Basic Appraisal Procedures

Direct Capitalization

*A method used to convert an estimate of a single year's income expectancy into an indication of value in one direct step, either by dividing the net income estimate by an appropriate capitalization rate or by multiplying the income estimate by an appropriate factor. -Direct capitalization gives us a "snapshot" of value at one particular point in time

Short-Lived Items

*A building component with an expected remaining economic life that is shorter than the remaining economic life of the entire structure -Items have some life: roof coverings, water heaters, carpeting and furnaces -Cost to replace X percent of value lost = amount of depreciation -Utilize the useful life of the components not the economic life

Long-Lived Items

*A building component with an expected remaining economic life that is the same as the remaining economic life of the entire structure -Items are only replaced under extraordinary circumstances: Framing, foundation, insulation and underground pipes -Total cost - deferred maintenance - short-lived depreciation = remaining value X total incurred depreciation = long-lived depreciation

Vacancy and Collection Loss

*A deduction from potential gross income made to reflect income deductions due to vacancies, tenant turnover and non payment of rent. Often vacancy and collection loss is expressed as a percentage of potential gross income and should reflect the competitive market. -A well run operation will sustain a reasonable amount of vacancies over time, 5%, 10% or more

Entrepreneurial Profit

*A market derived figure that represents the amount an entrepreneur receives for his or her contribution to a project and risk -Make your own decisions as to whether or not entrepreneurial incentive or profit is a factor in your local marketplace -Not included in a cost service, such as Marshall and Swift

Yield Capitalization

*A method used to convert future benefits into present value by 1) Discounting each future benefit at an appropriate yield rate or 2) developing an overall rate that explicitly reflects the investment's income pattern, holding period, value change and yield rate. -Takes into account the income over a holding period, which could be several years in duration -Yield rate must provide for both the return on and the return of capital. -The overall value is estimated by adding together the present worth of the income and the present worth of the reversion of capital

Paired Data Analysis

*A quantitative technique used to identify and measure adjustments to the sale prices or rents of comparable properties; to apply this technique, sales or rental data on nearly identical properties are analyzed to isolate a single characteristic's effect on value or rent. -Hard to find adequate data -Classic case is to find two properties identical in all aspects except a fireplace, then attribute the sales price to that feature.

Income Capitalization Approach

*A set of procedures through which an appraiser derives a value indication for an income producing property by converting its anticipated benefits (cash flows and reversion) into property value. -This can be done in one of two ways - the income can be divided by a rate or multiplied by a multiplier. Formula: Value = income/rate or value = income X multiplier -We typically use a multiplier when appraising small residential income properties.

Other Income

*All income generated in the operation of the property that is not derived directly from space rental. -Could include income from vending machines, coin operated washers and dryers, income from storage or parking spaces

Rent

*An amount paid for the use of land, improvements or a capital good.

Expenditures Made Immediately After Purchase

*An element of comparison in the sales comparison approach; comparable properties can be adjusted for any additional, atypical investment (Ex: curing deferred maintenance) required to make a property salable. -An adjustment for expenditures made immediately after purchase are: Curing deferred maintenance, demolition, re-grading, zone change, access, utilities and remediation of environmental contamination.

Conditions of Sale

*An element of comparison in the sales comparison approach; comparable properties can be adjusted for differences in the motivations of either the buyer or a seller in a transaction. Ex: When the comparable transaction is not an arms-length sale. -May be hard to uncover -Not using an arms-length transaction sale is generally the best course of action

External Obsolescence

*An element of depreciation; a diminution in value caused by negative externalities and generally incurable on the part of the owner, landlord or tenant -Occurs offsite -Often market wide and may impact all properties in a market area equally -May be temporary or subject to fluctuation or cyclical influences -Can be attributed entirely to the land -May be estimated by: analysis of market data and capitalization of income loss

Overall Capitalization Rate (RO)

*An income rate for a total real property interest that reflects the relationship between a single year's net operating income expectancy and the total property price or value. -Formula: Overall rate = overall income/overall value -Example: Subject property has NOI of $80,000. A comp sold for $525,000. The comp has a NOI of $65,000. RO = $65,000/525,000 or 12.38%. Value of subject property = $80,000/0.1238 or $646,203.

Capitalization Rates

*Any rate used to convert income into value -The income that we would be dividing by the rate is net operating income

Specific Data

*Details about the property being appraised, comparable sales and rental properties and relevant local market characteristics -it is more direct and applies specifically to the subject of your appraisal assignment

Direct Costs

*Expenditures for the labor and materials used in the construction of improvements aka hard costs. -Building permits -Materials used -Labor -Equipment -Security -Workers Comp and Insurance

Indirect Costs

*Expenditures or allowances for items other than labor and materials that are necessary for construction but are not typically part of the construction contract aka soft costs. -Architectural and engineering fees -Appraisal, accounting and legal fees -Construction loans -Insurance and taxes

Depreciation

*In appraising, a loss in property value from any case; the difference between the cost of an improvement on the effective date of the appraisal and the market value of the improvement on the same date.

Scheduled Rent

*Income due under existing leases. -Simply means more than one rent

General Data

*Items of information on value influences that derive from social, economic, government and environmental forces and originate outside the property being appraised. -tends to influence all properties in an area equally -usually it is the closer and more proximate influences that exert the greatest pressure

Deferred Maintenance

*Needed repairs or replacement of items that should have taken place during the course of normal maintenance -Items in need of immediate repair: broken windows, peeling paint, missing shingles and inoperable AC

Fixed Expenses

*Operating expenses that generally do not vary with occupancy and which prudent management will pay whether the property is occupied or vacant. -Typically real estate taxes and insurance

Variable Expenses

*Operating expenses that generally vary with the level of occupancy or the extent of services provided. -Most common types of variable expenses: management fee, utilities, payroll, decorating, supplies, maintenance and repair, trash removal, misc. and replacement allowance

Percentage Rent

*Rental income received in accordance with the terms of a percentage lease; typically derived from retail store or restaurant tenants and based on a certain percentage of their gross sales. -Typically a fluctuating rental amount -There may be no base contract rent amount

Net Operating Income (NOI)

*The actual or anticipated net income that remains after all operating expenses are deducted from effective gross income but before mortgage debt service and book depreciation are deducted. -Formula: Gross annual rent (potential gross income) + other income - vacancy/credit loss = effective gross income - total operating expenses = net operating income -Gross is what you start with Net is what you have left over

Contract Rent

*The actual rental income specified in a lease. -May or may not be the same as market rent, would only be used if it is supported by comparable market rents.

