Estimating Value

Reconciliation means

analyzing the findings from the approaches used, and then weighing the findings that each provided. It`s the appraiser`s responsibility to resolve the differences in values in order to arrive at one suggested value.

Once the sales comparison is complete, and depending on the type of property, the appraiser may

apply other approaches to value (e.g., cost and income). If more than one approach is applied, the appraiser will then reconcile (weigh the merits of each approach and rely more heavily on one or equally on all approaches applied) to estimate the final value.

In Reconciliation

appraisers rely on their experience, expertise, and professional findings to resolve differences between the comparable properties when using the different approaches to determine the value of the subject property.

When physical depreciation or functional obsolescence is present, the appraiser determines if the situation is

curable or incurable The appraiser describes these conditions in comments and also indicates the cost to cure if repairs and replacements are feasible.

To determine value using the cap rate formula,

divide annual income by the cap rate (I/R=V)

to determine cap rate,

divide annual income by value (or sales price) (I/V=R)

GRM

doesn`t take into account any operating costs; it`s a rough estimate of how income relates to value and is best used for one- to four- family units where the primary use is a rental property. Because it is a rough estimate, it`s used in conjunction with comparable sales in the area to arrive at a property value.

Gross Income Multiplier (GIM)

essentially the same as GRM but it uses all sources of income from the property rather than only rent. the multiplier is found from a comparable property by diving the sales price by the property`s income to determine value. Larger properties generally have multiple income sources such as laundry, vending machines, or parking meters rather than smaller income properties where rent is often the only source of income. Therefore, this is more suitable for five-unit or larger income properties.

Income Approach to Appraising Property

helps you and your client determine if a property might meet the desired rate of return.

Incurable Depreciation

includes items not practical to correct. Examples are a furnace or a roof that hasn`t reached the end of its economic life.

Income approach

is also known as the income capitalization approach. it estimated the present value of any future benefits of owning a particular property. It`s based on the value principle of anticipation.

The reproduction cost

is the cost to build an exact replica of the subject, with the same materials and deficiencies.

To determine income using the cap rate formula,

multiple the cap rate by the value (RxV=I)

Curable Depreciation

refers to an item that can be repaired or replaced and where the cost to cure the item is less than or the same as the anticipated increase in the property`s value after the item is cured. Items of deferred maintenance such a painting or repair of faucets. the cost to cure should be reasonable or economically feasible.

The replacement cost

reflects the cost to build a functionally equivalent improvement.

The principle of substitution

sales comparison approach relies on the value principle of substitution, which says that the value of property is equal to the value of an equivalent substitute property. However, since every property is different, appraisers follow a process of adjustment to comparable properties (the substitutes) when estimating the value of a subject property. Think of it as a way to compare apples to apples when you`re starting out with Granny Smith, Honeycrisp, and Gala Apples.

The sales comparison approach to value

sales comparison approach that uses a process of comparison with similar properties that have a known sale price to determine a subject`s market value. Most reliable of the three approaches when appraising single-family homes for market value.

Yield Capitalization

similar to direct capitalization but projects farther into the future than one year. it also considers the potential value of the property upon resale. An expected rate of return is applied to income from the entire holding period to find the current property value. Think of it as the total return of the investment expressed in an annual rate. Yield capitalization is most often used for larger properties where the investor wants a value based on long-term holdings, along with the effect of debt repayment and potential resale of the property on the ultimate return on investment.

Steps taken in the reconciliation process

the appraiser conducts a thorough review of the work done on the project to ensure to the best of their ability that all the gathered data is correct. next, the appraiser uses their best judgement to arrive at a value final estimate.

When doing the appraisal reconciliation

the appraiser must look carefully at the alternative conclusions and from those, select their final opinion of the value.

Determining indicated value

the cost approach determines this by estimating the reproduction cost of the new improvement and subtracting the amount of depreciation from all causes described above. then the appraiser adds an estimate of the site value as if it were vacant and available to be developed to its highest and best use.

the gross income multiplier is

the sales price divided by gross annual income.

Direct Capitalization

this method calculates a net operating income (NOI) for a property over the next year, then applies a capitalization rate to that income to derive a market value for the property the capitalization rate is found by analyzing the sales price and income of comparable properties. The formula to calculate cap rate is R=I/V where R is the cap rate, V is the property value (the sales price of a comparable) and I is the net operating income. Direct capitalization is generally appropriate for small- to medium- sized properties and those with stable forecast net income. can find the value by using V= I/R

The Cost Approach

to finding appraised value measures value as a cost of production, including the acquisition of the land and the construction costs. Its reliability depends on valid reproduction cost estimates and appropriate estimates.

Gross Rent Multiplier (GRM)

use this by dividing the sales price of a comparable property by that property`s monthly or annual gross rent to arrive at a single number which is your GRM. That number is then multiplied by the subject property`s anticipated monthly or annual gross rent to arrive at a property value.

Three types of depreciation considered

1. Physical depreciation: loss in value caused by deterioration in physical condition 2. Functional obsolescence: loss in value caused by defects in design, such as a poor floor plan or atypical or inconvenient sizes/ types of rooms. examples include: houses where there are bedrooms on a level without a bath(s), or where the only access to a bedroom is through another bedroom. 3. External depreciation or "economic obsolescence" is a loss in value caused by an undesirable or hazardous influence offsite. Examples are heavily trafficked areas, industrial odors, or airport noise.

