chapter five valuation - career education corporation€¦ · · 2016-02-26demand transferability...

Copyright 2008 by Career Education Systems, Inc. 1

VALUATION

CHAPTERFIVE

VALUATION

TABLE OF CONTENTS

1) APPRAISAL – PAGE 22) DEPRECIATION – PAGE 53) PRINCIPLES OF VALUE – PAGE 104) MARKET DATA APPROACH – PAGE 145) COST APPROACH – PAGE 186) INCOME APPROACH – PAGE 247) THE APPRAISAL PROCESS – PAGE 29


1. PURPOSE OF APPRAISAL

1. APPRAISAL

ESTIMATE

value

WHAT DOES AN APPRAISER ACTUALLY DO?

Estimate value for lenders, owners, etc.

2. COMPENSATION OF APPRAISER

Time and effort

Based on time and effort


3. ECONOMIC CHARACTERISTICS OF VALUE

Utility

Scarcity

Demand

Transferability

Uncle SamDemands Taxes

Must be useful

Must be a limited supply

Must be wanted

Seller must be able to give to buyer

4. REQUIREMENTS TO OBTAIN FAIR MARKET VALUEKnowledgeable buyers and sellers

No undue pressure

I must sell NOW!!!!!


STEADYUP

STEADYDOWN

PRICEDEMANDSUPPLY

Factors affecting real estate supply and demand

1. Interest rates2. Local economic conditions


2. DEPRECIATION

1. TAX DEPRECIATION

Investments

ARE THERE DIFFERENT TYPES OF DEPRECIATION?

To encourage investment, tax regulations allow owners of investment property to deduct a percentage of the cost of the property each year from their taxable income.

2. VALUE DEPRECIATION

Item goes down in value due to age, wear and tear, etc.


Depreciable Base

Land NEVER depreciates

Improvements only

2. Economic Life1. Physical Life

# of years -profitability

# of years -structurally

sound


2. Effective Age1. Chronological Age

Maintained and improved over years - looks like 20 year old property

Built 30 years ago

Actual age

Apparent age based on condition; generally less than chronological age

STRAIGHT LINE Method Depreciation

Depreciate EQUAL amounts each year


3 STEPS:

1) Determine value of improvements (AS IF NEW)

2) Subtract depreciation

3) Add the current land value

Property Value $60,000

Land Value $10,000

Economic Life 20 years

What is the depreciated value after 5 years?????


Depreciable Base $50,000

(improvements only)

Property Value (improvements and land)

$60,000

Less: Land value -$10,000

Depreciation per year

$50,000 ÷ 20 years = $2,500/year

Total depreciation after 5 years

$2,500 x 5 years = $12,500

Depreciated value of improvements

$50,000 - $12,500 = $37,500

Depreciated value of property

$37,500 + $10,000 = $47,500


3. PRINCIPLES OF VALUE

1. HIGHEST AND BEST USE

WHAT ITEMS DOES AN APPRAISER CONSIDER IN ESTIMATING VALUE??

Use that provides greatest net return on land

2. SUBSTITUTION

$71,000 $70,000 $72,000

WHY PAY MORE?Property only worth what one can get another one for just like it


3. CONFORMITY

$150,000

$150,000$200,000

$150,000

Properties should conform to neighborhood for greatest value

4. ANTICIPATION

Scheduled airport completion date - next 2 years

Look to the future for value


5. COMPETITION

YEAR 2007

$100,000 PROFIT

SAM’S MARKET

High profits attract competition

$70,000 PROFIT

SUPER GROCERY

YEAR 2008SAM’S MARKET $30,000

PROFIT


6. PLOTTAGE INCREMENT (ASSEMBLAGE)

$10,000

$10,000

$10,000

$50,000

Total value of combined properties exceeds total value of individual properties


4. MARKET DATA APPROACH

1. Residential / Vacant land

HOW DOES AN APPRAISER ESTIMATE THE VALUE OF A HOUSE?

Best on these type properties

2. SUBSTITUTION

SHOULD SELL FOR $100,000

$100,000 SALE PRICE

Market data approach based on substitution


ADJUSTMENTS TO COMPARABLES

CPA - COMPARABLE POORER, ADD

CBS - COMPARABLE BETTER, SUBTRACT


3. COMPETITIVE MARKET ANALYSIS (CMA) – SALES COMPARISON

SOLD PROPERTIES

WHAT MARKETWILL BEAR

Used to establish list price

COMPETITIVE MARKET ANALYSIS (CMA)

FOR SALE PROPERTIES

WHAT SELLERS

WOULD LIKEMARKET TO

BEAR


COMPETITIVE MARKET ANALYSIS (CMA)

EXPIRED PROPERTIES

WHATMARKET

WILL NOTBEAR


5. COST APPROACH

New / Very few comparables / Special purpose properties

HOW DOES AN APPRAISER ESTIMATE THE VALUE IF THERE ARE NO COMPS?

