©2011 cengage learning. chapter 9 real estate appraisal california real estate principles ©2011...
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Chapter 9Real Estate Appraisal
California Real Estate Principles
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Chapter 91. Define appraisal and list the elements and
forces that influence value.2. Distinguish between utility value and market
value3. Define depreciation; outline the causes of
depreciation; describe how to calculate depreciation
4. Discuss the 3 approaches to value; outline the steps in each approach
5. Define gross rent multiplier and cap rate
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Tax assessor
Assessed value
Insurance agent
Insured value
Realty company
Market value
Bank
Loan Value
Salvage value
What is the purpose of the appraisal?
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APPRAISALAn estimate or opinion of value as of a specific date.
The accuracy of an appraisal is determined by theSkillExperienceJudgmentOf the appraiser
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Licensing
A person who meets minimum statutory requirements may be licensed or certified as an appraiser by the California Office of Real Estate Appraisers (OREA) by satisfying education (courses & hours), experience (hours) and testing criteria.
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Appraisal License RequirementsLicenses: Education Experience
Trainee Appraiser
Licensed Appraiser 150 hours 2,000 hours
Certified Residential 200 hours 2,500 hoursAppraiser
Certified General 300 hours 3,000 hoursAppraiser (1,500 must be
non-residential
Must have 15 hours of USPAP property) to obtain license & 7 hours to renew.
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ValueValue in Use
(Utility Value = Worth to an OwnerMarket Value = Value in Exchange
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“Highest price in terms of money for which a
Property would sell in an open market,
The seller not being obligated to sell,
The buyer not being obligated to buy,
Allowing for a reasonable length of time
to effect the sale”
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Value affected by
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4 Elements: D U S T
Demand – desire to own
Utility - usefulness
Scarcity – lack of abundance
Transferability – can transfer ownership
Subjective ValueEmotional ValueHistoric Cost
Value
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P E P SForces that change Value
Economic ForcesConsumer: Income, Employment, Credit, Interest Rates
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Physical ForcesNatural: Land, Climate, ResourcesMan-Made: Buildings, Roads, Utilities
Social ForcesArea: Neighborhood, Living StandardsPeople: Family Size, Lifestyle, Attitudes
Political ForcesGovernment: Zoning, Fiscal Policy, TaxesPeople: Environmental Protection, Education
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PRINCIPLES OF VALUATIONHighest and Best Use ChangeBalance Supply and DemandContributionSubstitutionProgression – RegressionCompetitionConformityAnticipation©2011 Cengage Learning
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DEPRECIATIONPhysical Deterioration
Worn out, run down, deferred maintenance, weatheringCurable or Incurable
Functional ObsolescenceOut of date, poor floor plan,
lack of modern appliances,out of style architecture Curable or Incurable
Economic ObsolescenceNeighborhood or Social Causes:
Traffic, noise, flood zone, crimeIncurable
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DEPRECIATION: Functional Obsolescence
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Kitchen Family
DiningUtility
Living
BathBedroom Bedroom
Bedroom Bedroom
This 4-bedroom, 1 bath home with no access to the back yard from the family room and utility room far from the bedrooms where kitchen becomes a hallway is an example of functional obsolescence (a floor plan that does not fit today’s needs).
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The Appraisal Process
G en era l D a taR eg ion
C ityN e ig h b orh ood
S p ec ific D a taT it leS ite
Im p rovem en ts
C o llec t D a ta
P re lim in ary S u rvey an d A p p ra isa l P lan
D efin e th e P rob lem
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Ind icated Value
C ost Approach
W ritten R eportLetter
Short FormN arrative
F ina l Estim ate of Va lue
R econcilia tion/C orre la tion o f Value
Ind icated Value
Market D ata Approach
Ind icated Value
Incom e Approach
D ata C lassifica tion and Analysis forH ighest and Best U se
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Types of Appraisal Reports
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Letter Report: Restricted Report
Short Form Report: Summary Report
Narrative Report:Self-Contained Report
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Cost Approach to ValueUsed primarily for:
New constructionSpecial purpose propertyPublic buildings
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To replace/reproduce the improvements on the property.
The upper limit to value.BEST used for unique properties with a
limited market appeal
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COST APPROACH
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Steps:1. Estimate the land value, as if it were vacant.2. Estimate the current replacement cost of the
improvements
3. Estimate and subtract depreciation of the improvements.
4. Add back the value of the land.
Sq Foot x $ per sq foot = Current replacement cost
Replacement cost
Depreciation of Improvements
Present Value of Improvements
Present Value of Improvements+Land Value Total Value
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INCOME APPROACHCapitalization or Investment Approach
Value based on income produced by the property
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FormulaGross Scheduled Income GSI
Less Vacancy and Bad Debt - VACEffective Gross Income EGI
Less Operation Expenses - OENet Operating Income NOI
NOI = Value
Cap Rate
BEST for income producing properties
Apartments, Commercial, Offices
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Capitalization Rate
The higher the cap rate, the lower the value. $30,000 I 10% R = $300,000
$30,000 I 5% R = $600,000
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I = R X V
The higher the risk,
The higher the capitalization rate.
I
= V
R
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GROSS RENT MULTIPLIERDefinition:
A gross rent multiplier is a calculation of how many times the property’s rent goes into the price.
It can be based on the monthly or annual rent.
