
Limitations of the MCA
May be a lack of sales data (i.e., properties that have sold recently)
Limitations of the MCA
Inadequate number of comps similar enough to the subject
Limitations of the MCA
Appraisals become obsolete very rapidly
Limitations of the MCA
Value weighting the AMPs can be subjective
Limitations of the MCA
Calculate the products of the AMPs and weights
Sum these products
This sum equals the indicated value of the subject property
Six Steps of the MCA
Step 6: Determine the subject's indicated value
Six Steps of the MCA
Step 5: Value weight the comps' AMPs
Comps more similar to the subject receive a higher weight
These subjective weights are a function of the number and the magnitude of adjustments from Step 3
Six Steps of the MCA
Step 4: Determine the Adjusted Market Price (AMP) for each comp
Step 4: Determine the Adjusted Market Price (AMP) for each comp
AMP = each comp's sale price, +/- the dollar adjustments from Step 3
The range of the comps' AMPs should be much smaller than the range of the comps' sale prices
AMPs theoretically represent
Quantify the adjustment magnitude
- use the matched pairs technique
- use the cost approach to determine how much a component part contributes to overall value
Six Steps of the MCA
Step 3: Adjust the comps from Step 2 for dissimilarities
Determine the adjustment Direction (+ or -)
- theoretically transform the comps to be just like the subject via adjustments
- always adjust the comps, sale prices, not the subject's price
- define the preferred characteristics
- adjust downward if the com
Six Steps of the MCA
Step 3: Adjust the comps from Step 2 for dissimilarities
Five most common adjustments:
- A. Conditions of sale = special sales concessions offered by the seller
- e.g., seller-paid closing costs / points, non-arms-length deals, divorce or lawsuit settlements, condemnation or foreclosure sales
Six Steps of the MCA
Step 3: Adjust the comps from Step 2 for dissimilarities
- B. Financing Terms = special below market seller or third-party financing
- most of the PV of the financing saving will be capitalized into a higher sales price
Six Steps of the MCA
Step 3: Adjust the comps from Step 2 for dissimilarities
- C. Market Conditions = changes in the overall economy that affect value (e.g., interest rates, unemployment rates, S&D factors)
- D. Location = adjust for the comps and the subject being in different locations
- E. Physical Characteristics = adjust for
Six Steps of the MCA
Step 3: Adjust the comps from Step 2 for dissimilarities
Choose the comps from Step 1 that are most similar to the subject property
Six Steps of the MCA
Step 2
The more similar the comps and subject are, the less need there will be for adjustments
Ideally, all comps will be next door and will have just sold today
Six Steps of the MCA
Step 2
Gather comparable sales data
Six Steps of the MCA
Step 1:
Choose comps that have sold recently and are in close proximity to the subject
Gather data from the MLS, public sources, public records, lenders, builders, appraisers
Clean the data for inaccuracies
Six Steps of the MCA
Step 1:
Indicated value of the subject property equals:
The sale prices of comps that have sold recently and are in close proximity to the subject, +/- adjustments for dissimilar characteristics
Market Comparison Approach
Based on the Principle of Substitution:
When properties have equal utility, the one with the lowest price likely will sell first
Market Comparison Approach
MCA: ...the sale prices of comps that have sold recently and are in close proximity to the subject property , + / - adjustments for dissimilarities
Three Appraisal Approaches
Income: ... the PV of the anticipated income stream
Three Appraisal Approaches
Cost: ... the value of the land as though vacant, plus the depreciated value of the improvements currently
Three Appraisal Approaches
Four Appraisal Principles
Substitution:
(MCA) When assets provide the same utility, the lower priced one should sell first
Four Appraisal Principles
Anticipation
(Income) Value is a function of the PV of the property's anticipated income stream
Four Appraisal Principles
Contribution
(Cost) The value of a component part of a property equals the amount it contributes to overall value
Four Appraisal Principles
Highest and Best Use: (MCA, Income & Cost)
The use that generates the highest net return over the holding period, given current market conditions
To determine HBU, the use must be:
A. Legally Permissible - satisfy zoning laws, building codes, fire codes, safety codes, etc.
B. Physically probable -
Real Estate Valuation
Book value
historical cost minus cumulative depreciation
Real Estate Valuation
Depreciated value
FMV minus cumulative depreciation (ALWAYS WANT TO BE GREATER)
When will Book Value = Depreciated Value?
