pitfalls in the appraisal process presentation to: real estate expert summit june 2014 austin real...
TRANSCRIPT
PITFALLS IN THE APPRAISAL PROCESS
Presentation to: Real Estate Expert Summit
June 2014
AUSTIN REAL ESTATE
CONSULTANTSwww.austinrealestateconsultants.ca
Introduction
The following slides are the frame work of a presentation I made to Ossie Jurock’ Real Estate Expert Summit. After outlining the appraisal process, I have highlighted areas where a person, receiving an appraisal, should carefully review and evaluate their investment, making sure that the appraisal or research received has addressed all the relevant issues.
When reviewing data ask yourself “WHY”.
Project Evaluation
Every investor, prior to making a decision to invest should under take due diligence. This can be achieved in any of the following ways. Your own experience New research Hiring a consultant Order an appraisal Rely on promoters’ documentation
An Appraisal
What is an appraisal? Are there different types of appraisals? Why obtain an appraisal? How is the appraiser remunerated?
A representation of CURRENT circumstances.
Definition of an Appraiser
An appraiser is one who compiles and analyzes voluminous data of problematical accuracy from sources of dubious veracity and derives therefrom a numerical quantification of unquestionable necessity, analogous to a nebulous and euphemistic concept representational of value commensurate with ambient configurations of the open market and promulgates thereby a precise written declamation which delineates his observation, deliberations and conclusions
An Appraisal
There are many different reasons for an appraisal An appraised value is an interpretation of data Poor data can result in an incorrect value as can
an ill informed interpretation Determine why & for whom the appraisal was
done Reliance on a conservative appraisal, could result
in a missed opportunity There can be a range of values for any property
Your Property
Yourself
Your Buyer
Your Bank
Tax department
Assessed Value
Be careful when using the assessed value for making investment decisions.
BC Assessment undertake mass appraisal They may not be aware of physical changes to a
property Their value is based upon economic rent not
actual rent The fee simple interest is appraised. It can be high ( I appeal assessments every
year) or low.
Methods of Valuation
1. Income approach2. Gross rent multiplier3. Comparative approach4. Cost approach
Income Approach
Components Gross income Vacancy Expenses Yield rate derived from market analysis
Value = Net Income / Yield rateYield rate = Net income/ PriceValue = Gross Income x Gross rent multiplier
Expenses
Expense comparison should be on a per suite basis or $/sf of rentable area NOT as % of rent; actual is best. Each category should be checked out
Management
Caretaker
Insurance
Water and garbage disposal Property Taxes
Licences
More Expenses
Repairs & Maintenance Heat & Light Cablevision Elevator Advertising Misc; admin Security/tele, Capital Reserve
Comparative Approach
Compares a specific unit of value Comparative unit derived from sales
analysis Square footage Suite Room
In any comparative analysis, whether it be rental, cap rate, expenses or unit of comparison, make sure you are comparing APPLES with APPLES.
Cost Approach
Land Building Depreciation
Physical Economical Functional
Value = Land Value plus Building Cost New x % Depreciation Cost may be higher than value
Review of Collected Data
Neighbourhood Property Economy Highest and Best Use Rental and expense analysis Capitalization rates Comparative analysis Averages – UGH!!!
Reasonableness of Conclusions
Is the value arrived at in the appraisal logical given the available data?
Has the appraiser taken all reasonable steps to arrive at the conclusion?
Does the appraisal or research completed fully satisfy the needs of the investment analysis?
What other considerations should be taken into account?
Further Considerations
Negatives of the property or the area Reliability of the assembled data Physical condition of the building Future requirements for the property Current and proposed competition Alternative uses Value added Rezoning potential
More Considerations
Future potential Risk / Reward relationship Security of income Security of capital Liquidity
Questions?
Peter Austin, AACI. BSc. CArb.
AUSTIN REAL ESTATE CONSULTANTS4099 Springtree DriveVancouver, BC V6L 3E2
Ph: 604-733-3282
Email: [email protected]
URL: www.austinrealestateconsultants.ca