What is the sales comparison approach?
an opinion of market value is 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 into which a property may be divided for purposes of comparison (price per square foot, room, seat.) These units usually facilitate analysis even when the properties are not very comparable.
Reconciliation
Is necessary in nearly all sales analyses because the appraiser will usually analyze many sales that may lead to several different conclusions.
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
although the adjustment for market conditions is often referred to as a "time" adjustment, time is not the cause of the adjustment. Market conditions that change over time create the need for an adjustment not time itself.
Non-realty components of value
non-realty components of value include 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.
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
improvements such as streets, sidewalks, curbing, traffic signals, and water and sewer mains, located off the property itself but necessary to facilitate development.
on-site improvements
improvements such as grading, landscaping, fences, gutters, paving, drainage and irrigation systems, walks, and other physical enhancements to the land.
highest and best use
site value must always be considered in terms of highest and best use; even if the site has improvements, the site value is based on its highest and best use as though vacant and available for development to its most economic use.
Which is the preferred methodology for valuation?
sales comparison is the preferred methodology for developing a site value conclusion
Which is the most common technique for valuating land?
Sales comparison
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
the allocation method is based on the principle of balance and the related concept of contribution.
the market and physical condition
of the appraised property usually suggest whether an exact replica of the subject property (reproduction cost) or a substitute property of similar size and use (replacement cost) would be the basis of a more suitable comparison.
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 construction costs
include the costs of material and labor as well as the contractor's profit required to construct the improvement on the effective appraisal date.
indirect costs
are expenditures or allowances that are necessary for construction but are not typically part of the construction contract.
direct costs
expenditures for the labor and materials used in the construction of improvements; also called hard costs.
Some indirect costs
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
depreciation is the difference between the contributory value of an improvement and its cost at the time of appraisal
Three 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
3 Purposes of Appraisal Institute Formation (EDF)
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
the comparative unit method is used to derive a cost estimate in terms of dollars per unit of area
Comparative unit method (widely used)
the CUM is relatively uncomplicated, practical and widely used
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
3 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
actual age and effective age
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.
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
anticipation is 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 antic
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
although a lease 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
leases and expenses
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)
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; usually considered to be a synonym for yield rate
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 and creates risk; higher rewards are required in return for accepting higher risk. To a real estate investor, risk is
income and expense data
to derive pertinent income and expense date an appraiser investigates comparable sales and rentals of competitive income-producing properties
lease data
an income and expense forecast begins with lease anaylsys
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
a 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.