When Historical Cost = Fair Market Value
Real Estate Valuation
Leased fee value
residual value of a leased property to the owner
Real Estate Valuation
Leasehold value
the value of a lease to a tenant
Real Estate Valuation
Insurance value
how much coverage the lender requires the owner to carry on the improvements. (Ex. If your $100 house burns down Ins will pay $141 to replace it)
Real Estate Valuation
Appraised value
value opinion of a qualified appraiser as to whether the sale price is fair, given current economic conditions
Real Estate Valuation
Salvage value
a "fire sale" value to sell an illiquid property immediately
Real Estate Valuation
Assessed value
how much the tax assessor values the property for ad valorem tax purposes
Real Estate Valuation
Foreclosure value
sheriff's opening bid at a foreclosure sale
Real Estate Valuation
Condemnation value
amount the government will pay for property via imminent domain
Real Estate Valuation
Mortgage value
how much a lender will fund
(L/V) * (lesser of SP or appraised value)
Real Estate Valuation
Price vs. Cost vs. Value
Rarely equal each other, yet used interchangeably
Price = amount agreed upon by two parties
Cost = historical figure whose relation to value diminishes over time (ie $10,000 in 1969 compared to today)
Value = generally defined as FMV in this context
Examp
Real Estate Valuation
Investment value
what a property is worth to the investor
Invest if one's investment value > Fair Market Value
FMV is a consensus opinion of investors' individual investment values
One with the highest investment value likely will be the highest bidder
Real Estate Valuation
Fair market value
most probable cash selling price, assuming:
All parties have adequate time
Property has reasonable exposure time
No party is under duress (no one is forced to make deal)
All parties act prudently & with self-interest (ie seller wants the most money possib
An estimate of value
Appraisal
USPAP
(Uniform Standards of Professional Appraisal Practices) - clarifies the valuation process standards
Three approaches to estimating value:
Market comparison approach (MCA)
Cost approach
Income approach
Legally Enforceable Agreement
Contract
legally enforceable agreement to do or not to do something
Legally Enforceable Agreement
Express Contract
parties declare intentions either orally or writing
Legally Enforceable Agreement
Lease
lessor agrees to convey possession / use, while lessee agrees to pay full rent timely
Legally Enforceable Agreement
Implied Contract
created by actions of parties, not orally or in writing
Taxi ride or dining in a restaurant
Legally Enforceable Agreement
Bilateral
promise exchanged for a promise
Buyer promises to pay agreed price
Seller promises to deliver F&C title
Legally Enforceable Agreement
Unilateral
promise exchanged for performance
"If you do X, then I will do Y
Legally Enforceable Agreement
Forbearance
agreement NOT to do something
Mortgagee agrees NOT to foreclose if borrower meets all obligations
Legal Effect of Contracts
Valid
meets all requirements of law
Legal Effect of Contracts
Void
no legal effect, so not a contract and not binding on any party
Legal Effect of Contracts
Voidable
one party bound, but not the other
NHL player with option in last year
Commercial tenant with option to renew
Legal Effect of Contracts
Unenforceable
may have been valid at an earlier time, but now enforcement is barred
Beyond Statute of Limitations
Beyond expiration date of option
Competent parties
Contract Essentials
Mutual agreement
Contract Essentials
Lawful objective
Contract Essentials
Consideration
Contract Essentials
In writing
Contract Essentials
Must be of legal age and sound mind
Competent Parties
Power of Attorney
giving another party the power to act on your behalf
Corporations
person contracting on behalf of corporation must have authority and be of legal age and sound mind
Must be agreement to the contract provisions
Mutual Agreement
Offeree accepts, rejects or counter
Mutual Agreement
Offer and Acceptance
offeror makes offer to offeree, who accepts by communication
Counter-Offer
offeree makes changes to original offer and submits new offer
Prohibits fraud, misrepresentation or mistake
If so, contract is not valid
Mutual Agreement
Fraud
act intended to deceive, so as to have other party convey something of value
Innocent Misrepresentation
act NOT intended to deceive, but provided wrong information (e.g., DART service canceled)
Mistake
ambiguity in negotiations (e.g., wrong parcel) or mistake of fact (e.g., reduced parking spaces via condemnation)
Contractual Intent
all parties must have intended to contract
Duress
no party is forced, threatened or put in an unfair advantage
If so, offer can be voided by harmed party
3. Lawful Objective
Contract cannot call for performing illegal act (e.g., paying rent with weed)
4. Consideration
each party must provide something of value to prove a bargain has been made
5. In Writing
Statute of Fraud and UCC require all RE transactions be written and signed by all parties
Effective March 1, 2001
Electronic Transactions
E-sign
electronic signature legal
Texas requires writing under old Statute of Frauds for severe transactions like foreclosure and eviction
Electronic Transactions
Breach of Contract
Wronged party has six alternatives:
Partial performance
accept partially fulfilled K
Breach of Contract
Wronged party has six alternatives:
Unilateral Rescission
rescind K because other party is not performing
Breach of Contract
Wronged party has six alternatives:
Specific Performance
sue to force other party to perform
Breach of Contract
Wronged party has six alternatives:
Money damages
sue for $ if damages can be monetized
Breach of Contract
Wronged party has six alternatives:
Liquidated damages
amount agreed to in advance, should one party breach K
Breach of Contract
Wronged party has six alternatives:
Mutual Rescission
parties agree to rescind K
Statute of Limitations
Written
contracts have 4 years
Statute of Limitations
Oral
contracts have 2 years limit