Appraisal Methods and Adjustments

Transaction Details: Sale of a comparable property six months prior at a transaction price of $150,000.
Adjustments for Comparison Elements:
- Financing terms: -$2,600
- Market conditions: +8 percent
- Location: -5 percent
- Physical characteristics: +$12,500
- Non-realty: -$3,000
- Other conditions of sale: 0
- Legal characteristics: 0
- Use: 0
Final Adjusted Sale Price Calculation:
- Start with Transaction Price: $150,000
- Adjustment for Financing Terms:
- Calculation: $150,000 - $2,600 = $147,400
- Adjustment for Market Conditions (note: +8%):
- Calculation:
  - 8% of $147,400 = 0.08 * 147400 = $11,792
  - Adjusted Price: $147,400 + $11,792 = $159,192
- Adjustment for Location (-5%):
- Calculation:
  - 5% of $159,192 = 0.05 * 159192 = $7,959.60
  - Adjusted Price: $159,192 - $7,959.60 = $151,232.40
- Adjustment for Physical Characteristics:
- Increase of $12,500 leads to:
  - Adjusted Price: $151,232.40 + $12,500 = $163,732.40
- Adjustment for Non-Reality Items:
- Subtract $3,000:
  - Final Indication of Subject Value: $163,732.40 - $3,000 = $160,732

Types of Adjustments:
- Transactional Adjustments: Must be made first and are completed in the order listed above.
- Property Adjustments: Made second and are done in no particular order.
Important Note: Avoid mixing dollar amounts and percentage adjustments during calculations.

Property Under Appraisal: Located adjacent to a high-speed freeway; consists of:
- One-story frame dwelling
- 8 rooms
- 2 baths
- Total area of 2,000 sq. ft.
- Average quality construction and good condition during inspection.
Comparable Properties Transactions Disclosed:
1. Comparable Property 1: Sold one year ago for $160,000 (2,400 sq. ft., not adjacent to freeway).
2. Comparable Property 2: Sold this year for $150,500 (2,400 sq. ft., not adjacent to freeway).
3. Comparable Property 3: Sold one year ago for $150,000 (2,000 sq. ft., not adjacent to freeway).
4. Comparable Property 4: Sold this year for $140,300 (2,400 sq. ft., adjacent to freeway).
Adjustment Factors Required:
- Time adjustment
- Location adjustment (proximity to freeway)
- Size adjustment

Appraiser Challenges: In real-world scenarios, it is challenging to find two comparable sales that are identical except for one attribute.
Adjustment Characteristics:
- Adjustments can be either positive or negative.
- This example shows that all adjustments are negative because the subject property is perceived as inferior compared to the comparable sales.

Definition: Not the same as tax depreciation; it refers to the difference between replacement cost and the market value of improvements.
Types of Accrued Depreciation Include:
1. Physical Deterioration: Loss in market value due to aging, decay, or ordinary use.
2. Functional Obsolescence: Loss in value due to changes in tastes, preferences, technological innovations, or market standards. Examples might include outdated designs or equipment.
3. External (Economic) Obsolescence: Loss in value due to factors external to the property, such as increased traffic congestion, neighborhood changes from owner-occupied to rentals, or environmental concerns.

Procedure:
- Calculate the estimated reproduction cost of improvements.
- Subtract estimated accrued depreciation to obtain depreciated cost of building improvements.
- Add the estimated value of the site to find the indicated value according to the cost approach.
Major Assumption: The cost of creating a property is related to its market value.
Two Concepts of Cost:
- Replacement Cost: Cost of creating something of equal utility or functionality.
- Reproduction Cost: Cost of creating an exact physical replica.
Methods to Estimate Replacement Cost Include:
1. Quantity Survey Method: The most accurate as it reflects quantity and quality of all materials and labor costs.
2. Cost per Square or Cubic Foot: Estimation based on cost per unit of area utilizing similar structure costs.
3. Unit in Place Method: Cost estimation based on singular building components.
Sources of Replacement Cost Estimates:
- R.S. Means
- Consulting Firms
- Builders/Contractors

Replacement Cost: Estimated at $350,000 for a property with an economic life of 70 years.
Current Effective Age: 15 years.
Value of Land: Estimated at $55,000.
Market Value Calculation:
- Replacement Cost: $350,000
- Less: Depreciation: ($75,000) calculated as (Replacement Cost x Effective Age/Economic Life) = $350,000 x (15/70)
- Depreciated Cost of Building Improvements: $275,000
- Add: Estimated Value of Site: $55,000
- Indicated Value by Cost Approach: $275,000 + $55,000 = $330,000

Problem Set 7.1:
- Analysis of comparable property sales with different financing terms and calculations of present value for adjustments.
- Monthly Payments and Financing Costs are calculated over various loan periods.
Example of Solution: From previous calculations, the approximated present value of payment savings due to non-market financing is calculated.
**Final Calculation Leads to the adjusted selling price of the house being *$101,461.*

Problems focus on adjustments for historical sales prices to calculate average percentage change and necessary adjustments based on current market conditions, showing step-by-step calculations with variations in terms like compounded and non-compounded rates to arrive at adjusted sale prices accurately.
Each solution provides a clear methodology for arriving at the valuation using adjusted figures, giving students a comprehensive understanding of market evaluations in real estate appraisal situations.