Real Estate Appraisal Final Updated

Appraisal is best defined as - an opinion of value

Appraisers must be - licensed

Appraisers In Iowa - licensure is through the Iowa Division of Banking

Associate appraiser - 75 hours of courses, Identify supervisor (must take a course), Background check and fingerprinting

Certified residential appraiser - Must have experience as associate for a certain time period, Takes about 4 months, Includes national exam, Background check, 1-4 unit residential properties, or vacant land utilized for residential properties

Certified general appraiser - Must have experience as associate for a certain time period, Takes about 4 months, Includes national exam, Background check

USPAP - Uniform Standards of Professional Appraisal Practice

Bundle of sticks concept - Valuation requires consideration of all the different “sticks” held by various parties

Government ownership of “sticks” - Taxation, Eminent domain, Police power, Escheat

Value is - not intrinsic something doesn't have value in and of itself, its value depends on external factors like context, perception, or utility to someone.

Factors of value - Utility, Scarcity, Desire, Effective purchasing power, Utility

Effective purchasing power - Ability of a person or group to practice in the market. The value of a property must accurately assess what the market CAN pay

Price - The amount a particular purchases has/will pay and sell has agreed to accept. They are transaction specific.

Value - The anticipation of future benefits, as measured at a given point in time

When supply/demand, substitution, balance, and externalities are in harmony… - they indicate the property’s highest and best use

Substitution is a key - idea behind the sales comparison approach to value

The ultimate goal of the valuation process - Provide a well supported value conclusion that reflects all of the pertinent factors that influence the property’s value

Cost approach - Current cost of reproducing or replacing the improvements

Sales comparison approach - Analysis of sale of comparable properties appropriately adjusted for differences from the subject property

Income approach - Present value of property based on its income production

Identification of the problem - Client, Intended use and intended users, Type of value and its definition, Effective date, Characteristics relevant to the valuation, Assignment condition

Methods used in the income capitalization approach to valuation - Direct capitalization and yield capitalization 

Direct capitalization - Uses either a cap rate or an income multiplier applied to single year’s income

Yield capitalization - Uses multiple years’ income and a reversionary value with a yield rate

Cost approach = (land value + cost to reproduce/replace improvements - depreciation)

Cost approach is most useful for - New or nearly new improvements, Uncommon or not frequently exchanged properties (elementary school, church, etc)

In an appraisal the client is the person who - engages the appraiser

The appraiser determines - the intended users of an appraisal report and the client is always an intended user.

“Value” is a term that must always include - a modifier in an appraisal context (market value, assessed value, use value etc.)

Market value - The collective value judgments of market participants. Objective observation of collective market actions. The cash value

Assessed value - A value set on real estate and personal property by a governments as a basis for levying taxes. The monetary amount for a property as officially entered on the assessment rolls

Use value - The value that a specific property has for a specific use, which may or may not be 

highest and best use. This is value to a specific user.

Investment value - Value to a particular investor or class of investors based on the investor’s specific requirements. Depends on a set of investment criteria.

Insurable value - The value of an asset covered by an insurance policy. But more accurately an indication of cost.

Deposition value (cases of distressed sales) - Shorter than the typical exposure time in that market. The seller is under compulsion to sell. An adequate marketing effort will be made during the exposure time

Liquidation value - Very short exposure time in that market. The seller is under extreme compulsion to sell. An adequate marketing effort is not possible due to time constraint

Chapter 7

Original landlord -> Original tenant -> Sublessee - The original tenant becomes the sandwich leasehold interest.

Sandwich interest may have value if - contract rent is less than the rent collected from the sublessee.

Life estate - Rights of use, occupancy, and control limited to the lifetime of a designated party

Life estate has two values that can be valued - Designed party/life tenant and the remainder interest.

Easements - Interest in real estate that transfers use but not ownership

Dominant estate - Benefits from the easement 

Servient estate - Burdened from the easement

Scope of work is - analogous to a determination of the solution to the problem

Scope of work should address - Extent to which the property was identified, Extent to which the property was inspected, Type/extent of data researched, Type/extent of analysis applied

Forces influencing value - Social, Governmental, Environmental, Economic

Social - Focus on demographic characteristics of those persons who are a part of the market for the subject property

Governmental - Property tax burden, Zoning, building, housing codes, Quality of public services

Environmental - Any natural or man-made features that are contained in or affect the property’s location. Topographical features, Navigable waterways, Traffic flow and patterns.

Economic - Regulations affecting real estate finance, Availability of financing, Financial capacity of market area’s occupants to buy, rent property, maintain it, and renovate/rehabilitate it.