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GROSS RENT MULTIPLIERComp. Sales Price Gross Monthly Rent Multiplier
Comp. Monthly Rent (GMRM)
Comp. Sales Price Gross Annual Rent Multiplier
Comp. Annual Rent (GRM)
THEN
Gross Scheduled Income (GSI) x Gross Rent Multiplier (GRM) = Estimated Value ($)
FAILS TO CONSIDER VACANCIES AND EXPENSES
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Gross Rent Multiplier ExampleSales Price $350,000 = 175 gross mo. Rent
Mo. Rent $2,000 multiplier
Sales Price $350,000 = 14.58 gross annual
Annual Rent $24,000 multiplier
($2,000 X12mo.)
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MARKET VALUE APPROACH
The most probable price that real estate would bring in an arm’s length transaction, under normal market conditions, on the open market.
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BEST used for existing one-to-four unit residential property, vacant land and condominiums
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Comparison Approach “If comparable homes sold for $XXX, then subject home should sell for $XXX”
1. Select 3 to 5 comparable or similar properties with similar architectural style and character which have recently sold under reasonable market conditions in the same neighborhood
2. Make adjustments for the different between the comps and subject property for amenities by adding or subtracting from their sales prices.
- + - + - + - +
3. The result gives a value range for the subject property. From the value range, select the probably market value of the subject property.
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MARKET DATA ANALYSISItem Subject Property Comparables
1 2 3
Address
Sales Price
Data Source
Date of Sale
Location
Site/View
Design/Appeal
Constr. Quality
Age
Condition
# of Rooms
# Bedrooms
# Baths
Liv. Area (sq ft)
Garage/Carport
Patio, pool, etc.
412 Acme Drive
$335,000
Sales contract
9/1/00
Hi-qual suburb
Inside lot
Rambler/exc
Good
7 yrs
Good
8
4
2 ½
2,700
2-car att
15 x 21 patio
131 Skip Rd
$353,000
Present owner
6/29/00
Same
Corner lot
Same
Good
6 yrs
Good
7
4
2 ½
3,300
Same
15 x 26 patio
221 Sutter St
$333,500
MLS
7/14/00
Same
Corner lot
Same
Good
8 yrs
Good
7
3
2
2,350
Same
18 x 16 patio
168 Bow Rd
$318,500
Selling broker
5/17/00
Same
Inside lot
Same
Good
8 yrs
Good
6
3
2
2,150
Same
15 x 17 patio
Additional Data 2 fireplaces
Range, oven
D/W disposal
Central air
2 fireplaces
Range, oven
D/W
Central air
1 fireplace
Range, oven
D/W
Central air
1 fireplace
Range, oven
D/W
Comments Subject has superior energy efficiency to comps 2 and 3 and is at least equal in this respect to comp 1. Principal difference between comps 1 and 2 is square footage.
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Arm’s Length TransactionNeither party is under duress
The property is on the market for a reasonable time.
Both parties have full knowledge of the property’s assets and defects.
No unusual circumstances exist.The price was not affected by special
financing.
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Chapter 9 Question
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Subject Comp #1 Comp #2
Value : ? Sale: $400,000 Sale: $350,000
Bedroom: 3 4 2
Bathroom: 2 3 1
A bedroom in this area is valued at $10,000
A bathroom in this area is valued at $15,000
What is the indicated value for Subject Property?
A. $325,000 C. $375,000
B. $350,000 D $425,000
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Chapter 9 Answer
Comp # 1 Comp #2
$400,000 $350,000
- $10,000 + $10,000
-$15,000 + $15,000
$375,000 ( C ) $375,000
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The range of value for subject property is $375,000
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Review Quiz Chapter 9
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1. The most important consideration in an appraisal is the:a. methods usedb. experience and knowledge of the appraiserc. data gatheredd. inspection of the title records
2. Which of the following is a physical force that influences value?a. rate of changes in populationb. income levelsc. size and shape of the parceld. zoning changes
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Review Quiz Chapter 9 3. The appraisal principle that states that the value of a
property is dynamic, not static is called:
a. principle of supply and demand
b. principle of highest and best use
c. principle of substitution
d. principle of change
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4. A loss in value because of busy street is an example of:
a. economic obsolescence
b. accrual for depreciation
c. functional obsolescence
d. physical deterioration
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Review Quiz Chapter 9
5. The market approach would be given the most weight if appraising a:
a. New homeb. New apartmentc. Five year old homed. Special purpose property
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Review Quiz Chapter 9 6. Find the value by use of the income
approach (round to the nearest $100)(1) an older 3-unit apartment rents for $1,000 per month per unit(2) vacancy factor of 5%(3) annual operating expenses $10,000(4) capitalization rate of 8%
a. $302,500b. $288,000c. $276,500d. $275,000
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Review Quiz Chapter 9 7. With a gross annual multiplier of 150, a duplex that
rents one unit for $575 per month and the other for $625, should have an estimated value of:
a. $173,000
b. $176,000
c. $180,000
d. $197,000
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8. Licensed by the Office of Real Estate Appraisers to do the most complex property appraisal is the:a. real estate agentsb. certified residential appraiserc. certified general appraiser
c. licensed appraiser
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Review Quiz Chapter 9 9. The type of appraisal report required by most lenders
is the:
a. loan report
b. narrative report
c. short form report
d. letter form report
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10.Regarding the sales comparison approach, which is false?
a. the comps are adjusted to the subject property
b. 3 is the minimum number of comps to use
c. the subject property is adjusted to the comps
d. this approach is best for valuating residential homes
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Answers to Review Quiz Chapter 91. B 6. A
2. C 7. C
3. D 8. C
4. A 9. C
5. C 10. C
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