Effective Age

*The age of property that is based on the amount of observed deterioration and obsolescence it has sustained, which may be different from its chronological age -Can be more than, less than or the same as actual age

Entrepreneurial Incentive

*The amount an entrepreneur expects to receive for his or her contribution to a project.

Excess Rent

*The amount by which contract rent exceeds market rent at the time of the appraisal; created by a lease favorable to the landlord and may reflect unusual management, unknowledgeable parties, a lease execution in an earlier stronger rental market or an agreement of the parties. Due to the higher risk inherent in the receipt of excess rent it may be calculated separately and capitalized at a higher rate in the income capitalization approach. -If the subject has excess rent, any increase in the indicated value would be attributable to the excess rent and not to the real estate.

Deficit Rent

*The amount by which market rent exceeds contract rent at the time of the appraisal; created by a lease favorable to the tenant, resulting in a positive leasehold and may reflect uninformed parties, special relationships, inferior management, a lease executed in a weaker rental market or concessions agreed to by the parties.

Effective gross income

*The anticipated income from all operations of the real property after an allowance is made for vacancy and collection losses and an addition is made for any other income. -It is our best estimate of how much real income will be generated by the property -It anticipates vacancies

Reconciliation Criteria

*The criteria that enable an appraiser to form a meaningful, defensible conclusion about the final value opinion. Value indications are tested for the appropriateness of the approaches and adjustments applied, the accuracy of the data and the quantity of evidence analyzed.

Net Adjustment

*The difference between the total positive and negative adjustments made to a comparable sale price. -Net adjustments between the comparable sales can be compared but they are not an absolute measure of comparability

Replacement Cost

*The estimated cost to construct, at current prices as of the effective appraisal date, a building with utility equivalent to the building being appraised. -Use modern materials, current standards, design and layout -Fire and casualty insurance is written to pay an amount equal to replacement cost.

Reproduction Cost

*The estimated cost to construct, at current prices as of the effective date of the appraisal, an exact duplicate or replicate of the building being appraised. -Difficult task bc materials may no longer be available & craft people may be needed -Build in any problems and functional obsolescence that might be present

Remaining Economic Life

*The estimated period during which improvements will continue to represent the highest and best use of the property; an estimate of the number of years remaining in the economic life of the structure or structural components as of the date of the appraisal; used in the economic age-life method of estimating depreciation -An important indicator to lenders -Fannie and Freddie don't require this estimate but FHA and VA do

Functional Obsolescence

*The impairment of functional capacity of a property according to market tastes and standards aka functional inutility -May or may not be present -Functional problems are more nebulous and harder to detect -Subject to change over time, a moving target -Most common causes are: layout, outmoded items, inadequacies, superadequacies and atypical items. *Functional Utility: the ability of a property to be useful and to perform the function for which it is intended according to current market tastes and standards

Market Rent

*The most probable rent that a property should bring in a competitive and open market reflecting all conditions and restrictions of the lease agreement, including permitted uses, use restrictions, expense obligations, term, concessions, renewal and purchase options and tenant improvements. -It is a lot like market value -Assumes there will be willing parties on both sides, typically motivated, that will negotiate a fair rental price -It is what the property should bring in rent

Actual Age

*The number of years that have elapsed since construction of an improvement was completed, aka historical or chronological age

Sequence of Adjustments

*The order in which quantitative adjustments are applied to the sale prices of comparable properties. -An example of an acceptable sequence is: 1)Property rights conveyed 2)Financing terms/cash equivalency 3)Conditions of sale 4)Expenditures made immediately after purchase 5)Market conditions 6)Location 7)Physical characteristics 8)Economic characteristics (income) 9)Use/zoning (income) 10)Non-realty components of value (income) -URAR Adjustment Grid Sequence: sale concessions, date of sale, location, property rights and physical characteristics

Useful Life

*The period of time over which a structure may reasonably be expected to perform the function for which it was designed -Hard to gauge and infrequently used

Economic Life

*The period over which improvements to real property contribute to property value -A key indicator, implies that building improvements are a wasting asset -Land will not lose value just because it is older whereas building will lose value as they age -Economic life is shorter than physical life, more apparent in commercial than residential

Operating Expenses

*The periodic expenditures necessary to maintain the real property and continue production of the effective gross income, assuming prudent and competent management.

Discounted Cash Flow Analysis

*The procedure in which a discount rate is applied to a set of projected income streams and a reversion. The analysis specifies the quantity, variability, timing and duration of the income streams, as well as the quantity and timing of the reversion and discounts each to its present value at a specified yield rate. Can be applied with any yield capitalization technique and may be performed on either a lease by lease or aggregate basis.

Comparative Analysis

*The process by which a value indication is derived in the sales comparison approach. Comparative analysis may employ quantitative or qualitative techniques separately or in combination.

Sales Comparison Approach

*The process of deriving a value indication for the subject property by comparing market information for similar properties with the property being appraised -most commonly used approach for valuing sites is the sales comparison method -the most accurate and most understandable & should be utilized whenever possible -must have an adequate market data (quantity & quality of comparable sales) -Traditional minimum number of comparable sales is three

Reconciliation

*The process of reducing a range of value indications into an appropriate conclusion for that analysis. For example, the derivation of a value indication from the adjusted prices of two or more comparable sales in the sales comparison. -The process of reconciliation occurs at various points throughout the appraisal process, during: site value, replacement costs, depreciation, vacancy rates, market rents, GRM, operating expenses, taxes and insurance

Gross Income Multipliers (GIM)

*The relationship or ratio between the sale price or value of a property and its gross annual rental income -Same principle as GRM, however, GIMs are applied to larger multiunit residential properties and other income producing properties of any kind -GRM is based on monthly rent, whereas GIM is based on annual income -Formula: sale price/annual rent = GIM

Gross Rent Multiplier (GRM)

*The relationship or ratio between the sale price or value of a property and its periodic gross rental income. -We use this when performing an income approach on a single unit residential property -Derived by dividing the sale price by the gross monthly unfurnished market rent at the time of sale -Based on the assumption that there is a direct relationship between rental income and value -We must reconcile the data and select a number as the most appropriate GRM -Final step: multiply that GRM by the monthly market rent of the subject -The GRM technique can only be applied if there is a sufficient number of reliable sales and rental data

