logan piercy - Appraisal value of Real Estate Principles

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Appraisal value of Real Estate Principles

• logan piercy

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Outline

• The appraisal process
• Sales comparison approach
• Cost approach
• Income approach

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The appraisal report

• Try to arrive at an appraisal that is an unbiased
  written estimate of the fair market value of a
  property, usually referred to as the subject
  property, at a particular time.
• This process leads to an appraisal report that is
  the document the appraiser submits to the client
  and contains (1) the appraisers final estimate
  of value, (2) the data upon which the estimate is
  based, and (3) the calculations used to arrive at
  the estimate.

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Uses of an appraisal report

• Applying for a mortgage.
• Establishing a benchmark for setting the ask
  price and the bid price.

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The appraisal process

• 1. Identify the appraisal problem.
• The appraiser identifies (1) the property to be
  valued, (2) the property rights to be valued
  e.g., fee simple absolute or leasehold, (3) the
  type of value to be estimated value estimates
  for insurance, taxation, or other purposes, (4)
  the date of the estimate, and (5) limitations of
  the analysis.

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The appraisal process, II

• 2. Determine the required scope of work.
• The worked performed should be consistent with
  the expectations of typical uses of similar
  appraisals.

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The appraisal process, III

• 3. Collect data and describe property.
• Data are collected concerning the market and
  property-specific context of the subject
  property.
• The information often includes such items as
  recent transaction information, rental rates,
  vacancy rates, physical characteristics of the
  subject property and comparable properties, flood
  zone data, population and employment trends, and
  land use data.

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The appraisal process, IV

• 4. Perform data analysis.
• This include market analysis supply, demand,
  marketability.
• The highest and best use of a property is defined
  as the use found to be (1) legally permissible,
  (2) physically possible, (3) financial feasible,
  and (4) maximally productive, i.e., yielding the
  greatest net benefit to an owner.
• In most appraisal assignments, property is valued
  at its highest and best use.
• The appraiser usually visualizes highest and best
  use in two separate circumstances (1) highest
  and best use of the land as though vacant, and
  (2) highest and best use of the property as
  improved.

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The appraisal process, V

• 5. Determine value of land.

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The appraisal process, VI

• 6. Apply 3 conventional approaches to valuation.
• There are 3 conventional approaches (1) the
  sales comparison approach, (2) the income
  approach, and (3) the cost approach.
• Generally, all three approaches should be used in
  a formal appraisal.
• The sales comparison approach is usually the
  preferred approach. It is applicable to almost
  all one- to four-family residential properties
  and even to some types of income-producing
  properties where enough comparable sales are
  available.
• The income approach is the dominant approach for
  income-producing properties, e.g., offices.
• The cost approach is usually the last resort when
  there are no comparable sales and there is no
  income to measure, e.g., public auditoriums.

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The appraisal process, VII

• 7. Reconciliation and a final estimate of market
  value.
• Each of the 3 approaches is applied to establish
  alternative indicators of market value.
• Reconciliation the process in which the
  appraiser weighs the relative reliability of
  value indicators for the property being valued.
• Usually, more weight is given to the most
  applicable method and most reliable data.

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Sales comparison approach

• Basic Idea
• Value of RE can be determined by analyzing the
  sale prices of similar properties.
• Why?
• Because in a competitive market close substitutes
  will sell for similar prices.

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The process

• Exhibit 7-3

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Step 1

• 1. Identify elements of comparison and value
  adjustment.
• These elements are the relevant characteristics
  used to compare and adjust the property prices.
• Examples include location, site size, sale date,
  construction quality, building age, number of
  bath, etc.
• That is, those elements that have implications on
  the value of the property.

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Step 2

• 2. Select comparable sales.
• Identify recent sales that are similar to the
  subject property and located in immediate
  neighborhood.
• Select commercial comparables that compete with
  the subject property for buyers and/or tenants.
• Arms-length transactions. Comparable sales are
  fairly negotiated transactions no foreclosures.
• Usually need at least 3 comparable sales.

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Data

• The sources of market data on comparable sales
  include (1) public records, e.g., the local
  (county) property tax assessors office, (2)
  multiple listing service (MLS) that is usually
  maintained by the local board of realtors, and
  (3) private data services.

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Step 3, I

• 3. Adjust comparable sale prices to approximate
  subject.
• 2 categories (1) transactional adjustments, such
  as condition of sale, financing terms, and market
  conditions, (2) property adjustments, such as
  location, physical characteristics, legal
  characteristics, use, and non-realty items
  (personal property).
• Condition of sale arms-length transactions are
  preferable.
• Financing terms a favorable financing term
  (e.g., low-income homebuyer programs) is often
  associated with a higher purchase price. Try not
  to use sales with special financing terms because
  their adjustments are difficult.

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Step 3, II

• Market conditions historical sale prices need to
  be adjusted to reflect current market conditions.
  
• Location real estate value is about location
  this adjustment is rather difficult.
• Physical characteristics differences in lot
  size, quality of structure, floor plan have
  implications on RE value.
• Legal characteristics select sales with the same
  bundle of rights the adjustments are difficult.
• Use if you are asked to appraise a single-family
  residence and a similar house next door is
  currently used as a law office. Its current sale
  is not a comparable sale.

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Step 4

• 4. Reconcile adjusted sale prices obtain
  indicated value.
• The final adjusted sale prices of comparables are
  reconciled to the indicated value.
• Appraisers usually give more weights to the final
  adjusted sale prices of comparables that have
  more complete data, fewer and smaller adjustments
  (more similar), and more recent transactions.

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Sequence of adjustments

• Transaction price of comparable
• /- Property rights conveyed (most tricky
  adjustment)
• /- Financing terms (low-income loan?)
• /- Conditions of sale ( a forced sale?)
• /- Expenditures immediately after purchase
• /- Market conditions
• Market-adjusted normal sale price
• /- Location
• /- Physical characteristics (lot size, structure
  size, etc.)
• /- Economics characteristics (tenant mix, lease
  terms, etc.)
• /- Use (most tricky adjustment)
• /- Non-realty items
• Indication of subject value