Chapter 11- Appraisal Methods- California Real Estate Principles- 14th edition.

Appraiser Need find out Value by :

*1. Direct Costs*: construction costs (material and labor) *2. Indirect Cost*: cost other than labor and material- like professional fees, financing costs, taxes)

3 Approaches to Value

*1. The Market Approach (Comparison)* *2. The Cost Approach (Replacement)* *3. Income Approach (Capitalization)*

3 Essential of Market approach ( comparison )

*1. The information is from a reliable source* *2. There is an adequate number of comparable sales* *3. The comparable sales are truly comparable*

4 Steps in the Cost approach

*1.* Estimate the value of the land ( use the Market Comparison Approach). *2.* Estimate the replacement cost of the building as *if it were new*. *3.* Deduct estimated depreciation from the replacement cost new of the building. *4.* Add the value of the lot(step 1)) and the depreciated cost of the building (steps 2 & 3) to *find the total value (step 4)*

*NOT* an operating expense

*Cost of capital* : - Mortgage payments of principal - Mortgage interest

Types of Economic Obsolescence (incurable) are:

*Home to decrease in value due to economic obsolescence* below: 1. industrial plants in close proximity 2. beyond the confines of the property; 3. over-supply of like properties 4. aircraft noise 5. adverse zoning and legislative act ( city's legislative, government) 6. cemetery next door 7. departure of major industries from the area 8. number of rental units increases 9. change of location demand ; Misplacement of improvement > Economic obsolescence

All *Appraisers* must be:

*Licensed or certified* The license/certification categories are: 1. *trainee appraiser* 2. *Licensed residential appraiser* 3. *Certified Residential appraiser* 4. *Certified General appraiser*

A fee Appraiser is

*Self-employed*

Most difficult to estimate in Cost Approach is

*The depreciation* As a building gets older, the depreciation becomes more difficult to estimate

Curable Depreciation

*are repairs that add more to a building's value that they cost* - such as: new-roof ; block walls, gate những sửa chữa bổ sung mà nó làm tăng thêm giá trị của căn nhà, giá trị tăng hơn cả số tiền mà họ phải bỏ ra sửa chữa bổ sung .-

Straight-line Method

*assumes the value declines in equal amounts of depreciation each year, until it reaches zero*. ex: A building with an economic life of 50 years would depreciate 2 percent ( 100 percent / 50 years= 2 percent) in value each year.

Reconciliation

*is the process of selecting the most appropriate approach for the particular appraisal job and giving it the most consideration in pinpointing the final value*. Là quá trình lựa chọn cách tiếp cận thích hợp nhất cho việc đánh giá cụ thể và đưa ra xem xét nhiều nhất trong việc xác định giá trị cuối cùng.

Incurable Depreciation

*refers to repairs that would be so expensive they are not economically feasible. Not adding Value* - example: drive way crack; damage fromdry rot and termites việc sửa chữa rất tốn kém đến mức nó không thực tế về mặt kinh tế . việc sửa chữa không làm tăng giá trị của căn nhà

VARIABLE COSTS & FIXED COSTS

- *VARIABLE COSTS*: are operating expenses that can vary with occupancy (utilities and repairs) - *FIXED COSTS*: remain constant, such as property taxes and fire insurance.

Final Estimate of Value ( *Appraisal Report*)

- All report for Federally Related Transaction *Must be in Writing*. - *Narrative Reports ( the most comprehensive and complete)* are generally used for commercial properties and for use by government agencies.

*WAREHOUSES* can be *appraised* or *Rent* by

- Appraised *by the cubic foot* - Rent *by the square foot* *** *Caution: The industrial land the warehouse is on is appraised by the square foot*

*Marketability* and acceptability

- are the primary concerns when appraising a residential property. - *Marketability* is the ultimate test of *functional utility*

Gross Rent Multiplier (GRM) (Rule of Thumb)

- is a rough, quick way of *converting gross monthly rent into Market value* - To obtain the gross rent multiplier, divide the "sales" price by the monthly rent. *sales price ÷ RENT = GROSS RENT MULTIPLIER*

Economic Obsolescence ( Incurable) - also referred to as *Social Obsolescence*

- is the *loss in value* due to changes in the neighborhood and is external to the property itself. - *Economic Obsolescence is always incurable* - Economic Obsolescence is *most difficult to cure*.

Replacement Cost

- is the cost of building a similar new structure today ( of equal utility) using modern construction methods. - *replacement cost* is the present cost to build a building having the same amount of utility

Economic Life

- is the estimated number of years of anticipated financial return from the improvements. - The "Profitable" life of an improvement. Generally shorter than the physical life

Cost Approach (Replacement Cost Method)

- is the process of calculating the cost of the land and buildings then subtracting the accrued depreciation to arrive at the current value of the property. - The Cost Approach tends to set what the appraisers call an *"upper limit of value"*

Disadvantages of the Market data method (comparison)

- this method is least reliable when there are *rapid economic changes* - The effectiveness of the market data approach is limited by *economic conditions that change rapidly*.