Effective Rent

*The rental rate net of financial concessions such as periods of no rent during the lease term and above or below market tenant improvements. -Often leases will have rental concessions; the effective rent can be considered the base rent after the rental concessions are deducted

Total Operating Expenses

*The sum of all fixed and variable operating expenses and the replacement allowance cited in the appraisers operating expense estimate. -The appraiser is responsible for estimating appropriate operating expenses and reconstructing the operating statement to produce a credible indication of NOI for use in the appraisal

Gross Adjustment

*The total adjustment to each comparable sale price calculated in absolute terms. All the adjustments both positive and negative are added together to determine the gross adjustment to a comparable sale price. -May be a better indicator of the comparability of a comparable sale

Potential Gross Income (PGI)

*The total income attributable to real property at full occupancy before vacancy and operating expenses are deducted. -Constitutes the most money we could possibly get if we rented all units on the property for every day of the year at market rent; income should never exceed that but it could be less

Physical Life

*The total period a building lasts or is expected to last as opposed to its economic life. -Hard to gauge and infrequently used

Physical Deterioration

*The ware and tear that begins when a building is completed and placed into service -Real and tangible -Deferred maintenance (curable) -Short-lived items (incurable) -Long-lived items (incurable)

Hypothetical Condition

*a condition, directly related to a specific assignment, which is contrary to what is known by the appraiser to exist on the effective date of the assignment results, but is used for the purpose of analysis -it is contrary to known facts about physical, legal or economic characteristics of the subject property; or about conditions external to the property, such as market conditions or trends; or about the integrity of data used in an analysis -this type of appraisal could be significantly misleading to intended users if the use of the hypothetical condition were not properly disclosed

Modular Home

*a factory-built house built in compliance with a building code other than the HUD Code ( state or local building code) -built in sections, called boxes, which are transported to the site -most have conventional wood floor framing systems, but some are being constructed with steel frames, "on-frame"

Manufactured Homes

*a factory-built house manufactured under the HUD Code -HUD maintains and enforces the code, which pre-empts all state and local codes -constructed on a permanent steel chassis and has wheels and axels, arrives 100% finished

Allocation Method

*a method of estimating land value in which sales of improved properties are analyzed to establish a typical ratio of land value to total property value and this ratio is applied to the property being appraised or the comparable sale being analyzed -there is a normal or typical ratio between the land value and total value, we quantify the value of the land as a percentage of the total value -support for an allocation ratio may be derived from: mass appraisals, observed patterns, consultations with developers on their costs, an appraiser's files & published files (an appraiser must support their allocation ratio in the workfile)

Extraction Method (Abstraction)

*a method of estimating land value in which the depreciated cost of the improvements on the improved property is estimated and deducted from the total sale price to arrive at an estimated sale price for the land; most effective when the improvements contribute little to the total sale price of the property. -improved sales in rural areas are frequently valued this way because the building improvements may have a minimum contributory value in comparison to the underlying land value -may use this method due to a lack of land sales in rural areas

Land Residual Method

*a method of estimating land value in which the net operating income attributable to the land is isolated and capitalized to produce an indication of the land's contribution to the total property. -it identifies the two components of value - land and improvements; deals with income as the basis for value and should only be used in appraising income producing properties (Value=Income/Rate) -used primarily in highest and best use analysis -allocation and extraction have superseded this method -this technique has fallen out of favor and is not generally used

Ground Rent Capitalization Method

*a method of estimating land value that is applicable when the ground rent corresponds to the owner's interest in the land, the leased fee interest; applied by capitalizing ground rent at a market-derived rate. -only be applied where a subject site is rented under a land lease

Cost Approach

*a set of procedures through which a value indication is derived for the fee simple interest in a property by estimating the current cost to construct a reproduction of or replacement for the existing structure. -Cost approach formula: reproduction or replacement cost - accrued value + site value = property value. -You will earn your stripes as an appraiser in researching, analyzing and reconciling your way to the right three numbers. -It is the one universal approach that can be applied to any kind of improved real property.

Extraordinary Assumption

*an assumption, directly related to a specific assignment, as of the effective date of the assignment results, which if found to be false, could alter the appraiser's opinions or conclusions -it presumes as fact otherwise uncertain information about physical, legal or economic characteristics of the subject property; or about conditions external to the property such as market conditions or trends; or about the integrity of data used in an analysis

Brownfields

*an industrial or commercial site that is abandoned or underused because it suffers from real or perceived continuing contamination -about 500,000 brownfields nationwide -petroleum is the most common contaminant (200,000) -January 2002 President Bush signed H.R. 2869, which provides liability insurance for those who buy brownfield sites -EPA will control sites that cross state lines or that pose an imminent threat to public health or the environment

Land versus Site

*land: the earth's surface, both land and water, and anything that is attached by nature or human hands *site: land that is improved so that it is ready to be used for a specific purpose -land is raw; site is improved

Real Property

*the interests, benefits and rights inherent in the ownership of real estate -partial estates: life estate, easement & encroachment -specialized form of ownership: condo, coop, PUD, & timeshare

Scope of Work

*the type and extent of research and analyses in an assignment -understanding which analyses, methods and techniques are necessary and what data are necessary to correctly complete the analyses is an integral part of the scope-of-work decision -the Scope of Work Rule was added to the 2006 edition of USPAP -applies to appraisal reviews assignments as well as appraisals -scope of work includes: -the extent to which the property is identified -the extent to which tangible property is inspected -the type and extent of data researched -the type and extent of analyses applied to arrive at opinions or conclusions -solely the responsibility of the appraiser; ensures credible assignment results, consistent with the expectations of intended users & is consistent with what the appraiser's peers' actions would be in a similar assignment -in a Restricted Appraisal Report the scope of work need only be stated

Gross Living Area

*total area of finished, above-grade residential space; calculated by measuring the outside perimeter of the structure and includes only finished, habitable, above-grade living space, (Finished basements and attic areas are not generally included in total gross living area. Local practices, however, may differ)

