Ch 9Real Estate Appraisal

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Outline

I. Appraisal RegulationII. The Concept of ValueIII. Key Appraisal PrinciplesIV. The Appraisal Process

1. Sales Comparison Approach2. Cost Approach3. Income Approach

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I. Appraisal RegulationFinancial Institutions Reform, Recovery and Enforcement Act

(FIRREA) of 1989 4 Appraiser Categories:

1. Trainee Appraiser- 75 hours of classroom instruction - works under the supervision of a certified appraiser

2. Licensed appraisers(discontinued as of July 2004)

3. Certified residential appraisers- 200 hours of classroom instruction- 2,500 hours of appraisal experience- have at least an associates degree or 21 college semester credit hours- state exam at end of min of 2 years - can appraise single family homes, residential lots, res. income properties up to 4 units

4. Certified general appraisers- 300 hours of classroom instruction- 3,000 hours of appraisal experience- have at least a bachelor’s degree or 30 hours of college semester credit hours- state exam after min of 2 years- can appraise all residential properties & commercial, industrial, income properties with any # of units, apartment, & interest in real estate

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I. Appraisal Regulation

Important Changes to Appraisal Lawsince April 1, 2009:

1. Inclusion of the Market Conditions Addendumdescribes market trends

2. Home Valuation Code of Conduct-puts up a “firewall” between the and the appraiser-appraisal management companies select the appraiser

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II. The Concept of Value

Def. of market value:

. Investment value Price versus market value Market value versus cost of production Other types of value:

Insurable value Assessed & Taxable value

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Example: Taxable Value

What is the taxable value and property tax of a $180,000 property in Pinellas county, assuming 17 millage points, a $50,000 homestead exemption and a 100% assessment ratio?

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III. Key Appraisal Principles

The following four principles affect real estate values and are essential to real estate appraisals:1. Anticipation: The value of a property depends on

to the property owner in the future.2. Change: Economic, social, political and environmental forces are and affect real estate values. 3. Substitution: A buyer will pay no more for a property than the value of property.4. Contribution: The value of a component part of a house depends on .

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Source: The WSJ Complete Homeowner’s Guidebook by David Crook, p.162

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IV. The Appraisal Process

The process to create a Uniform Residential Appraisal Report (URAR):

Definition of the problem/purpose of report Data selection and collection Application of the three approaches to valuation:

1) Sales comparison approach2) Cost approach3) Income approach

Reconciliation of value indications Report of defined value

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The Appraisal Process:1. Sales Comparison Approach

Comparable sales data selection Elements of comparison

- Property rights conveyed- Conditions of sale- Financing terms- Market conditions- Location characteristics- Physical characteristics

Adjustment of sales data if comparable is superior->subtract the value of the element from the comparable’s value

if comparable is inferior-> add the value of the element to the comparable’s value

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Example: Sales Comparison Approach

Given the information below, determine the subject

value, assuming the value of a 1-car garage is $5,000.

Subject Comp1 Comp2 Comp3Sales Price ? $105,000 $93,000 $113,000Element ofComparison: “Garage” 2 2 1 4Adjustment Adjusted Value

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The Appraisal Process:2. Cost Approach

Estimate site value+ estimated production cost(reproduction cost vs. replacement cost)

- estimated accrued depreciation from:a) physical deteriorationb) functional obsolescencec) economic obsolescence

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Church in Seaside

Baroque Altar in Paderborn, Germany

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Example: Cost Approach

An appraiser is supposed to appraise themarket value of a church. She has estimatedthe land value to be $350,000 and the reproduction cost of the building to be$800,000. However, the current building isquite old. The estimated depreciation fromnormal wear and tear is $230,000 and thedepreciation from functional obsolescence is4% of reproduction cost. What is the marketvalue of the church?

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The Appraisal Process: 3. Income Approach

Gross income multiplier: GIM = Value/Annual Gross Income

Net income capitalization: Capitalization Rate = Annual Net

Income/Value Discounted cash flow (NPV)

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Example: Income Approach GIM

You are trying to value your commercial property. Assume that three comparable properties have a GIM of 9.7, 9.5, and 10.8. If your property has annual gross income of $125,000, what is the most probably selling price?

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Example: Income Approach Net Income Capitalization

You are assigned to appraise the value of an office building that has an annual net income of $340,000. The two comparables you have found have a capitalization rate of 9.8% and 10.2%. At what amount would you appraise the building?

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