Things to look into when accounting for economic trends - Household income, Per capita income, Consumer activity

Real estate markets - A group of individuals or firm in contact with one another for the purpose of conducting real estate transactions

Submarkets - A division of a total market that reflects the preferences of a particular set of buyers and sellers

Market segmentation - Identifying/analyzing submarkets within a larger market

Disaggregation - Grouping the subject and competitive properties together based on similar attributes or characteristics

Raw land - Land without any improvements. No grading, draining, utilities, etc

Site - Much more common, Improved in some way, Improvements can be “on-site” or “off-site”

On site - landscaping, grading, accessory buildings

Off site - utility lines, access to roads, drainage systems

Plottage - Increment of value that results when two or more sites are combined to produce a larger site with greater utility (probably a different HBU)

Excess land can be - valued separately

Architectural style - Character of building’s form and ornamentation. Has more to do with design than anything else. Functions well, Looks/feels good, Is affordable, Minimizes adverse effects on natural environment, spaces users, and community

Functional utility - Ability of a property or building to be useful and to perform its intended function. Efficiency of a building’s use regarding design and layout, performances features, and size/type of rooms. Use for which a particular improvement was designed, Its actuarial or contemplated use, Its most productive use

Market analysis - A study of the supply of and demand for a specific type of product in a specific market area. A market area would be a portion of a state or country not the entire state/country

Marketability analysis focuses on - how one specific property is expected to perform

Market analysis looks at - how a type of property is expected to perform in a market

Market analysis measures - demand and competition for neighborhood shopping centers 

in a specific market

Marketability analysis compares - how one particular neighborhood shopping center is  expected to perform 

Market analysis includes - both supply analysis and demand analysis and Requires the appraiser to identify sources and use that to estimate current demand/supply

Highest and best use - The reasonably probably use of property that results in the highest value

Highest and Best Use Requires that the use be - Physically possible (or reasonably able to make it so). Legally permissible (or reasonably able to make it so) and Financially feasible

Physically possible or legally permissible - is to be done first but financially feasible must be done third
The use that leads to the highest value for the real estate - highest and best use

Two methods/perspectives in determining highest and best use - Vacant and As improved

Vacant - The use of the real estate based on the presumption that the parcel of land is 

vacant or can be made vacant by demolishing any improvements

As improved - The use that should be made of the real as it exists (as currently improved or as 

if improved as proposed)

The sales comparison approach is - generally the preferred method for land valuation

When choosing comparables - recent sales, location, and zoning are most important than the size of the property

Market extraction - A valuation method where land value is estimated by deducting the contributory value of the improvements from the sale price

Market extraction is appropriate when - the value of the improvements is relatively low as a part of the total value of the property

Sales comparison approach - Main idea is that an opinion of market value can be supported by studying the market’s reactions to comparable and competitive properties, Best to use sold properties, rather than pending/listed properties, Useful for most appraisal situations, provided there are sufficient comparables, but most common for owner-occupied properties

Appraisal principle of substitution - A buyer will not pay more for a property than the cost of acquiring an equally desirable substitute property.

Don’t have to deal with every difference - just those that meaningfully affect value

Transactional adjustments (First) Should generally be done in a particular order

Transactional adjustments #1 - Real property rights conveyed

Transactional adjustments #2 - Financing terms 

Transactional adjustments #3 - Conditions of sale

Transactional adjustments #4 - Expenditures made immediately after purchase

Property adjustments

Property adjustments #1 - Location

Property adjustments #2 - Physical characteristics

Property adjustments #3 - Economic characteristics

Property adjustments #4 - Legal characteristics

Property adjustments #5 - Non-reality components of value

After adjustments - usually you will come up with different value estimations for the different comparables

Need to reconcile using judgment - not necessarily an average

We are adjusting comparables to try and make them like the subject 

Adjust up if comparable is inferior 

Adjust down if comparable is superior 

Adjustments should be made based on - the likely reaction of market participants as a result of the difference

A value conclusion may be reached based - on the income stream a property produces

Direct capitalization approach = NOI / capitalization rate = value

NOI = PGI - VC + MI = EGI (-) OpX

Reproduction cost - What would it take to make this exact thing again?

Replacement cost - A substitute using contemporary materials, standards, design, etc

3 categories of depreciation - Physical deterioration - Functional obsolescence - External obsolescence

Physical deterioration - Wear and tear, Climate, Construction quality

Functional obsolescence - Changes in technology, Design, Energy efficiency

External obsolescence - Changes in neighborhood, Market conditions, Stage of life cycle

Age/Life Ratio = Current age / Average life expectancy

Age/Life Ratio is then multiplied by - the total average cost to find the amount of depreciation

Final value conclusions may be stated as - a single value conclusion, a value range, or as a value relative to a benchmark, depending on the assignment