© 2008 by south-western, cengage learning chapter 18 charles j. jacobus thomas e. gillett

Chapter 18Chapter 18

Charles J.Jacobus

Thomas E.Gillett

Georgia Real EstateGeorgia Real EstateAn Introduction to the Profession An Introduction to the Profession

Seventh EditionSeventh Edition

Chapter 18Chapter 18

Real Estate AppraisalReal Estate Appraisal

AppraisalAppraisal

An estimate of value.

Purpose and UseInformal

Formal

Valuation ProcessValuation Process

USPAPDefine the problemPreliminary analysis, formulate a plan, & collect dateHighest & best useLand valueReconcile & arrive at an estimateReport the value

Characteristics of ValueCharacteristics of Value

Principles of ValuePrinciples of Value

Principal of Anticipation

Present worth of future benefit

Principal of Substitution

Property is worth what one would pay for an equally desirable substitute

Principal of Competition

Stabilizes prices

Principal of Change

Real property is always in a state of change

Principal of Conformity

Maximum value is achieved with homogeneity

Principal of Highest & Best Use

Use that results in the greatest value

Principal of Supply and Demand

Value results in the relative supply in relation to demand

Principal of Increasing Returns

Dollar spent adds at least a dollar to value

Principal of Decreasing Returns

Dollar spent does not add at least a dollar to value

Principal of Contribution

Worth of an improvement is not determined by cost but by what it adds to the overall value

Meanings of the word Meanings of the word ValueValue

Assessed Value

Estate Tax Value

Insurance Value

Loan Value

Combining two or more parcelsCombining two or more parcels

Assemblage with value increaseAssemblage with value increase

Meanings of the word Meanings of the word ValueValue

Rental Value

Replacement Value

Salvage Value

MarketsMarkets

Buyer’s MarketExcess supply

Seller’s MarketExcess demand

Broad MarketMany buyers &

sellersThin Market

Few buyers & sellers

Value ApproachesValue Approaches

Market Approach

Cost Approach

Income Approach

Market ValueMarket Value

Typically motivated

Well Informed & acting in their own best interest

Open market exposure

Cash or cash equivalency

Market Comparison ApproachMarket Comparison Approach

Subject property: Residence to be appraised

Comparables: Recently sold similar properties

Sales Records

Information needed?

Where to search?

Verification

Number of comparables

Fewest adjustments

Current market conditions

Time Adjustments

House Size

Garage & Patio

Building Age, Condition, & Quality

Landscaping

Lot Features & Location

Terms & Conditions of Sale

Unique IssuesUnique Issues Condominium, Townhomes, and Cooperatives

Vacant Land

Competitive Market AnalysisRecently Sold

Active Listings

Expired Listings

CMACMA Section # 1: Homes for Sale

Section # 2: Similar Sales

Section # 3: Expired Listings

Section # 4: FHA & VA

Section # 5: Buyer Appeal

CMACMA Section # 6: Marketing Position

Section # 7: High & Low points

Section # 8: Selling Costs

Section # 9: Sales Price & Net

GRMGRM

Gross Rent is compared to Sales Price

Annual Income vs. Monthly Income

Weaknesses of GRM

Sales Price

Gross Rent= GRM

$700,000

$100,000= 7 GRM

Building Sales Price GrossAnnualRents

Gross RentMultiplier

No.1 $245,000 $34,900 = 7.02

No.2 $160,000 $22,988 = 6.96

No.3 $204,000 $29,352 = 6.95

No.4As a Group:

$196,000$805,000

$27,762$115,002

= 7.06= 7.00

Calculating a GRMCalculating a GRM

Step 1: Estimate land as vacant $ 30,000

Step 2: Estimate new construction cost of similar building $120,000

Step 3: Less estimated depreciation -12,000

Step 4: Indicated value of building $108,000

Step 5: Appraised property value $138,000 by the cost approach

Costs Approach to ValueCosts Approach to Value

Cost ApproachCost Approach

Reproduction CostExact replica

Replacement CostSimilar utility

Square-Foot Method

Current construction cost divided by number of square feet

Square Foot MethodSquare Foot Method20 ft

ft Garage

20 ft X 20 ft = 400 sq ft

ft Driveway

45 X 20 =900 sq ft

Dwelling50 X 20 = 1000 sq ft20 X 30 = 600 sq ft

TOTAL = 1600 sq ft

Dwelling Value per Square Foot:

Base Price $56.45 add 0.80 for shake shingles add 1.25 for air conditioning add 1.50 for carpeting

Total $60.00 per square foot

Patio20 ft X 25 Ft =

500 sq ft

COST ESTIMATEDwelling 1,600 sf @ $60.00 = $ 96,000 add dishwasher 700 add fireplace 4,000

