Chapter 19- 75 Hr. Broker Basic Principles Course

Chapter 19 Real Estate Appraisal: 

Chapter 19 Real Estate Appraisal

Real Estate Appraisal : 

Real Estate Appraisal Appraisal – an opinion of value of a parcel of real estate, based on supportable evidence and approved methods, given by a licensed Appraiser as of a given moment in time Page 365

Appraiser Licensing: 

Appraiser Licensing Associate Trainee Certified Residential Appraiser Certified General Appraiser Real Estate Agents They Do “Appraisals” They Do “CMA’s ( BPO’s )” Page 365

VALUE : 

VALUE Demand - the need or desire Utility – usefulness Scarcity - a finite supply Transferability - transferability of ownership rights from one person to another Page 365

MARKET VALUE : 

MARKET VALUE Most probable price that a property should bring in a fair sale. Assumptions Competitive and open market Parties are acting prudently with knowledge of the facts No unusual circumstances Page 366

Market Value vs. Market Price vs. Market Cost: 

Market Value vs. Market Price vs. Market Cost Market Value is Most probable price that a property should bring in a fair sale. Market Price is the price that a property did bring in a fair sale Market Cost Added Improvements may not add to market value Page 367

Basic Principles of Value : 

Basic Principles of Value Anticipation – expectation values will increase Change – nothing remains constant Competition – interaction of supply and demand Conformity – harmony & esthetics Page 367

Basic Principles of Value : 

Basic Principles of Value Contribution – improvements add value Highest and best use – only one highest and best use at a given moment in time Increasing and diminishing returns – over improvement adds value only to the max of the property value range Page 367

Basic Principles of Value : 

Basic Principles of Value Assemblage – combing two or more lots into a single parcel Plottage – increase in value as a result of an assemblage 25 ft 125 ft A B C D B C 50 ft Page 365

Basic Principles of Value : 

Basic Principles of Value Regression Bigger house pulled down by smaller house Progression Smaller houses pulled up by Bigger houses Substitution One property is pretty much worth what comparable substitute property is worth Supply and Demand- These forces effect price. (i.e. sellers market and buyers market) Page 368-9

THREE APPROACHES TO VALUE (: 

THREE APPROACHES TO VALUE ( Sales Comparison Approach Cost Approach Income Approach Page 369

SALES COMPARISON APPROACH : 

SALES COMPARISON APPROACH 1. Locate comparable properties ( sold and those on the market) similar to our “subject” property 2. Adjust the comparable for differences to the subject property 3. Estimate the Value of or Subject Property Page 369 Principle of Substitution

PowerPoint Presentation: 

Subject Comp #1 Comp #2 Competent #3 Address 1329 Golden 1035 Williams 811 Crest Hill 7650 Plaque Rd Proximity to Subject 2 Blocks South 4 Blocks West 3 Blocks East Sales Price 475,000 480,000 490,000 470,000 Concessions None $4,000 None None View Similar Properties Similar Properties Park Similar Properties Designed / Appeal 2-Story Colonial 2-Story Colonial 2-Story Colonial 2-Story Colonial Quality of Construction Typical / Aluminum Typical / Aluminum Vinyl / Brick Vinyl / Brick Age 20 22 7 35 Condition Good Excellent Good Average Above Grade Rm Count 8 10 10 8 Bedrooms 4 4 5 4 Bathrooms 2.5 2.5 3.0 2.5 Gross Living Area 2,192 2,302 2,445 2,120 Heating / Cooling GFA / CA HW / CA GFA / CA Zoned GFA / CA

PowerPoint Presentation: 

Subject Comp #1 Address 1329 Golden Drive 1035 Williams Street Proximity to Subject 2 Blocks South Sales Price 475,000 480,000 Sales or Finance Concessions None $4,000 View Similar Properties Similar Properties Designed / Appeal 2-Story Colonial 2-Story Colonial Quality of Construction Typical / Aluminum Typical / Aluminum Age 20 22 Poorer + 2000 Condition Good Excellent Above Grade Room Count 8 10 Bedrooms 4 4 Bathrooms 2.5 2.5 Gross Living Area 2,192 2,302 Heating / Cooling GFA / CA HW / CA Garage 2 car 2.5 Car Better - 1000 Porch / Patio / Deck Deck Concrete Pad Fireplace / Location 1 - LR 1 – Family Room Fence / Pool None Fence Basement Full Finished Full finished Net Adjustments + 1000 ?????? $481,000

COST APPROACH : 

COST APPROACH Cost Approach – value based upon the assumption you are constructing the subject property today using today’s construction costs then applying depreciation and finally the cost of the land Page 371 Unique and No Income

COST APPROACH: 

COST APPROACH Value of the land $250,000 - Depreciation Physical $2000 Functional $3000 External $1000 Total $6000 Replacement Building Cost (i.e. new) Page 371 $350,000 - $6,000 Depreciated Building Value $ 344,000 + $ 344,000 Property Value $ 594,000

PowerPoint Presentation: 

Page 372 DEPRECIATION A loss in Value from any Cause Psychical - Wear and Tear ( i.e. paint, repair, poor foundation) Functional - Out datedness or contrary to peoples tastes Radiator heat, shag carpeting External Any thing adverse out side the Boundaries of the property School fire house land fill Always Incurable

INCOME APPROACH : 

INCOME APPROACH Value is a function of the properties anticipated Net Annual Income I = Net Annual Income Rate = Capitalization Rate or “Cap Rate” Value = property market value Page 375

INCOME APPROACH : 

INCOME APPROACH IRV Formula I = RXV R= I/V V = I/R Page 375 I R V

Solve for I: 

Solve for I Investor wants a 7% rate of return Property Value is $3,800,000 What is the net yr. income? I = Rate X Value I= .07 X $3,800.000 I = $266,000 R V X I

Solve for R: 

Solve for R Property Value is $2,250,000 Net yr. income $175,000 Investors rate of return? R = Income/Value R= $175,000/ $2,250.000 R = .07% R V X I

Solve for V: 

Solve for V Net yr. income $55,000 Investors rate of return .08 Property Value is? V = Income/Rate V= $55,000/ .08 R = $687,500 R V X I

PowerPoint Presentation: 

RECONCILIATION The art of analyzing and effectively weighing the finding of the different indications of values and determining a final value estimate. It is NOT averaging Page 376

PowerPoint Presentation: 

Appraisal Process Page 377

PowerPoint Presentation: 

Chapter 19 End of Chapter Tests