What is the sales comparison approach?
an opinion of market value developed by comparing properties similar to the subject property that have recently sold, are listed for sale, or are under contract.
Units of Comparison
the components which a property may be divided for purposes of comparison (price per square foot, room, seat) which usually facilitate analysis even when the properties are not very comparable.
Reconciliation
Analysis of value indications derived from one or more approaches. The final value estimate should be rounded so the appraiser does not give a false impression of precision associated with an opinion.
Comparative Analysis
general term used to identify the process in which quantitative and qualitative techniques are applied to comparable sales to derive a value indication in the sales comparison approach.
Data Analysis Techniques
Paired data analysis is based on the premise that when two properties are equivalent in all respects but one, the value of the single difference can be measured to indicate the difference in price between the two properties.
paired data analysis
a quantitative technique used to identify and measure adjustments to sale prices or rents of comparable properties; to apply this technique, sales or rental data on nearly identical properties is analyzed to isolate a single characteristic's effect on val
bracketing
a process in which an appraiser determines a probable range of values for a property by applying qualitative techniques of comparative analysis to a group of comparable sales.
Concessions
a financial payment, special benefit, or non-realty item included in the sale contract or rental agreement as an incentive to the sale or lease.
Market conditions
an adjustment often referred to as a "time" adjustment, although time is not the cause of the adjustment.
Non-realty components of value
Includes chattel, business concerns, and other items that do not constitute real property but are included in either the sale price of the comparable property or the ownership interest in the subject property. Should be deducted from real estate value.
Kelo v. City of New London
the taking of private land for economic development, and particularly for private sector development, has come under public scrutiny since the supreme court decision
off-site improvements
streets, sidewalks, curbing, traffic signals, and water and sewer mains, located off the property itself but necessary to facilitate development.
on-site improvements
grading, landscaping, fences, gutters, paving, drainage and irrigation systems, walks, and other physical enhancements to the land.
highest and best use
The site and improvement are analyzed separately to determine the most potential for income possibilities based on its most economic use.
Which is the preferred methodology for valuation?
sales comparison since it can be used for site and improvement valuations.
market extraction
is a technique in which land value is extracted from the sale price of an improved property by deducting the contributory value of the improvement, often estimated at their depreciated cost.
allocation
based on the principle of balance and the related concept of contribution.
replacement cost
the estimated cost to construct, at current prices as of the effective appraisal date, a substitute for the building being appraised using modern materials and current standards, design, and layout.
reproduction cost
the estimated cost to construct, at current prices as of the effective date of the appraisal, an exact duplicate or replica of the building being appraised, using the same materials, construction standards, design, layout, and quality of workmanship and e
direct costs
expenditures for the labor and materials used in the construction of improvements; also called hard costs.
indirect costs
are expenditures or allowances that are necessary for construction but are not typically part of the construction contract such as architectural fees and property taxes, are generally related to the size and cost of the project.
entrepreneurial incentive and profit
market value minus total cost of development equals profit (or loss)
depreciation
difference between the contributory value of an improvement and its cost at the time of appraisal
Major causes of depreciation
physical deterioration (wear and tear from regular use, the impact of the elements, or damage), functional obsolescence (a flaw in the structure, materials, or design, that diminishes the function, utility, and value of the improvement), external obsolesc
Financial Institution Reform, Recovery and Enforcement Act of 1989 (FIRREA)
each of the five FFIRAs plus the RTC was directed to draft preliminary and final rules (within a year) to give substance to this legislation; title IX was amended '91, appraisals for five federal institution, state and banking institutions
Government Agencies Subject to FIRREA
OTS (superseding the FHLBB) and OCC, both under Treasury, federal reserve board, fdic, national credit union administration, resolution trust corporation (RTC...defunct in '95)
Professional Appraisal Practice
founded on an established body of knowledge; in solving most appraisal problems, however, the final conclusions depend to a great extent on the ability, judgment, and integrity of individual appraisers
Purposes of Appraisal Institute Formation
Establish criteria for selecting and recognizing individuals with real estate valuation skills who were committed to competent and ethical practice; DEVELOP a system of education to train new appraisers and sharpen the skills of practicing appraisers; FOR
USPAP Preamble
the purpose of the uniform standards of professional appraisal practice is to promote and maintain a high level of public trust in appraisal practice by establishing requirements for appraisers.
cost data sources
in the absence of construction contract data, local building contractors and professional cost estimators can be reliable data sources.
cost-estimating services (M&S, FW, RS)
Marshall and swift public, F.W. dodge corporation, R.S. Means Company, Inc.
comparative unit method
used to derive a cost estimate in terms of dollars per unit of area
unit-in-place method
a cost-estimating method in which total building cost is estimated by adding together the unit costs for the various building components as installed; also called the segregated-cost method
Principles for Estimating Depreciation
market extraction method, economic age-life method, breakdown method
Curable or Incurable?