Gross Building Area

*total floor area of a building excluding unenclosed areas, measured from the exterior of the walls of the above-grade area. This includes mezzanines and basements if and when typically included in the region -distinctly different from GLA -used in measuring 2 to 4 unit residential properties & sometimes used in measuring commercial buildings, may include unfinished areas or common areas such as hallways -Fannie, Freddie, HUD/FHA & VA require use of GBA when appraising 2-4 family residential properties

Septic Systems

-1/3 of homes in America use private septic systems, older ones consist of merely a cess pool -modern systems the sewage leaves the house through a 4" line & goes to the septic tank, older tanks were made of steel - most today are concrete or fiberglass -size of the tank is linked to the bedroom capacity 1 room to 250 gallons

Estimate Value by the Applicable Approaches to Value

-3 common approaches to value: cost approach, sales comparison approach & income capitalization approach -don't always use each approach in every appraisal but we must consider the applicability of each approach to the particular appraisal problem at hand

Private Water Supplies

-40% of American homes have their own private water supply -submersible pumps are preferable

Cost Approach Applicability

-A lack of market activity precludes the use of the sales comparison approach. -The property is not typically income producing. -Building improvements are new. -Land value is well supported. -Improvements represent the highest and best use of the land as though vacant. -Estimating the use value of special purpose properties (no market properties) -Building additions or renovations are being considered. -Appraisal requires land and improvements be valued separately for insurance or accounting purposes. -Land value is a significant portion of the overall value, as with agricultural properties.

Non-Realty Components

-Refers to personal property and business assets, such as furniture in a hotel and fixtures in a restaurant -Can make a significant difference in value and may need substantial adjustments -May also include trade fixtures in leased space

Air Conditioning

-A/C systems need to be properly sized for the building according to: 1)building volume 2)window area 3)insulation R factors 4)appliance heat output 5)solar orientation 6)humidity level in climate -(SEER) label acceptable Minimum is 10 to Maximum is 18

6 Site Valuation Methods

-ALL six methods are quantitative in nature & require specific value judgments to be made based on market evidence 1) Sales Comparison-comparison with recent sales 2) Extraction-subtracts estimated improvement value to arrive at land value 3) Allocation-uses land-to-value ratios based on improved sale comparables 4) Subdivision Development-subtracts estimated development costs from discounted sale proceeds 5) Land Residual-divides up and capitalizes the income between land and improvements 6) Ground Rent Capitalization-capitalizes income from leased land

Estimating Depreciation

-Age-life method: -Modified age-life -Breakdown method or observed condition

Consistency

-An appraisal must exhibit internal consistency -Do all the data and conclusions used throughout the report reflect the same highest and best use? -Do the improvements described and valued in the sales grid and cost approach coincide with the improvements as shown in the sketch and in the photographs?

Commercial Construction

-Class A - fireproofed steel frame -Class B - reinforced concrete frame -Class C - masonry or reinforced concrete -Class D - wood or steel studs -Class S - pre-engineered structural; members

Market Conditions

-Commonly referred as "time" adjustment -Changes in real estate market may be: cyclical, one-time only, seasonal and exponential -Steps for evaluating the market: what and where, when and supply/demand -Never assume that a difference in sales price is due solely to time elapsed -Our starting point is to measure a change in market conditions in terms of a percent; the final step we convert that percentage into a dollar amount -Adjustments should always be calculated from the time of the comparable property's contract of sale to the effective date of the appraisal; at that point in time

Cost Estimating Methods

-Comparative-Unit Method -Unit-in-place Method -Quantity survey method -Another simplistic method is the index method, which is only available in limited situations

The Uniform Appraisal Data Set

-Created in 2011 by Fannie and Freddie. The purpose was to standardize appraisal report data.

Use/Zoning

-Deals with income producing and commercial properties when adjustments could be made for differing values indicated by differing intensities of use -Ex: a property that has a variance to conduct business in a way that is no longer allowed under the current zoning may have an advantage

Residential Income Approach

-Developing an income approach in appraising residential properties (1 to 4 units) we employ multipliers -In the appraisal world we draw the line between a residential property and a nonresidential property at 4 units -Properties with 5 or more living units are considered to be nonresidential properties -The valuation technique has to suit the property type appraised -Limitations imposed by federal financial institution regulatory agencies and state licensing statutes stipulate that license residential appraisers are qualified to appraise noncomplex 1-4 residential units with a transaction value less than $1 million and complex 1-4 unit residential units with a transaction value less than $250,000.

Financing Terms/Cash Equivalency

-Differences in financing between a comparable sale may lie in interest rate, amount of down payment, points paid and concessions given. -When we make adjustments for financing we are comparing the comparable properties' financing to "typical" financing terms that are available in the market -Suspicious types of sales might include: short sales, foreclosures, auctions, FHA and VA sales

Cost Approach Least Applicable

-Difficult to estimate depreciation -Difficult to estimate the amount of entrepreneurial profit -Difficult to estimate the land value -Interest valued other than fee simple (adjustments must be made)

Cost Estimates

-Direct cost -Indirect cost -Entrepreneurial incentive

Relevance

-Do not get fancy; be precise and be concise. -If you use technical terms define them in the report -Make sure any information that is relevant and germane is included

Quality of Data

-Do you feel comfortable with the data you gathered? -Should I go back and check some other data sources? -How much of the data was gathered from first hand or primary sources? -Would I be comfortable if I had to defend my appraisal in court with the information I have now?

Prior Sales

-Document how many times the subject and comparables have sold in the past year -USPAP requires that we report and analyze prior sales of the subject for three years prior to the effective date of the appraisal

Physical Characteristics

-Everything a homeowner does or does not do either adds to or detracts from value -Common physical characteristics of residential property improvements: design and appeal, how to estimate quality, condition versus age, counting rooms, square footage, basements, energy efficiencies, garages and carports, appliances and porches and decks

Above Grade Area

-Fannie Mae says: above-grade gross living area is the most common comparison for one-unit properties -Appraisers must be consistent when calculating and reporting finished above-grade room count and square footage for the GLA above-grade; only finished above-grade areas can be calculated; garages and basements cannot be included -a level is considered below-grade if any portion of it is below-grade - regardless of the quality of its finish or the window area of any room -for units in condo or co-op projects, the appraiser must use interior perimeter unit dimensions to calculate the GLA; in all other instances, the appraiser must use the exterior building dimensions per floor to calculate the above-grade GLA of a property

