Chapter 4 - Valuation and Market Analysis
Appraisal terms
Appraisal - an estimate (opinion) of value
Purpose of an appraisal
Function of an appraisal
Many types of value, the type of value depends on the purpose/function of an appraisal
Market value
Most probable price in a competitive and open market
Under condition of a fair sale with buyer/seller acting knowledgeable and prudently
Price
What one paid for “something”
Much different than “value”, which is what oe would be willing to pay for “something”
Comparative market analysis (CMA)
Uses the sales comparison approach to establish value
Term used by real estate agents to describe market value of a property
* MAI: member of the appraisal institute
* USPAP: uniform standard of professional appraisal practice
Market value and market price
Market price is what one paid to add a garage
Market value is what a typical buyer would be willing to pay to have a garage before they opt for a property with no garage
Value
* characteristic/element of value (DUST)
Demand - how many buyers are seeking this property?
* utility - does the property have everything a buyer wants?
Scarcity - is there enough supply for all buyers?
Transferability - can a seller convey title to a buyer?
Economic principles of value
Supply and demand
Many homes for sale and few buyers will decrease value
Few homes for sale and many buyers will increase value
Highest and best use
The first step in determining value
When determining current market value;
A property can only be appraised according to how it is currently being used
Cannot appraise a property for what it could be used for
Substitution
Used by real estate agents to determine market value
Using properties that are similar which have recently sold to determine market value
Contribution
Determine elements that contribute to value of some properties which other properties do not benefit from
Ex: community pool, clubhouse, playground, etc.
Value
Economic principles of value
Change
The only constant is change
Value today can change tomorrow
* Conformity
Never out build the neighborhood
Large homes surrounded by smaller homes will suffer from regression *
Small homes surrounded by large homes will benefit from progression *
Anticipation of value
Present worth of anticipated future benefits
Used primarily with income producing properties
Competition
Works much like supply and demand
If several similar properties are for sell in the same area, competition will drive down prices
* plottage
The increase in value resulting from consolidating two or more adjacent lots into one larger lot
Influences on value
Social focus - appraisers consider things such as:
Marriage rates
Divorce rates
Birth rates
Death rates
Economic forces - what is the economy doing to affect value?
Political forces
What the government is doing to affect value
Physical forces - appraiser considers such things as:
Primarily rental property or owner occupied?
Primarily low income or high income?
Approaches to value
* sales comparison approach
Most useful way for a broker to assist a seller determine sales price
Income approach
Must be an income producing property
Cost approach
Method of estimating the buildings replacement cost
* sales comparison approach
Types of properties
Market comparison
Make adjustments for differences such as:
Time of sale
Location
Physical characteristics
Sales concessions
Subject Comp 1 Comp 2 Comp 3
3 BR 3 BR 3 BR 3BR
2 BA 2BA 1 ½ BA (½ BA = $1,500) 2 ½ BA
1400 SF ($30 per foot) 1425 SF 1375 SF 1475 SF
$115,000 $109,000 $120,000
Adjustments - $ (750) SF +$750 -$2,2500
+$ (1,500) Bath -$1,500
Adjusted sales price $114,250 $111,250 $116,250
Income approach to value
Used for income prodicing properu
Two method to the income approach
* capitaliaszation approach (best for commercial)
* gross rent multiplier (best for residential)
Capitalization approach
Sub comp
NOI = $73,400 NOI = $87,200
CAP = 11% Value = $825,000
Value = $667,272… CAP = 11%
Gross rent multiplier (GRM) approach
Sales price
Monthly gross income (rent) = GRM
Monthly gross income (rent) * GRM =estimated value
Subj Comp
Rent = $900 Value = $85,000
GRM = 103 GRM = 103
Value = $92,700 rent = $825
Approaches to value
* cost approach
Method of estimating the buildings replacement cost
5 steps
Estimate value of the land (cannot depreciate)
Estimate replacement or reproduction cost
Estimate accrued depreciation (economic life)
Subtract estimated depreciation from cost new
Add depreciated value to the land value
Types of depreciation
Physical deterioration
Normal wear and tear
Functional obsolescence
Something that may have been normal when built but may not be very functional today
External obsolescence
Something external to the property that will depreciate value
Such as:
Property underneath the runway of an airport
Property located next to a railroad track
Property located next to a interstate
Poorly maintained property next door or nearby
Curable and incurable
Curable
Forms of depreciation that can be cured such as physical deterioration or functional obsolescence
Incurable
Forms of depreciation that cannot be cured such as external obsolescence
* comparative market analysis (CMA)
Used by real estate agents
Utilize the sale comparison approach
Mist make adjustments to sales prices of similar properties that have recently sold
data/information is available to agents via the multiple listing service (MLS)
If no similar or comparable properties exist, agents should seek help from an appraiser
Similar terms and use
* broker price opinion (BPO)
Broker opinion of value (BOV)
Convicted by real estate agents for banks. Much cheaper for the bank to hire a real estate agent to do a BPO/BOV rather than pay an appraiser to do an appraisal
If doing a BPO, the lender would be your client
The appraisal process
Define the problem
Preliminary survey and appraisal plan of action
Collect data
Analyze and process data collected
Application of three approaches to value
Correlation of final estimate
* reconciliation
Process of appraiser using all three approaches to value in estimating value