Principles of Valuation & Appraisal
Value vs Cost
Value is what the property's worth. Cost is the sum of all past expenses that have gone into the property.
Three (3) types of appraisal report
1. Letter of opinion
2. Short form report
3. Narrative report
Different types of appraisal approach
1. Sales comparison or market data approach
2. The cost or summation approach
3. The income approach
Uncle IRV
I – Net operating income
R – Capitalization rate
V – Value
Calculations:
I = R x V
I / V = R
I / R = V
The cost of replacing the building with one that serves the same functional utility and basically has the same amenities
Replacement cost
The six (6) situations that require a professional appraisal
1. Contracts for the sale of property
2. Lending institutions before making a loan
3. Insurance agents before insuring a property
4. Lawyers when handling property settlements, planning and settling estates
5. Investors before buying or selling
6. Properties condemned for public use under eminent domain
Above grade, heated, enclosed, and finished area. Appraisers measure the exterior of a structure to calculate
Gross living area (GLA)
annual; based on the assumption that the property is 100% rented for the entire year at market rent
Potential gross income (PGI)
Multiple listing services (MLS), professional reporting services, lending institutions, brokers, attorneys, public records, other appraisers, appraiser's files
Data sources for market analysis
Name the comparative unit methods
square foot method and cubic foot method
The difference between market value and market price
Four (4) factors of general data
PEGS – Physical, Economic, Governmental, Social
Estimates value by comparing the property being appraised with similar properties that have sold recently under normal market conditions.
Sales comparison or market data approach
How to select comparables
3 to 5 options
Recent sale, similar social & economic environment and close to subject property, and sold under similar market conditions.
Appraiser estimates the installed cost of each component of the building (i.e. floors, walls, roof, plumbing, electrical systems, heating, air conditioning)
Unit in place method
The prerequisites to value
DUST - demand, utility, scarcity, transferability
Three (3) approaches to analyzing data
1. The sales comparison or market data approach
2. The cost or replacement approach
3. The income or capitalization approach
Most appropriate for special purpose properties and new properties; is based on the principle of substitution
The cost or summation approach
CIA vs CBS
C – comparable
I – inferior
A – add
If the comparable is inferior to the subject property, add the value.
C – comparable
B – better
S – subtract
If the comparable is better than the subject property, subtract the value.
A detailed breakdown of everything that goes into a building (i.e. labor, materials, services, profits, overhead); most difficult and most accurate method
Quantity survey method
Location, size & shape, depth tables, soil characteristics, key lots, assemblage
Factors that influence value
Explain the appraisal process in six (6) steps
1. Define the problem
2. Make preliminary study
3. Gather data
4. Analyze data (3 approaches)
5. Reconciliation & Final Estimate
6. Prepare Appraisal Report
The investor will decide how much they are willing to pay based upon the amount of income the property will produce; the principle of anticipation is at the core of this
The income approach
The cost at today's prices of constructing an exact replica
Reproduction cost
Types of depreciation
Functional obsolescence (interior): due to inadequate, over-adequate, or out-of-date improvements–results from obsolete items
Economic obsolescence (environmental, external, locational, or social obsolescence): due to forces beyond owner's control and usually incurable