Below-Grade Area

-Fannie Mae says: rooms that are not included in the above-grade count may add substantially to the value of the property-particularly when the quality of the finish is high -the appraiser must report the basement or other partially below-grade area separately and make appropriate adjustments for them on the 'basement and finished area below-grade' line in the 'sales comparison analysis' grid

Real Property Rights Conveyed

-Fee simple or partial interest - When we appraise properties that are subject to a mortgage we typically appraise the fee simple interest -Generally, when valuing partial interests we discover that the value of a partial interest is less than the pro rata share of a fee simple interest

Rent Controls

-GRM Analysis should not be utilized in a market area in which there are rent controls

Defining the Problem: 6 Sub-steps within

-Identification and location of the real estate -Identification of the property rights -Definition of value -Purpose and intended use of the appraisal -Effective date of the opinion of value -Any special limiting conditions

Not Operating Expenses

-Income taxes -Depreciation -Financing and debt service -Capital improvements -An appraiser must carefully reconstruct the operating statement in order to add in any expenses that the owner's figures may have omitted and to remove any expenses that are not legitimate operating expenses.

Gross Monthly Market Rent

-Investigate rental transactions of similar properties in the market area -Sources of rental information may come from: subject property, comparable sales used in the sales comparison approach, interviews with investors, landlords, tenants, neighbors, leasing agents and other appraisers -Rental data and GRM indicators can be from further back in time

Rounding

-Is the final opinion of value appropriately rounded? -We need to round to avoid the perception that our final value of opinion is a precise number. We do not wish to imply a precision that we do not possess. -The most common definition of market value defines it as "the most probable price that a property should bring...".

Location

-Location always has a great influence on the value of real property -An appraiser must determine the boundaries of the area of influence in order to decide what other properties can be considered reasonable comparables; Exceptions: Few sales have occurred in the neighborhood, subject is in a rural area and subject is unusual or atypical

Quantity of Data

-Make sure you have an adequate amount of data. Seek refuge in a wide sampling of the market. -Explain that you could not find sales of properties that were very similar to the subject in all aspects due to ___________________________. -So you have enough land sales to accurately estimate the site value? -Have there been enough recent sales to come to a conclusion of the local market trends?

Adjusting Rents

-Many factors could influence the earnings capacity of a single unit property requiring an adjustment when estimating market rent -Adjustments should be made only for significant differences

Breakdown method

-More detailed, identifies and treats each items of depreciation separately -More accurate but more time consuming, therefore, not generally used *Curable depreciation: items of physical deterioration or functional obsolescence that are economically feasible to cure. Economic feasibility is indicated if the cost to cure is equal to or less than the anticipated increase in the value of the property -Becomes a test of economic feasibility, would a prudent person make such an investment -If costs are estimated using the comparative unit method then depreciation should be measured by the age-life method -If costs are calculated using unit-in-place or quantity survey then the breakdown method would be used

Accuracy

-Must exhibit due diligence and not render appraisal services in a careless or negligent manner -Review all math calculations

Site Planning

-One chance to get the site right; if misplaced it could hinder the value of the property considerably -consider the direction of the sun, climate & wind

Three Kinds of Depreciation

-Physical deterioration -Functional obsolescence -External obsolescence

Modified Age-Life

-Primary method used, deals with whole property and easier to understand -Limitation is: calculates depreciation as a lump sum -Preferable method used by appraisers when there are substantial items of deferred maintenance in a property: Cost new - deferred maintenance = remaining improvement cost - depreciation = depreciated cost of improvements + site value = value by cost approach

Age-Life Method

-Primary method used, deals with whole property and easier to understand -Limitations are: calculates depreciation as a lump sum, assumes straight line pattern of depreciation -Total depreciation is estimated by calculating the effective age of a property to its economic life: Effective age/total economic life X total cost = depreciation

Sales Comparison Formula

-Sale price of comparable + or - adjustments to price = indicated value of subject -Process starts with the comparable not the subject -Never adjust the subject property, think of the subject property as a base, which does not move

Comparative Unit Method

-Simplest, quickest, least complicated and least accurate method -Used primarily by appraisers 1) Market derivation: derive unit cost from the market, more difficult with commercial/industrial properties 2)Cost service: cost multipliers, such as Marshall and Swift, add indirect cost and entrepreneurial incentive

Single Unit Investment

-Single unit homes are less frequently purchased for investment; the rent from one home in most markets is insufficient to overbalance the costs -It is important to investigate the market area before purchasing a single unit investment property -GRM analysis may or may not be applicable to single unit residential properties

Adjusted Sale Price of Comparables

-Take the sale price of each comparable property and add to or subtract from the sale price the amount of the net adjustment -The adjusted sale prices should form a tighter pattern than the raw unadjusted sale prices we started with

Appropriateness

-The final weighting in our value judgements will hinge on the appropriateness of our methodology -Did we use the right techniques for that type of property? -Did we employ the proper methods of analyzing the data collected?

GRM-Derivation

-The first step is to search the market area for similar properties that sold while rented -Need to be similar in physical characteristics, as well as economic and legal characteristics -Should be comparable in terms of: division of utility expenses between the landlord and tenant, ratio of expenses to income and lease terms

Quantity Survey Method

-The quantity and quality of all materials used and all categories of labor estimated -Most comprehensive and accurate method but requires extensive knowledge and ample time to complete. Most appraisers do not have the expertise. -Cannot use cost estimation like Marshall and Swift

Final Opinion of Value

-There is not just one way to arrive at the final reconciliation of value; no magic formula -Apply logic reasoning and a good deal of common sense and some limited statistical analysis -We are analyzing the strengths and weaknesses of each approach. -Which approach is strongest/weakest for that type of property? -If more than one approach is used do they support each other? -If they differ why? -Most of the time we are going to have to go all the way out on a limb and produce a single point value conclusion

Economic Characteristics

-They include all the attributes that influence income, such as: operating expenses (lower expenses = more net income), tenant mix (proven versus unproven tenants) and lease terms (lease above, below or equal to market rent)

GRM Reconciliation

-To properly utilize the GRM approach we should have a considerable number of sales in order to perform a valid analysis -The most common statistical procedures that we might employ might include: range, mean, median and mode -Round to the nearest whole number, don't be too precise

Unit-in-Place Method

-Total building cost is estimated by adding together the unit costs for the various building components aka segregated cost method -Typical components would include: excavation, foundation, floor construction, framing, ceilings, walls, roofing, plumbing, HVAC and electrical

Applicability of the Sales Comparison Approach

-Valuations are most accurate when compared with similar properties nearby (subdivision) -Does not work well in a weak market -May not be the best approach to use for unusual or special use properties -Relies heavily on the principle of substitution

Electrical Systems

-Voltage=Pressure -Amperage=Volume -nominal voltage varies between 110 and 120 and between 220 and 240 -heavy duty power equipment runs 220/240 (electric dryers, ranges) & normal receptacles, lighting, small appliances & computers run on 110/120

Review

-We need to undertake an internal review, last chance to check our conclusions -Review the entire process including our scope of work -Were our data sources and methods of collection and verification adequate? -Did we explain formulas and calculations in an appropriate manner?