Dwelling total $100,700

Garage 400 sf @ $30.00 12,000Driveway 900 sf @ 2.00 1,800Patio 500 sf @ 6.00 3,000Landscaping 2,000

Subtotal $119,500

Construction financing, real estateTaxes and title policy, add 10% 11,950

GRAND TOTAL $131,450

Quantity SurveyAll inclusive cost of building item by item

Unit in PlaceCost of a unit X the number of units

Cost Handbooks

Estimating DepreciationEstimating Depreciation

Physical Deterioration

Wear & Tear

Forces of nature

Functional ObsolescenceFaulty or out of date design

Economic ObsolescenceOutside the property lines

Computing DepreciationComputing Depreciation

Straight Line Method (Age/Life Method)Actual Age: Historical conceptEffective Age: How old it appearsPhysical Life: Physically soundEconomic Life: Productive life

Building Cost

Economic Life= Depreciation per Year

Depreciation per Year X Effective Age = Accrued Depreciation

Depreciation ExampleDepreciation Example

2,000 sq. ft bldg. x $68 per sq. ft. = $136,000 Cost New

X 10 Year Effective Age

$136,000 Cost New60 Year Economic Life

= $22,66.67 Depreciation per yr

$2,266.6667 Depreciation per year

$22,666.67 rounded to $22,700.00

Cost Approach Final StepsCost Approach Final Steps

Current Construction Cost

Minus Deprecation

Plus Land

Income ApproachIncome Approach

Capitalize: to convert future income to a current value

Income

Rate= Value

$18,0000.09

= $200,000

Income and Expense Forecasting

Projected Gross Income

Scheduled Gross

Vacancy & Collection losses

Operating Expenses

Reserves for Replacement

Net Operating Income (NOI)

Return on InvestmentReturn of investment

Operating StatementOperating Statement

Scheduled Gross Annual Income $84,000Vacancy Allowance and Collection Losses 4,200Effective Gross Income $79,800

Operating ExpensesProperty Taxes $ 9,600Hazard and liability insurance 1,240Property management 5,040Janitorial services 1,500Gardener 1,200Utilities 3,940Trash pickup 600Repairs and maintenance 5,000Other 1,330Reserves for replacement Furniture & furnishings 1,200 Stoves & refrigerators 600 Furnace &/or air conditioning 700 Plumbing & electrical 800 Roof 750 Exterior painting 900

Total Operating Expenses 34,400

Net Operating Income $45,400Operating Expense Ratio: $34,400 / $79,800 = 43.1%

Operating Expense Ratio

Operating Expenses

Effective Gross Income

= Operating Expense Ratio

Capitalizing IncomeCapitalizing Income

Mortgage Equity Tables

Overall Rate: mortgage equity factor

Income

Overall Rate= Value

Overall Rates - 10-year Holding Overall Rates - 10-year Holding Period, 25-year Loan for 75% of the Period, 25-year Loan for 75% of the Purchase Price, 10% Investor Return Purchase Price, 10% Investor Return

Mortgage Equity TablesExample

$45,400.09376

= $484,215

DepreciationAccounted for in cap rate

Fictional DepreciationIRS depreciation

27 ½ Years

Choices of ApproachesChoices of Approaches

All 3 approaches when possible

Suitability of each approach

Market Approach $180,000 x 75% = $135,000

Cost Approach $200,000 x 20% = $ 40,000Income Approach $160,000 x 5% = $

Final Indicated Value $183,000

ReconciliationReconciliation

Weighted Factor: Relevance & Reliability

Appraiser's Best Estimate

Appraisal RegulationAppraisal Regulation

The Appraisal Foundation Uniform appraisal standards Criteria for certification & recertification of

appraisers System for certification & recertification

Two Subcommittees Appraiser Qualifications Board Appraisal Standards Board

Federal RegulationTitle XI of the Financial Institution Reform,

Recovery, and Enforcement Act of 1989 (FIRREA)

Developing the Appraisal Uniform Standards of Professional Appraisal

Practice

Departure Provision Complete Appraisal Limited Appraisal

Reporting Options Self-contained Report Summary Report Restrictive Report

USPAP Required Reporting Standards Signed certification

Formats of Reports Letter Report

Form Report

Narrative Report

Review Appraisals

Real Estate Analysis

Professional Appraisal SocietiesProfessional Appraisal Societies

AIREA & SREA combined to form the Appraisal Institute

National Association of Fee Appraisers

Farm Managers and Rural Appraisers

American Society of Appraisers

Key TermsKey Terms

AppraisalCapitalizeComparablesCost approachDepreciationFIRREAGross rent multiplierHighest and best use

Income approachMarket approachMarket valueOperating expensesScheduled grossProjected grossUSPAP

© 2008 by south-western, cengage learning chapter 18 charles j. jacobus thomas e. gillett

cengage learning market

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overall value slide

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