Unit 17: Real Property Valuation 1 Learning Objectives: - PDF document

10/29/2019 Unit 17: Real Property Valuation 1 Learning Objectives:  Licensing requirements for valuation services  Multiple types of valuation and their implications  Steps to the appraisal process  Investment property valuation  Depreciation  Reconciliation  The appraisal profession 2 Appraising • Licensed by state • Certified residential appraisers • Certified general appraisers (commercial) • Pay based on time & complexity • not commission or appraisal amount 3 1

10/29/2019 Appraising FIRREA – Financial Institutions Reform Recovery & Enforcement Act • Regulates thrift industry (S&L, Credit Unions) • Mostly to regulate appraisers on federally related loan transactions • Appraisal Qualification Board • Appraisers do not need to be real estate agents 4 Appraising Informal estimate of value by real estate brokers 1. Comparative market analyses are an exemption to the North Carolina Appraisers Act if real estate brokers never represent themselves as an appraiser. 2. CMAs should refer to probable sales price and never to market value . 5 Appraising Broker Price Opinions • For non-brokerage clients. • Full brokers may perform BPOs for a fee to non-brokerage clients. • Must be in writing • Probable selling price • BPO & CMA same meaning in NC 6 2

10/29/2019 Value The relationship between an object desired and a potential purchaser described as present worth of future benefits Characteristics of Value 1. D emand 2. U tility DUST 3. S carcity 4. T ransferability 7 Market Value M ost probable price in a competitive & open market (1) Payment must be in cash or its equivlant (2) The buyer and seller must be unrelated and acting without undue pressure (an arm’s length transaction ) 8 Market Value M ost probable price in a competitive & open market (3) A reasonable length of time must be allowed for the property to be exposed in the open market (4) Both parties must be well informed of property’s use and potential, including assets and defects 9 3

10/29/2019 Value Market value versus Market price 1. Market value —a value estimate based on the analysis of comparable sales and other pertinent market data; list price 2. Market price —what the property actually sold for; sales price 10 Value Market value versus cost • Cost —past expenditures on the property • Cost does not equal market value. • But can be close if improvements are new. 11 Forces and Factors Influencing Property Value 1. Social forces —such as marriage and divorce rates, family size, and social activities 2. Economic forces —such as income and employment levels and interest rates 12 4

10/29/2019 Forces and Factors Influencing Property Value 3. Political forces —such as zoning, building codes, and environmental issues 4. Physical Forces – topography, location, climate, size, shape, promimity to major arterials, public transportation, jobs 13 BASIC ECONOMIC PRINCIPLES OF VALUE 1. Highest and Best Use – only one at a time 2. Substitution – when several items with essentially the same amenities and utilities are available, the lowest price will affect the most demand 14 BASIC ECONOMIC PRINCIPLES OF VALUE 3. Supply and Demand – value will change if supply decreases and the demand increases or remains the same 15 5

10/29/2019 BASIC ECONOMIC PRINCIPLES OF VALUE 4. Conformity—maximum value is realized if property conforms to existing neighborhood standards 16 Forces and Factors Influencing Property Value 5. Anticipation – Value can increase or decrease in anticipation of some future benefit or detriment affecting the property 17 Forces and Factors Influencing Property Value 6. Contribution - Is the expense of improvement equal to the increased market value? Over-Improvements 18 6

10/29/2019 Forces and Factors Influencing Property Value 7. Competition —excessive profits tend to attract ruinous competition 19 Forces and Factors Influencing Property Value 8. Change —life cycle of value includes growth, stability, decline, and renewal 20 The Appraisal Process Orderly set of procedures used to collect and analyze data to arrive at a value conclusion 1. Specific data—Subject properties & comparison properties 2. General data—Neighborhood 21 7

10/29/2019 The Appraisal Process 8 Steps 1.State the problem: what type of value is being sought? 2. Determine & perform scope of work 3.Collect and analyze the data needed and the sources 4.Determine the highest and best use of the site. 22 The Appraisal Process 5.Estimate the land value, usually by a sales comparison analysis 6.Estimate the value by each of the three approaches 7.Reconcile the estimated values for the final value estimate 8.Report the final value estimate (see Figure 17.1 ) 23 Approaches to Value - (Appraisal Methods) Three Approaches (techniques) to Arrive at an Accurate Estimate of Value 1. The sales comparison approach 2. The cost approach 3. The income capitalization approach 24 8

