REE Chapter 7: Valuation Using the Sales Comparison & Cost Approaches

Accrued Depreciation Equation

(cost of structure / expected lifetime) x age

Accrued Depreciation Example - Replacement cost of 10-year old building is $500,000 and building is expected to have a 50-year life - annual depreciation = - accrued depreciation =

- $500,000 / 50 = $10,000 annual depreciation - $10,000 x 10 yrs = $100,000 accrued depreciation

Appraiser Certification: - Certified Residential Appraiser

- BA degree + 200 classroom hours - 2500 experience hours - pass national residential exam + state supplemental

Appraiser Certification: - Certified General Appraiser

- BA degree + 300 classroom hours - 3000 experience hours (>50% non-residential) - pass national general exam + state supplemental

Multiple Listing Service (MLS)

- RESIDENTIAL - a comprehensive listing, updated daily, of properties for sale in a given community or metropolitan area; includes a brief description of each property with a photo and its asking price but can be accessed only by realtors who work for an MLS member

Curable Physical Deterioration example

- addressing normal wear & tear in a property - painting walls - replacing appliances

External (economic) Obsolescence Examples

- changes in desirability demand for neighborhood - increased traffic congestion

Incurable Functional Obsolescence example

- changing the floor plan from closed to open - too expensive

specialty buildings are ....

- churches - schools - government (things that are not sold often)

Cost data sources: in the absence of construction data....

- local building contractors - professional cost estimators (data vendors) can be reliable data sources.

Causes of depreciation: - Physical deterioration

- loss in value due to aging and ordinary use - curable

Causes of depreciation: - External (economic) Obsolescence

- loss in value due to changes beyond property boundaries - changes in neighborhood that lower the value of the house - incurable

Causes of depreciation: - Functional Obsolescence

- loss in value due to changes in tastes, technology, or market standards - incurable

Appraisal Users (Consumers)

- mortgage lenders - buyers and sellers - firms (M&A, dissolutions) - courts (eminent domain, divorce, bankruptcy)

Primary Source of data

- multiple listing service (MLS) - residential - commercial information exchange - commercial (CIE)

Cost Approach Uses:

- new & proposed construction - specialty building - insurance appraisals

Comparable Sales Source of data 1.) 2.)

- primary - secondary

Secondary Source of Data

- public records (land records, country assessor) - data vendors (Loopnet / CoStar)

S-I-C reliability, approach orders matters!

- sales - income - cost

Sales Comparison Approach Uses:

- single-family owner-occupied residential - small income producing residential (1-4 units)

Appraisal approaches, listed in order of general reliability: 1. ____________________________ 2. ____________________________ 3. ____________________________

1.) Sales (comparison) approach 2.) Income approach 3.) Cost approach

Appraiser Certification: - Registered Trainee Appraiser

100 classroom hours

In the sales comparison approach, _________ comps are sufficient if they are similar to subject.

3

Practice: A comparable property sold 15 months ago for $105,000. If property values are increasing at a rate of 0.25% per month (no compounding), what would be the adjustment amount to the sale price of the comparable property? (Adjustment amount, not Adjusted SP)

= $105,000 x (.0025) x 15 = $3,937.50

Replacement costs have been estimated at $360,000 for a building with a 60-year economic life. The current effective age of the property is 10 years and the site value if $100,000. What is the estimated value of the property using the cost approach with straight line depreciation? - Annual depreciation= replacement/lifetime - Accrued depreciation = annual X age - MV = RV - AD + SV

= $360,000 / 60 = $6,000 = $6,000 x 10 = $60,000 = $360,000 - $60,000 +$100,000 = $400,000

Site Value Equation Example: - SP of comparable property is $4m, estimated replacement cost of building is $800,000, and accrued depreciation amounts to $120,000. What site value per acre do you extract from this 4 - acre comp sale? SV = MV - RC + AD

= $4,000,000 - $800,000 + $120,000 = $3,320,000 for four acres = $3,320,000 / 4 = $830,000 per acre

An appraisal is an unbiased written estimate of the market value of a subject property. Which of the following statements best describes the concept of market value? A.) It is an estimate of the most profitable selling price of a property in a competitive market B.) It is the value a particular investor places on a property C.) It is the price we observe when a property is sold D.) It is the maximum amount that a seller would be willing to accept

A.) It is an estimate of the most profitable selling price of a property in a competitive market

Accrued Depreciation equation

AD = MV - Replacement cost

Practice: SP of comp = $300,000. The comparable was built 5 years ago and the subject 10, the comparable has 2,200 square feet of living area and the subject has 2,400. - Age = $2,000 reduction per year - Living area = $100 per square foot What is the adjusted sales price?

Age adjustment: 10-5 = 5 x $2,000 = $10,000 (superior) Size adjustment: 2,400 - 2,200= 200 x $100 = $20,000 (inferior) Adj SP = $300,000 - $10,000 + $20,000 = $310,000

Commercial Information Exchange (CIE)

COMMERICAL

_____________ can use appraisals to make sure you are getting compensated correctly.

Courts

Transaction Adjustment: ___________ Example Best comp available sold for $180,000 seven months ago - Adjustment amt given 0.32% monthly appreciation rate: $180,000 (0.0032) = $576 per month $576 per month x 7 months = $4,032 Adjusted SP: $180,000 + $4,032 = $184,032

Date of Sale

_____________ use appraises apart of mergers & acquisitions to make sure they are paying the right amount for a company's real estate.

