APPRAISAL METHODS

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Chapter 11
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• APPRAISAL METHODS

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• The appraiser uses three appraisal methods and
  then correlates this data to arrive at a final
  valuation for a property.

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• I. COMPARATIVE APPROACH (MARKET DATA METHOD)

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• Takes current selling prices of properties
  similar to the appraised property and adjusts
  those prices for any differences.

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A. How to Adjust a Comparable Sale (Comps)
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• Subtract the value of any improvements found in
  the comparable houses but not in the house to be
  appraised.
• Add the value of any improvements found in the
  appraisal house but not found in the comparable
  houses.
• Adjust also for differences in location, lot
  size, building size, condition of the property,
  time differences between the sales.

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374

• Compare with cost of similar unsold properties
  which have been on the market for a long time
  they are probably overpriced.
• Compare with comparable properties from many
  different sources

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B. Advantages of The Market Approach
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• It is easy to learn and, with a little
  experience, easy to apply.
• Required information is usually readily available
  since there are generally many recent comparable
  sales.
• This is the most effective appraisal approach for
  home and condominium sales.

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C. Disadvantages of The Market Approach
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• This method requires many recent comparable sales
  of similar properties.
• This method is least reliable when there are
  rapid economic changes.
• The market data method is less valid with certain
  income properties because a separate analysis of
  the income is required.

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375

• II. COST APPROACH (REPLACEMENT COST METHOD)

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• THE COST APPROACH is the process of appraising a
  property by calculating the cost of the land and
  buildings as if they were new today, and then
  subtracting the accrued depreciation in order to
  arrive at the current value.

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Costs are Both Direct and Indirect
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• Direct Costs - expenditures for labor and
  materials used in the construction of the
  improvement(s). A contractors overhead and
  profit are generally treated as direct costs.
• Indirect Costs - expenditures other than material
  and labor costs. Examples are administrative
  costs, professional fees, financing costs,
  insurance, and taxes.

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B. Steps in the Cost Approach
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1. Appraise the Land Separately -
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• Estimate the value of the vacant land using the
  market comparison approach.

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2. Estimate Replacement Cost
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• Replacement Cost - the cost of building a similar
  new structure today using modern construction
  methods. The most current information is
  available from construction cost engineers.
• Three Replacement Methods
• Comparative-Unit Method
• Unit-In-Place Method
• Quantity Survey Method
• The simplest way to determine replacement cost is
  to determine the Square Footage, which is
  obtained by measuring the outside of the
  structure.

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3. Estimate and Deduct Depreciation
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• Depreciation - reduction in the value of property
  due to any cause.
• Three types
• Physical Deterioration (Curable or Incurable)
• Functional Obsolescence (Curable or Incurable)
• Economic Obsolescence (Incurable)

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4. Value of the Property -
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• Add the depreciated value of any improvements to
  the value of the land. This figure is the market
  value of a property using the cost approach.

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C. Advantages of The Cost Approach - can be used
for
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• New buildings.
• Unique structures.
• Public buildings.
• Cost equals value when improvements are new and
  of the highest and best use.

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D. Disadvantages of The Cost Approach
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• There must be an accurate value of the site
  (land).
• Since determining depreciation is more difficult
  as buildings age, the reliability of the
  depreciation estimate may be questioned.
• This approach may be difficult to apply to condos
  or planned unit developments because the land,
  improvements, and marketing costs are not always
  easy to determine just for appraising one unit.

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385

• III. CAPITALIZATION APPROACH
• (INCOME APPROACH)

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A. Steps in the Income Approach
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1. Calculate the Annual Effective Gross Income
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• Figure out how much gross rental income is
  currently being generated if the property is
  fully rented.
• Adjust this figure upward if more rent could be
  charged and downward if rent is too high and
  causing a lot of vacancies.

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2. Complete an Operating Expense Statement.
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• The basic expense categories are
• Property taxes
• Insurance and licenses
• Manager fees
• Utilities
• Maintenance, repairs, and services (gardener,
  pool man, etc.)
• Replacement Reserves - the cost of replacing an
  item in the future

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• 3. Deduct Related Operating Expenses (Step 2)
  from Gross Income (Step 1 to get Net Income)
• 4. Divide Net Income by the Appropriate
  Capitalization Rate
• 5. Result of Dividing Net Income by the
  Appropriate Capitalization Rate

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B. Gross Rent Multiplier (GRM) -
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• A multiplication rule of thumb for converting
  rental value into market value.
• Neighborhoods have determinable multipliers
  (rules of thumb).
• Select the proper multiplier.
• Find out the gross rents of the appraisal
  property.
• Multiply the rent times the multiplier.
• The result is an approximate value of the
  property.
• Not an accurate appraisal by any means.

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C. Advantages of the Income Approach
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• The advantage of the income approach method is
  that no other method focuses solely on
  determining the present value of the future
  income stream from the subject property.
• Emphasis is on the income generated by the real
  property. This is of primary importance to
  investment buyers. VALUE OF PROPERTY

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D. Disadvantages of The Income Approach
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• Sometimes difficult to determine capitalization
  rate.
• May also be difficult to estimate vacancy rate,
  economic rent, operation expenses, and reserve
  requirements.

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• IV. CORRELATION OF VALUE (BRACKETING)

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• CORRELATION is the process of selecting the most
  appropriate appraisal method for a particular
  type of property and giving it the most
  consideration in pinpointing final value.

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• V. FINAL ESTIMATE OF VALUE (APPRAISAL REPORT)

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• The documentation of the appraiser's findings.

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A. Cost of an Appraisal
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• There is little need to pay for an expensive
  appraisal simply to determine a selling price for
  a home or condominium.
• A local broker can help you.
• On the other hand, appraisal of large parcels,
  commercial buildings, and apartment houses, or
  appraisals to be used in court, may require the
  services of a highly skilled appraiser.

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• VI. LICENSING, FEE APPRAISERS, AND APPRAISAL
  ORGANIZATIONS

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A. Appraisal License and Certification
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• Trainee Appraiser
• Residential Appraiser
• Certified Residential Appraiser
• Certified General Appraiser

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B. Fee Appraisers -
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• An independent, self-employed appraiser he or
  she appraises for a fee or charge.
• http//naifa.com
• National Association of Independent Fee Appraisers

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Chapter 11 - Summary
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• 3 Appraisal approaches
• Comparative approach
• Cost approach
• Capitalization approach
• Market data approach
• Principle of substitution

• Cost approach
• Replacement cost
• Comparative-unit
• Unit-in-place
• Quantity survey
• Depreciation
• Physical
• Functional
• Economic
• Curable/incurable

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Chapter 11 - Summary
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• Capitalization Approach
• Determine value
• Cap rate
• Gross rent multiplier
• Gross income multiplier
• Correlation/Reconciliation
• Final estimate of value

• Short form/Narrative
• Cost of an Appraisal
• Licenses certification
• Trainee license
• Residential license
• Certified residential license
• Certified general license