Site Analysis and Evaluation (801)

True market value of property is

Always unknown

What are the three traditional approaches to estimate the value of property

Cost, sales comparison, and income

The cost approach

based on new construction cost minus depreciation plus site value

The sales comparison approach

based on the sales of similar properties

The income approach

based on the income the property can produce

What are the two reasons why there are different approaches to value

different types of property require different methods or approaches and more than one method increases the confidence in a final estimate of value

Each method has its own theoretical basis. See if you can identify the appraisal method to the proper theoretical base. Which approach is based upon the idea that property value can be estimated using:

The current cost of reproduction less the depreciation from all physical, functional, and economic causes?

Each method has its own theoretical basis. See if you can identify the appraisal method to the proper theoretical base. Which approach is based upon the idea that property value can be estimated using:

The income it is capable of producing?

Each method has its own theoretical basis. See if you can identify the appraisal method to the proper theoretical base. Which approach is based upon the idea that property value can be estimated using:

Selling prices of recently sold similar properties?

Principle of Substitution

The value of a property tends to be set by the cost of acquisition of an equally desirable substitute property, assuming that no costly delay is encountered in making the substitution

This means that a prudent purchaser would pay no more for a property than the cost of acquiring a substitute property on the open market. A purchaser can acquire a substitute property in three different ways. Decide which valuation method is indicated in each alternative. See if you can match the following motivations with the appropriate method of valuation.

Buying an existing property which is a substitute for the one being appraised.

This means that a prudent purchaser would pay no more for a property than the cost of acquiring a substitute property on the open market. A purchaser can acquire a substitute property in three different ways. Decide which valuation method is indicated in each alternative. See if you can match the following motivations with the appropriate method of valuation.

Constructing a substitute with the same utility as the property being appraised.

This means that a prudent purchaser would pay no more for a property than the cost of acquiring a substitute property on the open market. A purchaser can acquire a substitute property in three different ways. Decide which valuation method is indicated in each alternative. See if you can match the following motivations with the appropriate method of valuation.

Acquiring an investment property which would produce the same rent and offer the same risk as that involved in the property being appraised.

Market Value=

Land Value + Building Value

What is the first step to the cost approach?

Determine the cost new of all improvements

What is the second step to the cost approach?

Estimate the amount of depreciation

What is the third step to the cost approach?

Subtract the amount of depreciation from the cost new

What is the fourth step to the cost approach?

Add the land value to the deprecated improvement value

What is the cost approach estimate of market value for a property if the value of the land is $45,000, the cost new of all improvements is $65,000, and improvements have depreciated 20%?

$97,000

Which of the following do you think is the most difficult problem faced by the real estate appraiser using the cost approach?

a) Estimating the depreciation of old improvements.

b) Estimating the cost of new improvements.

A

What are the three broader categories of depreciation?

Physical deterioration, functional obsolescence, and economic obsolescence

Physical deterioration

A loss in value due to wear and tear and the force of nature

Functional obsolescence

A loss in value due to the inability of the structure to adequately perform the function for which it is used

Economic Obsolescence (locational/ external obsolescence)

A loss in value as a result of impairment in utility and desirability caused by factors outside the property’s boundaries

Try to match the type of depreciation with the statement describing conditions for which value is lost.

Excessively high ceilings and too few bathrooms.

Try to match the type of depreciation with the statement describing conditions for which value is lost.

Broken windows and a leaking roof.

Try to match the type of depreciation with the statement describing conditions for which value is lost.

Close proximity to a hazardous waste site

Appraisers must decide which is the most appropriate method to use when appraising property. Under which of the following conditions do you think the cost approach is best to use?

When the improvements are new

In applying the cost approach, the appraiser begins by estimating the land value. The value of the land is generally estimated by comparing the land being appraised with similar land recently sold in the area and making adjustments for differences. Within the cost approach, land value is estimated using the:

Formula for the sales comparison approach

Market Value = Sales price of comparable ± Adjustments

Although several sales are used in the approach, for the purpose of explanation, we will use only one sale. Suppose Property “A” sold for $145,000 and, in your opinion as an appraiser, it is 10% better than the subject. Using this information as the basis of your estimate of value, what is the value of the subject?

$130,500

Formula for the income approach

Market Value= Income/ Rate

Income

The amount of money that is typically received by the own in the form of rent for the real estate or other income

Rate

Reflects a return both on and of the investment

What is the estimated market value of a property that rents for $1,400 per month when an appropriate capitalization rate is 12%?

$140,000

The income approach formula can be used not only to determine value but also to determine income or rate. For example, if the value is $100,000 and the rate 9%, the income produced by the property is $100,000 X .09, or $9,000. How much income is produced by a property that is worth $250,000 if the rate is 8%?