Sales Comparison Approach Reconciliation

-We should expect differences; same or similar values from comps would be suspect -Do not expect perfection in the opinion of value, cannot always have access to 100 percent of the information needed and data is not always interpreted correctly or consistently -There is safety in numbers of comps -NEVER AVERAGE! At this point we have established a value range, our estimate will fall somewhere between ________________ and ________________ -Make adjustments based on quantity and quality of data for each comp -Type of adjustment matters; the following are more subjective, intangible and harder to quantify: sale or financing concessions, date of sale/time, location, view, design, quality and condition. If you have to make heavy adjustments in those areas your value conclusion may be suspect

Final Reconciliation

-When summarizing your thought process be: persuasive, succinct, positive and direct -Reconciliation is your summation to your client and intended users of your report -This is where you reinforce your scope of work; you need to convince the reader that you did all that was necessary to solve the problem -Consists of various items such as: review, appropriateness, consistency, accuracy, relevance, quality and quantity of data

Ranking Analaysis

-a qualitative site valuation method -a variant of relative comparison analysis, in which the comparable sales are ranked in ascending or descending order, then the relative position of the subject is determined with in the array

Relative Comparison Analysis

-a qualitative site valuation method -less precise application of the sales comparison method but it reflects the imperfect nature of real estate markets -analyze comparables to determine whether each one is overall: superior, equal to or inferior in relation to the subject property. Shown as (+), (=) & (-)

Sales Comparison Adjustments

-adjustments should be derived from the market (location & market conditions) -we only need to adjust for items that are significant (differences a typical purchaser would be able to recognize and then translate into dollar preferences) -possible adjustments: traffic, size, shape, topo, exposure, usable area, corner location, floodplain, utilities, soil conditions, zoning & restrictions

Legal Restrictions

-check local zoning ordinances, may be setback requirements, height or view restrictions -check deed restrictions and subdivision regulations -may also be a required distance between the well a septic system - most codes call for at least 100ft

Site Preparations: Physical Considerations

-clearing the site of rocks, trees and stumps and any debris, property needs to be rough graded and the top soil should be stripped off and saved to put back later -sub-base for the driveway and parking area needs to be installed -temporary "service-drop" needs to be arranged from the power company & an electrician dispatched to set the meter and temporary power panel, also run water and telephone lines and dig a drainage ditch if necessary

Insulation

-conductors transfer energy more quickly; good conductors are metal and stone, poor conductors are plastic and air -heat energy will flow from warm areas to cold areas -the measure of resistance to heat transfer is called an "R" factor, ex: an inch of wood has an R factor of 1; depending on where you are the desired R factors may be R-13 in the floors, R-19 in the walls & R-30 in the ceilings

Roof Framing

-conventional rafter systems consist of boards that are set at an angle & meet at the ridge -roof truss systems resist the spreading stresses and transfer all the weight to the outside walls, they are about 3 or 4 times as strong as a conventional rafter system & none of the interior walls are load bearing; usually factory built to custom specs and trucked to site and erected with cranes

Pipes

-distribution lines have traditionally been copper after a bad go with galvanized iron pipes -drain lines have traditionally been cast iron with recent general acceptance of plastic pipes -"Black Plastic" polyethylene is flexible & permitted for cold water use only -rigid plastic pipe includes PVC (approved for cold only) and CPVC (approved for both hot & cold) -white PVC pipe is not accepted by all codes -black ABS plastic pipes are stronger & are generally acceptable today

Foundation Walls

-earliest foundations were made of stone and brick; today most are poured concrete or concrete block

Wiring

-earliest type of wiring in a house is called knob and tube, -40s & 50s BX or armored cable was common but the cable was hard to work with, hard to cut & didn't bend well -aluminum wiring was used for a short period of time but it proved to be a fire hazard -since the 60s the most popular wires have been plastic coated or Romex, which are flexible and give wires adequate protection

Building Styles and Construction

-early 1600s: one room with a dirt floor -1650: few houses with 2 rooms side by side -1670: 2 story house with 2 rooms on each floor -up to 1900: almost all houses were 2 story except a few log cabins -1900: large one story homes, such as Frank Lloyd Wright's "Prairie Style" home -1910-1930: one-story homes for the masses, "bungalow" homes -1940-1950: stretched into "ranch" style homes -1950-current: 5 basic housing types 1) Ranch - 1 story 2) Cape Cod - 1 1/2 story 3) Two-story 4) Split-level - multi levels 5) Split entry (sometimes called split foyer, bi-level or raised ranch) - one story with finished basement

Topography

-easiest site to build on is a level one, but you have to build in drainage -a gently sloping lot is preferable -sloping lots may involve extensive re-grading, filling, terracing and retaining wall

Plumbing Systems

-encompass 2 main systems: the distribution system and the drain/waste/vent (DWV) system -drainage system carries off waste water: grey water from sinks & laundry carried off in drain lines use 1.5-3" lines, black water from toilets taken away by soil lines use 3" lines -"U" shaped water-filled traps are installed under each fixture to keep sewer gases from venting back into the house

Windows

-from an insulation standpoint are a disaster -best to have fewer windows on N side & more on S -modern windows filled with a gas, most commonly Argon but Krypton where space is thinner

Floor Framing

-girders are the main support beams and are set in pockets that were formed in the top of the end walls of the foundation -steel girders are often used, but are heavy & difficult -most girders are also supported by posts