Determining cost

1. Use published indexes and tables to source the data, such as Marshall & Swift Tables™. 2. The cost is then adjusted by its loss in value due to depreciation from all causes. 3. Accurate site value is required as a separate figure. (The sales comparison approach is used most commonly to estimate this value.)

The process appraisers follow when conducting the sales comparison approach

1. analyze the subject property to identify its characteristics, particularly those that are in demand in the current market. 2. Identify comparable properties that have been recently sold. 3. Compare the comparables to the subject property and make adjustments to the sales price of the comparables where they are different. 4. Use the data to arrive at an opinion of value for the subject property on the date of appraisal.

Importance of the "drive by"

Appraisers must at least drive by comparables, partially to uncover information not found in the records (such as MLS history) that will necessitate adjustment to the comparables. A drive-by can identify a new circular drive, evidence of foundation shifting, a worn-out roof, superior or inferior view, and traffic or other nuisances such as airport noise. Adjustments must be made to comparables for items like these. Another reason for driving by potentially comparable properties (after the subject site visit) is that it gives the appraiser the chance to place the subject property and comparables within the context of the neighborhood and the larger market. Often, a drive-by causes the appraiser to redefine subject neighborhood boundaries to capture properties more similar to the subject, or to choose more suitable comparables.

Calculate the projected net operating income for a property over the next year, then apply a capitalization rate.

Direct Capitalization

Two Categories of Comparison

Elements of Comparison: analyze comparables` locational/physical property characteristics and transaction differences. They explain why different prices are paid for comparables. Units of comparison: allow the comparison to be standardized. Units may be priced per square foot, per apartment unit, per acre, etc.

Divide the sales price of a comparable property by its total gross income. Use the result on the subject property to determine a value.

Gross Income Multiplier

Divide the sales price of a comparable property by its gross rental income. Use the result on the subject property to determine a value.

Gross Rent Multiplier

Bracketing

Lenders like to see the subject property "bracketed" in several ways. Bracketing is a process in which an appraiser determines a probable range of values for a property by comparing a group of comparable sales to the subject. The appraiser attempts to include both superior and inferior units of comparison such as age, transaction price, etc. For example, comparables that are five and 15 years old bracket a subject that is 10 years old.

Cost approach is most often used in these circumstances:

New construction of both residential and commercial property Unique properties, such as highly energy-efficient houses, residential acreage with excess land, and high-dollar houses with many amenities Special-purpose commercial uses, such as hospitals, some manufacturing plants, hotels, and other single-purpose properties.

Making adjustments

The appraiser identifies at least three comparables to use, then makes adjustments to the sales price of the comparable properties to estimate the value of the subject property. If the subject property has a superior amenity (a two-car garage while the comparable property has a one-car garage, for example), the sales price of the comparable property is increased by an appropriate amount or factor. If the subject property is inferior in an area (for example, the yard is not well-maintained, while the comparable property is beautifully landscaped), the sales price of the comparable property is decreased. The amount of the adjustment is based on the value of the item in the market. For example, if the comparable home has a fireplace and the subject property doesn't, and homes with fireplaces sell on average for $1,000 more, then the comparable property's sales price is adjusted down by $1,000.

Some questions that test comparability

The appraiser selects comparable properties that are as similar as possible to the subject property by evaluating certain characteristics. Is the subject property held in fee simple interest? Will the transaction be for the fee simple estate? Are the comparables also fee simple? Is the subject property or comparable sale subject to easements (e.g., ingress/egress access) or encroachments (e.g., a neighbor's fence overlaps the property boundary)? Are there any deed, easement, or leasehold restrictions? Was the comparable sold with advantageous financing or as distressed property? Was the comparable sale executed at arm's length? Or was the sale between relatives or transacted under any duress such as a forced sale before bankruptcy? Was any personal property included in the sale price (e.g., a detached spa, a boat included with lakefront property)?

Applying Elements of Comparison

To be able to make valid computations of adjustments, the elements of comparison must be applied in this order. 1. Financing terms and cash equivalency: This is often offered by builders for new construction or as seller concessions in resale transactions. 2. Conditions of sale: Was it an arm's length transaction? Were personal items included, or fixtures excluded? 3. Market conditions at time of contract and closing. 4. Location: Underwriters assume appraisers understand the local marketplace, and will accept comparables that exceed distance, time, or other guidelines, if the appraiser supports the decision with written, detailed explanation that demonstrates that local expertise. 5. Physical characteristics: This includes the site, view, construction quality, amenities, size, etc.

Apply an expected rate of return to income from the entire holding period to find the current property value.

Yield Capitalization

Depreciation

a loss in value

Site Value

added to the depreciated value of the improvements to estimate the value by the cost approach. Example: The appraiser determines the site value of the subject is $25,000, and the cost of the improvements is $100,000. The incurable depreciation (due to age of the improvements) is $10,000. The curable depreciation estimate is $2,000 (say, for replacing fencing and broken gutters). No functional obsolescence was noted. The value estimated by the cost approach is $113,000. $25,000 (site value) + 100,000 (replacement cost) - 10,000 (incurable depreciation) - 2,000 (curable depreciation) = $113,000 (estimated value)