10/29/2019 Approaches to Value - (Appraisal Methods) The Sales Comparison Approach (see Figure 17.2) • Aka Market Data Approach • An estimate of value is obtained by comparing the subject property (the property under appraisal) with recently sold comparable properties (properties similar to the subject) • Best indicator of value for residential properties and land 25 Approaches to Value - (Appraisal Methods) The Sales Comparison Approach (see Figure 17.2) Comparable properties — the intent is to adjust the comparables to be identical to the subject a. Date of sale —The closer the sale, the more relevant the price b. Location —Neighborhood differences c. Physical features —physical differences between the comparable properties and the subject d. Terms and conditions of sale —Arm’s length transaction 26 27 9

10/29/2019 Approaches to Value - (Appraisal Methods) The Sales Comparison Approach (see Figure 17.2) Selecting Comparables 1.Comparable should be as similar as possible to subject 2.Comparable should have sold within the last 120 days 3.At least 3 comparables 28 Approaches to Value - (Appraisal Methods) The Sales Comparison Approach (see Figure 17.2) Do not use as comparables 1.Active listings, expired listings, or under contract properties which do not have a sales price 2.Abnormal transactions such as owner- financed, non-arm’s length, or distressed property sales (i.e. foreclosures or short sales) 29 Approaches to Value - (Appraisal Methods) The Sales Comparison Approach (see Figure 17.2) Adjustments are made as follows: 1.If comparable is superior or has a feature that the subject property lacks, the value of the comparable is decreased by the market value of the feature 2.If comparable is inferior or lacks a feature that the subject property has, the value of the comparable is increased by the market value of the feature 30 10

10/29/2019 Approaches to Value - (Appraisal Methods) The Sales Comparison Approach (see Figure 17.2) 3. A single value must be determined using a weighing process called correlation, not simple averaging NEVER NEVER NEVER adjust the price on the subject property 31 32 Approaches to Value - (Appraisal Methods) The Sales Comparison Approach (see Figure 17.2) Comparative market analysis (CMA) —informal version of the sales comparison approach 1.Determines a range of probable sales prices 2.A client-level service a. A dual agent must perform a CMA for both clients (not necessarily the same CMA) b. A CMA cannot be performed for a customer/third party 33 11

10/29/2019 Approaches to Value - (Appraisal Methods) The Cost Approach (see Figure 17.3) 1.Estimate the value of the land 2.Estimate the current cost of constructing 3.Estimate the amount of accrued depreciation 4.Deduct depreciation from cost to build new 5.Add land value to depreciated cost of building(s) 34 Approaches to Value - (Appraisal Methods) The Cost Approach (Cont.) Determining reproduction or replacement cost 1.Reproduction cost—cost of an exact duplicate at current prices; mainly historical properties 2.Replacement cost—current cost of improvements with utility or function similar to subject property; most common calculation 35 Approaches to Value - (Appraisal Methods) The Cost Approach (Cont.) Methods of estimating reproduction or replacement cost (1) Square-foot method—based on the average; most widely used method (2) Unit-in-place method—based on the installed costs of components 36 12

10/29/2019 Approaches to Value - (Appraisal Methods) The Cost Approach (Cont.) Methods of estimating reproduction or replacement cost (3) Quantity survey method—based the raw materials plus the cost of the construction labor plus indirect costs; most exact method 37 Approaches to Value - (Appraisal Methods) The Cost Approach (Cont.) Depreciation – 3 Classes 1. Physical deterioration: Curable—normal wear and tear • Incurable – structural components • 38 Approaches to Value - (Appraisal Methods) The Cost Approach (Cont.) Depreciation – 3 Classes 2. Functional obsolescence: • Curable— physical or design features than can be replaced or remodeled. • Incurable – features that can not be easily remedied 39 13