Real Estate Valuation Exam 1
comparable property
"a property similar to the subject property being appraised that recently sold at arm's length, where neither the buyer nor the seller was acting under significant financial pressure."
Maximally Productive
- determine the highest and best use of land as though vacant, for each alternative use being tested, the cost to develop the requisite improvements is deducted from the value of the property as if complete to calculate the residual land value. The use that produces the highest land value on the effective date of the appraisal is the highest and best use - Land sales can be used to test which alternative is maximally productive when the comparable plots of land have the same or similar highest and best use conclusions as the subject property
Steps in the Valuation Process
- identify client and intended users - identify intended use - identify the type and definition of value - identify the effective date (current, retrospective, prospective) - Identify relevant characteristics of property - identify any assignment conditions
implications of "if you can't finance it, you can't sell it"
- if financing isn't available, pool of buyers becomes smaller - will have to use almost all cash to buy property - equity has higher cost of funds / lower returns than debt -More equity > Higher cost of funds > lower anticipated return > lower value
property adjustments
-Location -Physical characteristics -Economic characteristics - legal ( use and zoning) - non realty components of value
Debt Payment Calculation
1) property value x LTV % = mortgage 2) property value - mortgage = equity 3) mortgage = pv, fv=0, i/y = interest %, n=years amortized, CPT PMT = debt service
how to calculate noi
1) sf x lease rate = potential gross income (pgi) 2) pgi - vacancy & loss % = effective gross income 3) effective gross income - expenses = NOI
Understand 5 Steps of Sales Approach
1. Research Market to find comps the most important step 2. Verify comp info 3. Select unit of comparison (price per sf acre etc) 4. Adjust for differences 5. Reconcile value indications of comps
Overimprovement
An addition or change to property not in line with its highest and best use, or a betterment that exceeds that justified by local conditions.
Underimprovement
An improvement which, because of its deficiency in size or cost, is not the highest and best use of the site.
Macro level data
Items of information on value influences that derive from social, economic, governmental, and environmental forces and originate outside the property being appraised
surplus land
Land that is not currently needed to support the existing use but cannot be separated from the property and sold off for another use. Surplus land does not have an independent highest and best use and may or may not contribute value to the improved parcel (house in middle of plot, no room for breaking it up into two separate plots)
excess land
Land that is not needed to support the highest and best use - can be sold off as an individual plot and has more value than surplus land (land on side of house)
non conforming uses
Land uses that began before the last zoning change that are not consistent with the currently permitted use
Debt Coverage Ratio Formula
NOI / Debt service amt
how to find property value
NOI/Cap Rate
plottage
The increase in value or utility resulting from the consolidation (assemblage) of two or more adjacent lots into one larger lot.
Physically Possible - What can you do with it?
The physical possibilities of the vacant land are quickly constrained by factors such as site size, shape, frontage, availability of utilities and other support services, topography, soil composition, and other site conditions and environmental and locational factors
sales comparison approach
The process of estimating the value of a property by examining and comparing actual sales of comparable properties.
subject property
The property that is being appraised.
interim use
The temporary use to which a site or improved property is put until it is ready to be put to its future highest and best use.
Financially Feasible - What uses that pass first two tests make sense financially
Timing of use is a critical consideration - have a positive present residual land value for current development can proceed to the next step of highest and best use analysis - Any uses that are not worth, what they cost to produce would be eliminated in the tested financially feasible
important qualities in a property
access, frontage, exposure
sba (subject better add)
add value to subject if the specified feature is better on subject compared to comp
adjusments based on qualitative data
adjustments based on whether subject is superior, similar, or inferior to comps
Theory of Balance
both the relationship between land and improvements and the relationship between a property and its environment must be in balance for a property to achieve its optimum market value
adjustments based on quantitative data
can be mathematically calculated
what are the three valuation approaches
cost, sales comparison, income
property type market data
data about the subject property type from surrounding buildings of the same type
micro level data/ local market area data
details about the specific property being appraised, sales and lease transactions of comparable properties, and local market characteristics relevant to the analysis of the subject property
HBU as improved
focus on alternative uses considers three possible actions related to the current improvements: - retain improvements - modify improvements - demolish improvements and redevelop land
HBU as vacant with no improvements but ready for development
focuses on alternative uses of land, appraisers want to know is land developed or vacant: future development be feasible and improvements to be built
fundamental demand analysis
forecasts future demand based on segmentation of demographic and economic data to reflect the subject property's specific market. . Demand for new apartments can be projected based on forecasted population growth divided by avg household size, divided by % of households who are renters = projected need for new apartment units
frontage
front of property borders something like highway, lake etc
exposure
high visibility of site from street
transactional adjustments
in an appraisal, adjustments to comparable property transaction prices that concern the nature and terms of the deal property rights conveyed, financing terms, conditions of sale, expenditures made immediately after purchase, market conditions
cost valuation approach
land value plus what does it cost to build, less depreciation
covid impact on multifamily
landlords having trouble with tenants being able to pay rent, higher demand for multifam than there is a supply, healthy growth in rent since pandemic
covid impact on office
less demand/ occupancy,
Levels of market analysis level A&B:
less intense, based on current market conditions and published data
importance of verification
more complex a property is, more verification is needed
levels of market analysis level C&D
more intense, identify present demand and forecast future demand based on segmentation of broad demographic and economic data to analyze subject's specific market (focuses on economic forces that generate demand)
covid impact on retail
more online shopping, retail suffers
cash flow calculation
noi - debt service
what are the 4 hbu tests?
physically possible, legally permissible, financially feasible, maximally productive
cbs (comp better subtract)
subtract value if subject is inferior to comp
Theory of Subsitution
the value of property tends to be set by the cost of acquiring a substitute or alternative property of similar utility and desirability within a reasonable amount of time
types of adjustments
transactional & property adjustments
income valuation approach
value of income from property
reliability continuum
when different levels of demand analysis are appropreate - the more complex, the deeper analysis needed.
Legally Permissible - What can you LEGALLY do with it?
zoning laws, subdivision covenants, deed restrictions, leases, or other contractual obligations of the property owner