© 2010 by cengage learning real estate appraisal chapter 18 ________________ real estate appraisal

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Chapter 18

________________ Real Estate Appraisal

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Appraisal

An estimate of value. Three approaches to estimating value:

◦ Market – comparable sales data◦ Cost – construction cost plus land value◦ Income – monetary returns of property capitalized

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Valuing a House Market Comparison Approach

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Competitive Market Analysis

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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

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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

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Square-foot Method of Cost Estimating

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Income / Rate = Value

$18,000 / 0.09 = $200,000

Income Approach

Variation by Direct Capitalization

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Projected Annual Operating Statement (Pro Forma Statement)

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

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IncomeOverall Rate

= Value

$45,4000.09376

= $484,215

Direct Capitalization Using an Overall Rate

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

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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

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• Complete appraisal• Limited appraisal

Types of Appraisals

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

Reporting Options

Types of Appraisals andReporting Options under USPAP

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1. Letter report

2. Form report

3. Narrative report

4. Review appraisals

5. Real estate analysis

Formats of Appraisal Reports

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Appraiser License Certified General Appraiser Certified Residential Appraiser State licensed appraiser Provisional licensed real estate appraiser Appraiser trainee

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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

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Value Market value Assessed value Insurance value Loan value Estate tax value Plottage value Rental value Replacement value

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Markets Buyer’s market – excess supply of housing

for sale. Seller’s market – demand exceeds supply.

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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

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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

Key Terms