*Comparison Approach (Market data Method)*

- use the *"Principle of substitution"* ( Buyer pay less for similar properties) - is a method of appraising real property by comparing the current selling prices of recently sold *similar properties and adjusting those prices for any differences*. - technique key: *"Subtract or add"* from to the selling price of the comparable property to adjust for differences ( this technique is the most difficult & important part for the appraiser) - Most Real estate salesperson refer to

*A " Capitalization Rate" can be determined by*:

1. *Band of investment theory*. 2. *Market data/ comparison* 3. *Summation ( a factor for the depreciation)

The Market Data Method (Comparison) is the most common approach for:

1. *House* 2. *Condominiums* 3. *lots and vacant land* 4. *Unimproved property*

The Cost Approach is most common approach for:

1. *New Building* because there is minimal depreciation 2. *Special purpose* or *Unique structures* : Church,temple, factory, a city hall, airplane, public building

3 Types of *Depreciation* causes are:

1. *Physical Deterioration* 2. *Functional Obsolescence* 3. *Economic obsolescence* - *OBSOLESCENCE* is a term meaning a *"MAJOR CAUSE"* of depreciation. - *Obsolescence* is NOT a method of calculating depreciation.

*Operating Expenses* when appraising an apartment building:

1. *Property Taxes* 2. *Insurance and licenses* 3. *Manager fees* 4. *Utilities* 5. *Maintenance, repairs, and services (gardeners)* 6. *Replacement reserves*

5 Methods of estimating Accrued Depreciation

1. Capitalized Income 2. Market 3. Straight-line ( Most common) 3. Engineering 5. Breakdown

3 ReplacementMethods

1. Comparative-Unit Method 2. Unit-in Place Method 3. Quantity survey Method

Capitalization Approach ( Income) is appraising real property by estimate the :

1. Quantity 2. Quality 3. Durability of its Net Income.

The *Capitalization Rate* is composed of two parts: *( A factor for depreciation) = The Summation Method*

1. a rate of return*"on"* the money invested 2. a return*"of"* the original investment of money - *Example*: an owner of a vacant building is trying to decide whether to lease her building to a hardware store or to post office. The owner would likely prefer the post office because: > *The post office would probably have a lower risk ( Lower Capitalization Rate) than the hardware store*.

Types of functional Obsolescence (curable or incurable) are:

1. an outdated kitchen; 2. antique fixtures 3. a four bedroom, one bath home 4. a one car garage 5. a bedroom that can be reached only by walking through another bedroom. 6. massive cornices 7. two properties in joint lot

Square Footage

A way of measuring real property in 1 ft. by 1ft. segments

Determine *NET INCOME*

Deduct the related operating expenses from the annual effective gross income. *Net Income = Gross Income - Operating Expense*

Process of Capitalization ( Income Approach)

Divide a capitalization rate into the *yearly net income* to obtain is the *the value of the Property* *NET INCOME ÷ CAPITALIZATION RATE = VALUE OF PROPERTY* $110,000 ÷ 10% = $1,100,000

Both *Appraisers and Real estate agents* are concerned with :

The *"Marketability"* of Real properties.

Reproduction Cost

The cost of reproducing a property (usually one that has been destroyed) at current prices using the same materials

A *Certified General License* would be needed to appraise:

an expensive *Commercial Property* like a strip mall.

Replacement Reserve

consists of funds set aside for the purpose of replacing items in the future. *Management fees and replacement reserves should be included in the basic operating expenses*

Depreciation

is a reduction in the value of a property due to any cause * Loss of value from any cause is called "depreciation".*

Effective Age

is determined by the condition of the building rather than the actual age.

Accrual For Depreciation

is the concept of estimating the amount of depreciation there will be in the future.

Actual Age

is the current (real) age of the building

Effective Gross income

is the gross income minus any vacancies or rental losses

Vacancy Factor

is the loss in rents due to any cause

Functional Obsolescence ( curable or Incurable)

is the loss in value due to : 1. outmoded ( no longer modern) 2. style 3. design 4. floor plan 5. Non usable space

Physical Deterioration

is the loss in value due to wear and tear. *Physical deterioration can be either Curable or Incurable* - Examples of Physical detorioration ( curable or incurable) are: 1. All forms of wear and tear 2. damage from dry rot and termites 3. negligent care (deferred maintenance) 4. depreciation that has already occurred.

Accrued Depreciation (observed)

is the loss in value of improvements from any cause at the date of the appraisal

Income Approach (*Capitalization*)

is the process of analyzing the *future net income* from a property to determine its current market value. - *Rent producing (income) properties* such as : commercial property; apartments; Offices; Warehouse; Manufacture; Restaurant. - The best appraisal approach to use on a *Shopping center* would be the cost income method. *The Income Approach determines the "present worth of future benefits"* *Capitalization is the process of converting income into value*

If Capitalization Rate *increase*

the estimated Market Value *decrease* - *I ÷ R = V* - *Net Income ÷ Capitalization Rate = Market Value*

The most difficult part of the market data method is

to adjust similar properties for difference.