items of physical deterioration or functional obsolescence are economically feasible to cure if the cost to cure is equal to or less than the anticipated increase in the value of the property. if the cost to cure is more than the anticipated increase in v
economic life
the period over which improvements to real property contribute to property value.
curable physical deterioration (deferred maintenance)
curable physical deterioration, also known as deferred maintenance, applies to items of immediate repair on the effective date of the appraisal
functional obsolescence 5 types
Curable caused by a deficiency requiring addition (installation) of a new item, Curable caused by a deficiency requiring substitution (replacement) of an existing item (curing a defect), Curable caused by a superadequacy that is economically feasible to u
income capitalization approach
an appraiser analyzes a property's capacity to generate future benefits and capitalizes the income into an indication of present value. the principle of anticipation is fundamental to this approach. techniques and procedure from this approach are used to
anticipation and change
fundamental to the income capitalization approach; all income capitalization methods, techniques and procedures attempt to consider anticipated future benefits and estimate their present value. this may involve either forecasting the anticipated future in
applicability and limitations
any property that generates income can be valued using the income capitalization approach, when more than one approach to value is used to develop an opinion of value for an income-producing property, the value indication produced by the income capitaliza
leases
can be drawn to fit any situation, most leases fall into one of several broad classifications: flat rental, variable rental, step-up or step-down, revaluation, annual increase, percentage
flat rental lease
a lease with a specified level of rent that continues throughout the lease term
index lease or variable
a lease, usually for a long term, that provides for periodic rent adjustments based on the change in an economic index
revaluation lease
a lease that provides for periodic rent adjustments based on the market rental rate of the space
contract rent
the actual rental income specified in a lease
effective rent
is an analytical tool used to compare leases with different provisions and develop an estimate of market rent. effective rent may be defined as the total of base rent, or minimum rent stipulated in a lease, over the specified lease term minus rent concess
percentage rent
rental income received in accordance with the terms of a percentage lease typically derived from retail store and restaurant tenants and based on certain percentage of their gross sales
potential gross income (pgi)
the total income attribute to real property at full occupancy before vacancy and operating expenses are deducted
effective gross income (egi)
the anticipation income from all operations of real property after an allowance is made for vacancy and collection losses and an addition is made for any other income.
net operating income (noi)
net operating income is the actual or anticipated net income remaining after all operating expenses are deducted from from effective gross income.
fixed expenses
operating expenses that generally do not vary with occupancy and that prudent management will pay whether the property is occupied or vacant.
variable expenses
operating expenses that generally vary with the level of occupancy or the extent of services provided
discount rate
a yield rate used to convert future payments or receipts into present value
return of capital
the recovery of invested capital, usually through income and/or reversion.
return on capital
the additional amount received as compensation (point or reward) for use of an investor's capital until it is recaptured. The rate of return on capital is the yield rate or the interest rate earned or expected.
risk
the anticipation of receiving future benefits creates value, but the possibility of not receiving or losing future benefits reduces value
income and expense data
an appraiser investigates comparable sales and rentals of competitive income-producing properties
lease data
an income and expense forecast begins with lease analyses
typical lease data
date of lease, legal description, names, terms, concessions, amount, etc.
rent
the amount of rent to be paid by the tenant is basic lease data
rent concessions
in an oversupplied real estate market, extra goodies
renewal options
extend lease term for one or more periods of time
expense cap and expense stop clauses
cap on CAM
escalation clause
In an agreement that provides for the adjustment of a price or rent based on some event or index, e.g. a provision to increase rent if operating expense increase
escape, kick out, and buy out clauses
little stores and big anchor tenants....a provision that allows a tenant to cancel a lease
continued occupancy clause
a lease provision that conditions the continued occupancy of one tenant upon the occupancy of another, usually an anchor tenant in a multi-tenant retail center
tenant improvements
a dollar amount (usually expressed as an amount per square foot) provided to the tenant by the landlord for the construction of tenant improvements, which may or may not equal the cost of remodeling
exclusive use clause
a provision that limits the landlord from leasing to any other tenants in the property or in a defined area who are conducting a similar business
replacement allowance (reserves)
periodic replacement of building components
exclusions from reconstructed operating statements
book, depreciation, income tax, depletion, special corporation costs, additions to capital, loan payments.
actual age is
called historical or chronological age
effective age is
the age indicated by the condition and utility of a structure and is based on an appraiser's judgment and interpretation of market perceptions.
gross lease
tenant pays rent and landlord pays expenses
modified gross lease
tenant and landlord share expenses
net lease
landlord passes on all expenses to tenant