Real Estate PrinciplesTenth Edition

Real Estate:

An Introduction to the ProfessionTenth Edition

Chapter 18

Real Estate Appraisal_________________________

Appraisal

An estimate of value.Three approaches to estimating value:

Market – comparable sales dataCost – construction cost plus land value Income – monetary returns of property

capitalized

Valuing a House Market Comparison Approach

-$7,560 +$2,960 -$2,700

Competitive Market Analysis

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.4

As a Group:

$196,000

$805,000

$27,762

$115,002

= 7.06

= 7.00

Calculating Gross Rent Multiplier

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 Value

Square-foot Method of Cost Estimating

Income / Rate = Value

$18,000 / 0.09 = $200,000

Income Approach

Variation by Direct Capitalization

Projected Annual Operating Statement (Pro Forma Statement)

Operating expense ratio: $31,070 / $79,800 = 38.9%

IncomeOverall Rate

= Value

$45,4000.09376

= $484,215

Direct Capitalization Using an Overall Rate

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

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

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

8,000

Final Indicated Value $183,000

Reconciliation

• Complete appraisal• Limited appraisal

Types of Appraisals

• Self-contained appraisal report• Summary report• Restrictive report

Reporting Options

Types of Appraisals andReporting Options under USPAP

1. Letter report

2. Form report

3. Narrative report

4. Review appraisals

5. Real estate analysis

Formats of Appraisal Reports

Appraiser License

Certified General AppraiserCertified Residential AppraiserState licensed appraiserProvisional licensed real estate

appraiserAppraiser trainee

Principle of Anticipation

Principle of Substitution

Highest and best use of a property

Principle of competition

Principle of supply and demand

Principle of change

Principle of contribution

Principle of conformity

Principles of Value

Value

Market valueAssessed valueInsurance valueLoan valueEstate tax valuePlottage valueRental valueReplacement value

Markets

Buyer’s market – excess supply of housing for sale.

Seller’s market – demand exceeds supply.

Professional Appraisal Societies

The American Institute of Real Estate Appraisers (AIREA) MAI SRA

Society of Real Estate Appraisers NATIONAL Association of Independent Fee

Appraisers Farm Managers and Rural Appraisers National Society of Real Estate Appraisers American Society of Appraisers

Key Terms

Appraisal Capitalize Comparables Cost approach Depreciation FIRREA Gross rent multiplier

Highest and best use Income approach Market approach Market value Operating expenses Scheduled gross,

Projected gross USPAP