$20,000

The income approach formula can also be used to determine the rate. For example, if the value is $100,000 and the income is $12,500, the rate received by the investor is $12,500 ÷ $100,000 = .125 or 12.5 %. What is the rate of return on an investment where the property value is $375,000 and the annual income is $35,625?

.095 or 9.5%

Use the following choices: a) The Cost Approach b) The Income Approach c) The Sales Comparison Approach

Suppose you are asked to estimate the value of a city-owned museum. Which of the three approaches do you think would be most appropriate in making the appraisal and why?

Use the following choices: a) The Cost Approach b) The Income Approach c) The Sales Comparison Approach

In the case of single family residential properties, which approach would you think most inappropriate in estimating value?

Use the following choices: a) The Cost Approach b) The Income Approach c) The Sales Comparison Approach

What approach would generally be used in evaluating a 50-unit apartment building and why?

The point that should be emphasized is that one approach may be more appropriate than the others in certain situations. The approach selected is dependent upon the availability of the data. Name the approach which normally would be used in evaluating each of the property types below:

Special-purpose or Religious property

The point that should be emphasized is that one approach may be more appropriate than the others in certain situations. The approach selected is dependent upon the availability of the data. Name the approach which normally would be used in evaluating each of the property types below:

Residential Property

The point that should be emphasized is that one approach may be more appropriate than the others in certain situations. The approach selected is dependent upon the availability of the data. Name the approach which normally would be used in evaluating each of the property types below:

Commercial Investment

The cost approach depends on

a) data from the land marketplace for estimating land value

b) material and labor prices from the cost marketplace

The sales comparison approach depends on

the availability of recent property sales

The income approach depends on

rental data for the income component of the model and financial or sale data for the rate component

See if you can answer the following questions: True or false

Market data is used in all three approaches to value.

See if you can answer the following questions: True or false

Only the market data approach uses the technique of comparing

See if you can answer the following questions: True or false

The market has no influence on costs and depreciation.

See if you can answer the following questions: True or false

The cost approach cannot be used in valuing land.

In appraising real estate, the appraiser may deal with either or both of its physical components:

the site and the structure

Land

The physical aspect of the solid surface of the earth and is often referred to as “raw land”

Site

Land which has been changed in such a way as to make it ready for an intended purpose. Such as adding things like gas, electricity, water, telephone, or sewer to raw land

Which approach requires that the appraiser know the value of the site before the property value can be estimated?

Tax laws often require land and improvements to be shown separately on the assessment roll. This is done to ensure equity and uniformity for special assessment and statistical purposes. Do you think that separating land and improvements for assessment purposes adds clarity to the taxation process?

Probably. Property taxation is a complex process with different levels of assessment, variation between classes, and with multiple levy rates being applied. As assessment administrators, it is important to try to make the process as understandable as possible for property owners. Listing land and improvements aside from being useful for administrative purposes, promotes truth-in-taxation, and helps property owners understand the process.

For some property and income tax applications, depreciated value is important. For purposes of real estate appraisal, it is generally agreed that land does not depreciate. As such, the land value must be separated from the total value of the property. If you know the sale price of a property, what must be done to determine the depreciated value of the improvements?

A separate valuation of the land is also necessary in applying the building residual technique of the income approach. In this technique, the land value is assumed to be known and a portion of the net operating income is deducted to represent interest and taxes on this land value. The balance of the net income is residual (left over) to the building, and it forms the basis for estimating building value.

Consider this situation: Your analysis of a vacant site shows that its highest and best use would be as an office building and, if used in that way, you estimate the value of the site alone at $300,000. Suppose now that on the site is an old apartment building. In applying the building residual technique, you find that the net income from the apartment is such that it produces no return on the building. What can you conclude from this?

It’s obvious that the site is not being put to its highest and best use and that the apartment building is an under improvement to the land. The building, even if structurally sound, has no economic value.

What are the six reasons why sites are valued separately from buildings

to value vacant sites, to apply the cost approach to value, for taxation purposes, for depreciation purposes, to apply the building residual technique, and to check on whether the site is improved to its highest and best use.

What is the first step of the appraisal process?

analyzes the problem and states specifically what has to be done. This includes two components: (a) determining the kind of value to be estimated; and (b) selecting the valuation approach which is most appropriate and reliable for the type of property being appraised.

What is the second step of the appraisal process?

determines what information is needed to solve the problem. This includes listing the types of data and the sources for the data.

What is the third step of the appraisal process?

gathers and records the data. This includes general, specific, and approach data. The general data is about the nation, region, city, and neighborhood. The specific data is about the property itself. The approach data includes such things as sales, cost, or income data depending on the valuation method selected.