Firms

___________ use appraises the most.

Mortgage lenders

comparable sales

Recent sales of similar properties in nearby areas and used to help determine the market value of a property. Also referred to as "comps."

Site Value Equation

Site Value = MV (or SP) - Replacement Cost + Accrued Depreciation

Determining Discrete Adjustment Factor Discrete - Sale A Sale price: $404,000 GLA 2600 sq ft Pool No - Sale B Sale Price: $443,000 GLA 3000 sq ft Pool Yes - Sale C Sale price: $419,000 GLA 2600 sq ft Pool yes Which do you use?

Use (A) and (C) because only difference is pool $419,000 - $404,000 = $15,000

Determining Discrete Adjustment Factor Continuous - Sale A Sale price: $165,000 GLA 2400 sq ft Time of Sale 1 year ago - Sale B Sale Price: $150,000 GLA 2000 sq ft Time of Sale recent - Sale C Sale price: $145,000 GLA 2000 sq ft Time of Sale 1 year ago Which do you use?

Use (A) and (C) because only difference is size 1. SP difference: $165,000 - $145,000 = $20,000 2. Size difference: 2400 sq ft - 2000 sq ft= 400 sq ft 3. Price PSF difference: $20,000 / 400 sq ft = $50 sq ft

Adjustments are made to SP of comps, NOT the subject. ___________ of subject is unknown!

Value

Cost Approach Equation

Value = (replacement cost) - (accrued depreciation) + (site value)

Sales Comparison Approach

appraisal methodology based on comparison of subject to similar properties sold recently

Cost Approach

appraisal methodology that involves estimating to build a property comparable to the subject

Reconciliation of Comparables: indicated value by sales comparison approach

appraiser reconciles adjusted sales price of comps into a single indicated value for subject

Fairly negotiated transaction prices that occurred under normal market conditions. - _________________ transactions - No estate __________, ________________ business transactions, or properties tied to special _______________ programs

arms-length; auctions; commingled; financing

Arm's Lenght Transaction

buyer and seller have no relationship prior to the sale

________________ use appraises to make sure they are pricing the house correctly.

buyers and sellers

Comparable Sales Criteria for Selection: - properties prospective buyers would consider _________________________

close substitute

Estimating Site Values 1.) Extract from _______________ sales

comparable

In the sales comparison approach, adjustments are made to SP of _______________ properties for differences with subject property.

comparable

Estimating Site Values: 2.) Solve ____________ approach equation for site value

cost

incurable

cost is high relative to the improved value, would cost too much to improve (not worth it to fix)

curable

cost is low relative to the improved value for the property (worth it to fix)

Physical deterioration is _____________.

curable

Depreciations is either _____________ or __________________.

curable; incurable

Cost approach is used when proper ________ is not available to complete other approaches.

data

Accrued Depreciation

difference between replacement cost and current market value or improvements

straight-line depreciation method

divide cost of structure by its expected lifetime; multiply by age

Replacement cost

estimated cost to build a substitute of equal utility to subject property - replace with something similar

The final price for each comparable property reached after all adjustments have been made in an appraisal report is termed the:

final adjusted sales price

Reproduction cost issue is that it is difficult to ________________.

implement

External (economic) Obsolescence is ___________________.

incurable

Functional obsolescence is ______________.

incurable

In the sales comparison approach, the value obtained after reconciliation of the adjusted sale prices from the comparable sales is termed the:

indicated opinion of value

Cost approach is the _____________ reliable.

least

property adjustments

making adjustments for discrete or continuous features

Reproduction cost is difficult to implement because of a lot of _______________ are no longer used.

material

Comparable Sales Criteria for Selection: - fairly negotiated transaction prices that occurred under _____________ market conditions

normal

Investment value is the perspective of a _____________ buyer.

particular

With the cost approach, you can appraise buildings when it is just a _________.

plan

Real Estate Appraisal

process of obtaining an unbiased estimate of MARKET VALUE for real property

example of _____________________ - Subject property; GLA = 2500 sq ft - Comp: SP = $170,000; GLA = 2250 sq ft (Comp is inferior, so adjustment is positive ADD) - Contributory value of $50 PSF Step 1: Determine adjustment amount (2500-2250) x $50 = 250 x $50 = $12,500 Step 2: Adjust sale price $170,000 + $12,500 = $182,500

property adjustment (continuous feature)

example of _____________________ - swimming pool -subject property: pool = no - comp: SP = $400,000; pool = yes - appraiser has determined a pool contributes $15,000 to market value in this subdivision - adjusted sale price of comp $400,000 - $15,000 = $385,000

property adjustment (discrete feature)

Commingle business transactions

real estate sold as part of the business - not clear what the value of the real-estate is

Replacement cost is also not a ______________ cost.

reproduction

Market Value is the most likely ____________ of a property in a competitive market.

selling price

Accrued depreciation is estimated using _____________________ method.

straight-line

property adjustments: rule of sue - if comp is superior to subject, ______________ the value - if comp is inferior, then _________

subtract; add

Reproduction Cost

the estimated cost to build an exact DUPLICATE of the building being appraised.

Market value is the perspective of a _________ buyer.

typical