Ventilation

-goes hand in hand with insulation & moisture is the enemy of insulation -moisture can lead to mold, peeling paint & rotting wood -as houses are being built more "tight" proper ventilation has become more important; however super insulation may be counterproductive if a house can't "breathe" -should be a vapor barrier on the heated side of a wall so that warm, moist air inside the house is prevented from entering the wall cavity -moisture in a house is produced by many things: 1)people breathing, avg person puts out 2.8lbs of moisture/day 2)plants 3)showers, 0.5lb moisture/shower 4)hot tubs, pools 5)dishwashers 6)washers/dryers 7)cooking, 4.7lbs moisture/day in avg home

Floor Trusses

-have greater strength and allow long clear spans without girders or posts -the open web design allows easy installation of plumbing & wiring

Floor Joists

-horizontal structural members, placed on edge which carry the house loads to girders and sills -thickness, width & spacing are determined by live loads placed on them; commonly 2x10's or 2x12's

Units of Comparison

-if comparable sales are not sufficiently similar so as to allow for direct comparison, then we use common units of comparison: 1)price per square foot (urban, small lots) 2)price per acre 3)price per front foot (waterfront & commercial properties) 4)price per lot (small difference in lot sizes 1.55acre v 2.37) 5)price per buildable unit (subdivision or multi-units) 6)price per animal unit (ranch or farm, measured by productivity, land will support ________)

Sill Plates

-in either form of construction, "J" shaped anchor bolts are installed when the wall is completed; this will be used to attach the masonry to the first piece of the wooden structure -usually 2x6 or 2x8 wooden boards

Addenda

-includes a collection of attachments at the end of an appraisal where you put all the supporting materials used to arrive at your value conclusion -Ex: contracts, covenants, deeds, surveys, title reports, building sketches & floor plans, leases, location maps, subject & comparable photos, etc.

Balloon Framing

-introduced around 1850 it was made possible by the invention of the steam-powered saw mill, mass-produced metal nails & the advent of rail transportation -allowed architects & builders to break out of the mold of building basic rectangular shapes

Stucco

-lime-based mortar finish applied to a wall -can be easily applied over concrete blocks -can be applied over frame walls but first wire mesh must be attached to solid sheathing -Exterior Insulation and Finish Systems (EIFS) aka Synthetic Stucco the exterior surface is water resistant but sever leaks have occurred around doors, windows & chimneys

Low-E Gas

-low emittance glass has a coating inside to reflect the sun's energy back -advantages are: better insulation, reduce CO2 into the air & reduce condensation on the interior

Slab-on-Grade

-monolithic slab-on-grade foundation is preferred in the S & SW over basements or crawl spaces & is the quickest and cheapest way to install a foundation -essentially one giant footing so the weight is distributed over its entire surface -a standard slab is 4" thick but is thickened an extra 8" on the edges & wherever concentrated loads occur (chimney, bearing post, partition)

Separate Site Valuations

-most residential appraising, we are valuing site rather than land -total property can be viewed as a combination of 2 elements: the value of the site & the value of any building improvements on the site -Include: 1)cost approach 2)assessments and taxation 3)condemnation appraisals 4)certain income capitalization methods 5)highest and best use analysis

Determine Highest & Best Use

-must be legally permissible, physically possible, financially feasible & maximally productive -may be only one use for the property if vacant and another for a property as it is presently improved

Gather, Record & Verify the data

-need to record the data in a workfile -the workfile must exist prior to issuance of the report -must keep 5 years after preparation or 2 years after deposition, whichever period expires last -workfile includes: -name of client & any other intended users -true copies of all written reports, on any media -summaries of oral reports or testimony -all other data, info & documentation to support the appraiser's opinions or conclusions -a workfile in support of a Restricted Appraisal Report must be sufficient for the appraiser to produce an Appraisal Report -must be made available by the appraiser when required by a state appraiser regulatory agency or due process of law

Site Preparations: Legal Considerations

-obtain a building permit -check applicable codes: building & fire codes -check environmental regulations: wetlands, protected areas & hazard areas -check flood plain -curb cut permit or driveway permit (if needed)

Masonry Construction

-popular in brick, stone, concrete block & poured concrete -sturdy, durable & low maintenance but costs more & has been around longer than frame construction

Roof Covering

-popular roof coverings from least expensive to most: 1)composition roll roofing 2)composition shingle 3)built-up rock 4) metal 5) wood shakes or shingles 6) cement fiber shingle 7) clay tile 8) slate 9) copper -most new construction employs fiberglass composition shingle which has a life of 20-35 years depending on thickness and weight; may be less in the South -newer low maintenance products being used include metal roofs and fiberglass tiles that look like clay -metal roofs have gained popularity over the past 5-10yrs

Deed

-prime source of specific data about a property that would include: legal description, owners of record, easements, deed restrictions & chain of title -deeds can be obtained from the owners, lender, county courthouse or title company

Fiber-Cement Siding

-recent innovation in siding called fiber-cement aka HardiPlank has become popular in the S & SW -gained popularity in residential and non-residential new construction and its features include: 1)low maintenance 2)moisture resistant 3)won't crack, buckle, rot or de-laminate 4)termite proof 5)non-combustible 6)50 year transferable warranty -can be applied over wood frame, sheathing or insulation board & masonry block or concrete

Roof Slope

-rise over run

Soil Conditions

-sandy soil may require wider footings & pilings -soil loses strength in proportion to their water content -drainage capacity can be a crucial factor; percolation tests will determine drainage suitability and the size of the drain field for a septic system; above ground, "mound", system may be installed and may require a pump

Foundation System

-serves 3 purposes: distributes weight, anchors & protects the wood in the house structure from decay and insects -made of 3 components: soil bed, footings & foundation wall or piers -stable foundation depends on proper footing depth & good drainage -footings need to be at least 1' below average "frost line" & should be twice as wide as the foundation wall & as deep as the wall is wide & they may or may not have metal reinforcing rods (rebar)

Platform Framing

-studs run one story high & wall sections are framed on the convenient "platform" consisting of the floor joists and subfloor -second floors require a new platform which is erected on top of the walls & framed up with one story studs

Architectural Styles

-styles can be influenced by: type and texture of exterior finish, colors, roof style, roofing material, window types, building shape & ornamental details (shutters, dormers, cupolas & corner boards) -2011 Fannie Mae & Freddie Mac created the Uniform Appraisal Dataset for standard appraisal reporting, it states that the appraiser must identify the architectural style of the subject property and comparable sales: 'Colonial', 'Rambler', 'Georgian' and 'Farmhouse' NOT 'brick, '2 story', 'average', etc.