What is the fourth step of the appraisal process?

verifies the data by checking with a reliable source. In some cases it is important to check the data against multiple sources.

What is the fifth step of the appraisal process?

reviews the entire process to be sure that all relevant facts have been considered and handled properly and that no errors have been made in calculations.

What is the sixth step of the appraisal process?

makes a definitive statement resulting in a final estimate of value.

Appraisal data is divided into two main categories

General data and specific data

General data

covers the nation, region, city, and neighborhood

Specific data

Covers (1) details of the specific property being appraised, and (2) comparative data relating to construction costs, sales, and income and expenses of properties judged to be similar to and competitive with the property being appraised.

Direction of analysis

General —> Specific

Site data

Information about the site includes such things as a description of the land (size, shape, and topographical features) and the presence or absence of public improvement (gas, electricity, water, paved streets or sidewalks)

Building data

This includes a comprehensive description of the physical improvement and its condition and an analysis of its layout, style, and design.

Approach data

Different approaches require different data. Some data is relevant for one approach but not for another.

What is the first step in the data collection process?

List the type of data needed.

What is the second step in the data collection process?

List the possible sources of these data.

What is the third step in the data collection process?

Construct forms for tabulating the data. Your office will probably provide you with standard data collection forms.

What is the fourth step in the data collection process

Search the data files in your office for information already collected and applicable to the assignment. Record this data.

What is the fifth step in the data collection process

At this point you are ready for the field phase of the process:

a. Personally inspect and record the neighborhood, the site(s), and the building(s) data.

b. Check sources likely to supply needed data and record all data obtained.

c. Verify your data, particularly sales data.

Real Estate

The physical, tangible land and all things permanently attached to it

Real property

The “right of ownership” of the physical real estate—often called the “bundle of rights.” Included in the bundle of rights are the right to use the real estate, to sell it, to rent it, to give it away, and the right not to do any of these things.

Taxtion

Power to tax the real estate for support of government and to sell the property if taxes are not paid.

Eminent Domain

Power to take property by condemnation for public use, provided just compensation is paid.

Police Power

Power to regulate property for the health, safety, morals and general welfare of the public. Building codes, zoning ordinances, traffic regulations, and sanitary regulations are based upon the police power of government.

Escheat

Power to have property revert to the state when there are no legal heirs.

Personal Property

Tangible items which are not permanently attached to and part of the real estate, such as a window air conditioner.

There are often cases where judgment is needed to decide whether something is real estate or personal property. Appraisers usually follow two guidelines:

(1) How the item is attached (permanent or nonpermanent)

(2) The intent of the person who attached it (to leave the item permanently or to remove it at some future date, often upon the sale of the property.)

Market Value

The highest price in terms of money which a property will bring if exposed for sale on the open market by an informed seller, allowing a reasonable time to find a purchaser who buys with the full knowledge of all the uses to which it is adapted and for which it is capable of being used, with neither the buyer nor the seller being under compulsion to buy or sell.

Market Price

The selling price of property regardless of circumstances influencing the sale, such as pressure, motives, knowledge or terms.

The two chief characteristics of real estate are:

Immobility and Tangibility

The two chief characteristics of personal property are:

Mobility and Tangibility

Explain why a valuable painting secured to a wall in a house is not generally considered real estate.

Generally, an item is classified as personal property (1) if it was not the intention of the person attaching it that it should become part of the real estate; and (2) if it can be removed without damaging the real estate or the item itself. It is generally understood that paintings are an item that can be moved from one place to another. The owner usually takes great care not to damage the item, or the real estate, when removing it.

Why do you think the distinction between real estate and personal property is important to the appraiser?

If an item were personal property, it could not be considered in estimating the value of real property. On the other hand, if the item were real estate, then its contribution to the value of the real property must be considered.

Real property refers to something

Identify true or false

The theory on which the concept of real property is based is called the “Bundle of Rights Theory.”

Identify true or false

It is possible for something to be personal property at one time and real estate at another.

Identify true or false

In estimating the value of real property, both real estate items and personal property items need to be considered.

Identify true or false

When we talk about buying and selling real estate, we actually mean buying and selling real property.

Indicate whether each item described below is considered real estate (RE), real property (RP), or personal property (PP)

A brick fireplace in the living room of a house

Indicate whether each item described below is considered real estate (RE), real property (RP), or personal property (PP)

The physical land and buildings

Indicate whether each item described below is considered real estate (RE), real property (RP), or personal property (PP)

Trees on the land

Indicate whether each item described below is considered real estate (RE), real property (RP), or personal property (PP)

The right to sell land and any building attached to the land