Churches, hospitals, etc.

3 STEPS IN THE COST APPROACH

1. Estimate current replacement cost

2. Subtract for depreciation

3. Add the current land value


40’ 50’

PROCESS - STEP 1

Estimate current replacement cost

Length x Width

50’ x 40’ = 2,000 square feet

2,000 square feet

x $80 per square foot

1. Square foot method (outside dimensions)

PROCESS - STEP 1

= $160,000 replacement cost

Length x width x cost per square foot


Price items by units4. Unit-In-Place method

2. Cubic foot method

3. Quantity survey method

Length x Width x Height

Price items individually

Length x width x height x cost per cubic foot

Price rebuilding item by item; every brick, board, etc.

Price rebuilding by units; concrete, roof, etc.

1. REPRODUCTION COST - REPLICA

2. REPLACEMENT COST - SIMILAR

Exact replica cost

Cost of similar materials


PROCESS - STEP 2

Subtract for depreciation

Three causes

1. PHYSICAL DETERIORATION

Deferred maintenance

Usually curable

e.g., peeling paint, sagging floors, etc.


2. FUNCTIONAL OBSOLESCENCE

Curable through modernization

Original bad floor plan - INCURABLE

Problems inside property lines; does not function the way modern properties do

3. EXTERNAL (ECONOMIC) OBSOLESCENCE

Usually incurable

Problems outside property lines

HOUSE


EXAMPLE:

$160,000 (Step 1 - NEW)

- 20,000 (Step 2 - DEPRECIATION)

+ 30,000 (Step 3 - LAND)

PROCESS - STEP 3

Add current land value

$170,000 VALUE


INCOME PROPERTIES / APARTMENT BUILDINGS / SHOPPING CENTERS/

6. INCOME APPROACHHOW DOES AN APPRAISER ESTIMATE VALUE OF COMMERCIAL PROPERTY?

1. CAPITALIZATION APPROACHCentral business districts

EXAMPLE:

NET INCOME = 10% OF VALUE

NET INCOME = $10,000

VALUE = $100,000

SUNSET APARTMENTS


Estimate potential GROSS INCOME

5 apartments

x $200 per month

x 12 months

PROCESS - STEP 1

= $12,000 annual GROSS INCOME

Subtract VACANCY FACTOR

$12,000 annual GROSS INCOME

- 10% VACANCY RATE

PROCESS - STEP 2

= $10,800 EFFECTIVE GROSS INCOME


Subtract OPERATING EXPENSES

(DON’T INCLUDE DEBT SERVICE)

PROCESS - STEP 3

= $6,600 NET OPERATINGINCOME (NOI)

$ 10,800 EFFECTIVE GROSSINCOME

- 4,200 OPERATINGEXPENSES

Determine rate of return (CAPITALIZATION RATE)

PROCESS - STEP 4

Cap rate is percent NOI is of value

Appraiser determines going rate


PoWeR Principle

NOI (PART)

÷

VALUE (WHOLE) x CAP RATE (%)

6,600 (PART)

÷

x 12% (RATE)

Capitalization rate is 12%

55,000?


2. GROSS RENT MULTIPLIER (GRM)

6 = 3 x 2

6 ÷ 3 = 2

Income Approach

PRICE RENT GRM

PRICE RENT GRM

$62,500 = $500 x 125

$50,000 ÷ $400 = 125

PRICE RENT GRM

PRICE RENT GRM


7. THE APPRAISAL PROCESS

STEP 1 - STATE THE PROBLEM

WHAT STEPS ARE INVOLVED IN THE APPRAISAL PROCESS?

Define purpose

STEP 2 - GATHER DATAPublic record, drive neighborhood, etc.


STEP 3 - ANALYZE AND INTERPRET

NEIGHBORHOOD ANALYSISConsidering factors outside property lines

Die

NEIGHBORHOOD CYCLE

Born

Young

Middle

Old

Life-cycle of neighborhood; growth, stability and decline


STEP 3 - ANALYZE AND INTERPRET

SITE ANALYSISConsidering factors inside property lines

STEP 4 - THREE APPROACHES TO VALUE

MARKET DATA APPROACHe.g., residential and vacant land



COST APPROACHe.g., churches, hospitals, etc.


INCOME APPROACHe.g., commercial properties


MARKET DATA $82,000

COST $80,000

INCOME N/A$82,000

STEP 5 (FINAL STEP) -RECONCILIATION

APPRAISAL REPORT

chapter five valuation - career education corporation€¦ · · 2016-02-26demand transferability...

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