Amperage

-the total amount of electricity that you have available -small houses with light loads, gas appliances may get away with 60 amps, 100 amps is the normal min amount, house with electric heat would require at least 200 amps & large homes today require 300 amps or more -the only definite way to tell the amperage is to examine the size of the entrance cable; the size or gauage of the entrance cable will enable you to calculate the amperage of the service

Subdivision Development Method

-this is a projection for only five years, yet it involves a large number of suppositions that must be made about selling prices for the lots and absorption by the market, along with extensive projections of expenses; if any projections miss their mark the consequences could be great

Subflooring

-today it's almost always 4'x8' sheets of plywood or OSB -1/2" may be an acceptable min but 5/8" or 3/4" is more desirable

Any Special Limiting Conditions

-two common types are: extraordinary assumption & hypothetical condition

Effective Date of the Value Opinion

-two dates are essential to an appraisal report -the effective date of value can be a past (retrospective), current or future (prospective) date, in many cases it's the date the appraiser inspects the property; the decision will be made in concert with the client's needs -the date of the report is the date you sign and issue the final report

Framing Systems

-undergo tremendous stress and must be engineered to handle it -the entire weight of the roof presses down on the walls and tries to spread them outward, the walls carry the weight down to the foundation and ultimately the footings -over 1k years the utilized framing system was the post and beam system

Heating Systems

-until 1840s all houses were heated by fireplaces, then metal wood-burning stoves were introduced -the modern "central" heating system with one central furnace didn't appear until 1880, at first burning wood, then coal, oil, gas & finally electricity -Warm air heat was "ductless" where heat rose and fell, then came an octopus system with ducts but no fans -Modern heat uses the duct system with forced air -Hot Water Heat: heated boiler sent through pipes to each room -Electric Heat: electricity sent through a resistor and warms each room by convection -Radiant Heat: waves of radiant energy passes through your body, 2 types water & electric -Electric Heat Pump: reversible A/C, used Freon R-22, inefficient -Geothermal Heat Pumps: EPA "most energy efficient" but most expensive

Sheathing

-used to strengthen the structure -provide a nailing surface for siding -combat air infiltration -form a moisture barrier -provide some insulation -most common is foam sheathing which can provide up to R-8 insulation -plywood or OSB board is sometimes used when strength or rigidity is required then "Tyvek" material is applied

Siding

-wood siding (shingles and clapboard) was the standard in the US from the 1600s through the 1800s -the last 50 years have shown many innovations in lower maintenance siding materials such as (in order of cost): 1)hardboard 2)wood clapboard 3)aluminum 4)vinyl 5)stucco 6)wood shingles 7)EIFS 8)brick 9)stone

8 Steps in the Valuation Process

1) Define the problem 2) Determine scope of work 3) Gather, record and verify the data 4) Determine the highest and best use 5) Estimate the land value 6) Estimate value by each of the 3 approaches (if applicable) 7) Reconcile the estimated values into the final opinion of value 8) Report the final opinion of value

3 Privacy Areas for Outdoor Activity

1) Private Area for family activities, usually in the rear yard and may be fenced in 2) Public Area, usually in the front yard contains the guest entrance and driveway 3) Service Area allows for semi-public area for deliveries, trash removal, meter readers, fuel trucks & mail deliveries

Sales Comparison Procedure

1) Research the market: search for properties similar to the subject in all aspects from listings, offers, refusals options to purchase and contracts 2) Verify the information: transaction should be verified with a party who has first hand knowledge, determine motivation, what concessions were made, was the transaction both accurate and appropriate 3) Select relevant units of comparison: will vary according to the type of property we are appraising 4) Identify differences and make adjustments: Identify pertinent and significant differences that will be recognized by a typical purchaser and strong enough to influence a modification in a buying decision 5) Reconcile the value indications: examine the strengths and weaknesses of our data and come to a reasoned conclusion as to the indicated value for the subject property.

8 Sources of Specific Data

1) deeds 2) location maps 3) tax maps 4) flood maps 5) assessor's records 6) title companies 7) zoning ordinances 8) multiple listing services

9 Sources of General Data

1) government 2) trade associations 3) utility companies 4) school districts 5) universities 6) departments of transportation 7) planning boards 8) multiple listing services 9) chambers of commerce

Reconciliation and Summary of Sales Comparison Approach

1)Do I have a sufficient quantity of comparables to justify a value conclusion? 2)Is my data of reliable quality? 3)Is each comparable appropriate? -A lot of what needs to be done in the reconciliation process is more intuitive than mathematical -Some appraisers go to the extent of a more formal weighting process where they might assign 50% of the weight to Comparable 1, 30% to Comparable 2 and 20% to Comparable 3

Ventilation Methods

1)attic fans 2)kitchen fans 3)vents - basement and crawl spaces 4)attic - ridge vents, perforated soffits 5)louvers 6)cupolas 7)mechanical air exchangers

Extraction Method Example 1

Scenario: A run-down neighborhood grocery store on a good corner location in a desirable older neighborhood recently sold for $400,000. The reproduction cost of the improvements today would be $250,000 and the total depreciation is estimated to be 80%. By extraction, what is the land value? If the improvements would cost $250,000 to reproduce today and they are 80% wasted, what is the present, depreciated value of the improvements? Answer: $250,000 x .80 = $200,000, amount depreciated $250,000 - $200,000 = $50,000, present value of improvements $400,000 - $50,000 = $350,000, value of the land

Allocation Method Example

Scenario: Subject has a total value of $300,000 by the sales comparison approach. One neighborhood across town has home sales from $260,000 to $270,000 and recent lot sales average $63,000. Another nearby neighborhood has $340,000 home sales and recent lot sales of $70,000. A builder in the area says his lot typically run about 25% of total value on new construction. What is the subject land worth? Answer: $63,000 - $75,000

Extraction Method Example 2

Scenario: The sale of a dilapidated storefront with two apartments upstairs is going for $250,000. Calculations of the reproduction cost of the improvements would currently be $280,000. Analysis of the property concludes total accrued depreciation is 60%. What would be your conclusion as to the value of the land? Answer: $280,000 x .40 = $112,000 $250,000 - $112,000 = $138,000, value of the land