florida real estate principles, practices & law 39th edition

Florida Real Estate Principles, Practices & Law 44th Edition

Unit 16: Real Estate Appraisal

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Appraisal Regulation

• Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA)

– The Appraisal Foundation

• Appraisal Qualifications Board (AQB)

• Appraisal Standards Board (ASB)

• State-certified appraisers

– Certified residential appraiser

– Certified general appraiser

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Federally Related Transaction

• Real estate-related financial (loan) transaction

– Sale, lease, exchange, financing, etc.

• Involves federal financial regulatory agency

• Requires services of an appraiser

– (state certified or licensed [Unit 1])

• Must be written and conform to USPAP

– Also includes appraisals for Fannie Mae, Freddie Mac, FHA, and VA

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Uniform Standards of Professional Appraisal Practice (USPAP)

• Set of guidelines for appraisal services

– Requires objective and impartial appraisals

– Establishes recordkeeping requirements

– Creates confidential appraiser-client relationship

– Unethical to accept compensation based on value

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F.S. 475 and Appraisal Services

• Licensees may perform appraisals for compensation– Licensees must abide by USPAP

– Cannot perform appraisals for federally related transactions

– Cannot refer to themselves as certified appraiser

• CMAs and BPOs– Do NOT have to comply with USPAP

– Are NOT appraisals

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Concept of Value

• Cost

– Expenditure to create an improvement (labor, materials, and land)

• Price

– Amount paid; the contract price

• Value

– Worth to many buyers and sellers at certain time

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Types of Value

• Assessed value

– Value used as a basis for property taxation

• Insurance value

– Estimate of money need to replace the structure

• Investment value

– Price an investor would pay given investors own financial and income tax situation

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Types of Value

• Liquidation value

– Value associated with a rapid sale

• Going-concern value

– Value of an income producing property or business with significant operating history

• Salvage value

– Estimate for which the improvements can be sold at the end of the structure's useful life

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Market Value

• The most probable price which a property should bring in a competitive and open market under all conditions requisite to a fair sale. Assumes the buyer and seller each act prudently and knowledgeably, and the price is not affected by undue stimulus.

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Assumptions in Market Value

• Value applies to a specific date when title is transferred

• Buyer and seller are typically motivated• Both parties are well informed or well advised,

acting in their own best interests• A reasonable time is allowed in the open market• Payment is made in cash in U.S. dollars or in

comparable financial arrangements• Price is not affected by special financing or seller

concessions

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Characteristics of Value

D Demand

U Utility

S Scarcity

T Transferability

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Principle of Substitution

• A prudent buyer or investor will pay no more for a property than the cost of acquiring, through purchase or construction, an equally desirable alternative property

• Sets upper limit of value

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Highest and Best Use

• The most profitable use of a property, must be

– Legally permissible (zoning)

– Physically possible

– Financially feasible

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Highest and Best Use

• As though vacant– Legal use of a site that would produce the greatest

value– Potential highest and best use of a site determines

its value

• As improved– How a site that has improvements on it can best

be used– Should improvements be demolished, renovated,

or retained in present condition

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More Principles of Value

• Increasing and decreasing returns

– Overimprovement occurs when an owner invests more money in a structure than the owner can reasonably expect to recapture

• Conformity

• Assemblage and plottage

• Progression and regression

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Example of Assemblage

LOT 1

LOT 2

$35,000 $35,000

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Example of Plottage

New Lot

$90,000

Plottage is the amount of increase in value due to assemblage90 – 70 = 20K

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Three Approaches to Estimating Real Property Value

• Appraisers will use all three approaches to estimate value if sufficient data are available for each approach

– Sales comparison approach

– Cost approach

– Income approach

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Relevance of Each Approach

• Sales comparison– Vacant lots in an established neighborhood

– Single-family dwellings

• Income approach– Income-producing properties

• Cost approach– Newly constructed houses

– To cross-check other approaches

– Special-purpose properties

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Sales Comparison Approach

• Value is estimated by reviewing recent sales of comparable properties (comps) similar to the subject property– Sales must have occurred recently in the same market– Comparable properties must be similar to the subject

property• Adjustments are made

– Transactional differences (changes in market conditions since the date of sale)

– Property differences (location, square footage, and so forth)

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Adjustments for Property Differences

• Adjustments are made to each comparable property for differences between the comp and the subject

• CBS

– Comp Better: Subtract

• CIA

– Comp Inferior: Add

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Subject Property

?

Comp 13752 Shamrock Dr

$141,500

Comp 23748 Shamrock Dr.

$136,000

Comp 33619 Shamrock Dr.

$140,000

Home Sold Price $141,500Sold 6 Months ago or 2%2% X 141,500 = +$2,830 Home is Larger by 160 Sq.Ft160 X $60 = - $9,600Adjusted Sale Price $134,730

Comp 1 $134,730 X .20 = $26,946Comp 2 $138,560 X .30 = $41,568Comp 3 $139,000 X .50 = $69,500Total $138,014

Market + 4% per year. Cost per Sq. Ft. $60

Home Sold Price $136,000Sold 3 Months ago or 1%

+$1,360 Home is smaller by 20 Sq.Ft$60 X 20 = +$1,200Adjusted Sale Price $138,560

Home Sold Price $140,000Home sold 0 months agoHome is same sizeLandscaping Better -$1,000Adjusted Sale Price $139,000

Comp 1 $134,730

Comp 2 $138,560

Comp 3 $139,000

Total $412,290

÷ 3 = $137,430

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Adjustments for Transactional Differences

• Financing terms– Appraiser adjusts each comparable for special

financing terms like seller-paid points

• Conditions of sale– Appraiser must research for abnormal pressure on

the buyer or seller

• Market conditions– Appraiser adjusts sale price of each comparable if

market has changed since the comparable sold

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Adjustments for Transactional Differences

• Square footage

– Appraiser adjusts sale price of each comparable based on whether the square footage is larger or smaller than the subject property

• Landscaping

– Appraiser adjusts sale price of each comparable based on the quality of landscaping

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Reconciliation

• Each comp’s sale price is adjusted for differences between the comp compared with the subject

• Each comp is rated in terms of its similarity to subject property

• Rating is reflected in giving weight to each comparable

• The weighed comps determine the indicated value using the sales comparison approach

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Example of Vacant Property Valuation on a lot measuring 110 X 120

(Line 19 page 382

• Sale 1 100 X 120 $36,800 ÷ 12,000 = $3.067 per sq. ft.• Sale 2 110 X 120 $37,000 ÷ 13,200 = $2.803 per sq. ft.• Sale 3 100 X 100 $36,000 ÷ 10,000 = $3.600 per sq. ft.• Sale 4 130 X 150 $39,800 ÷ 19,500 = $2.041 per sq. ft.

• Sale 1 $3.067 X .35 = $1.073• Sale 2 $2.803 X .30 = $0.841• Sale 3 $3.600 X .20 = $0.720• Sale 4 $2.041 X .15 = $0.306

100% = $2.94 per sq. ft.

$2.94 X 13,200 = $38,808

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Subject Property

?

Comp 1$184,500

Practice Question Number 14 Page 383

Bedroom adds $6,000Pool adds $11,000

Comp Price $184,500Minus Bedroom -$ 6,000Plus Pool +$ 11,000Subject Value $189,500

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Subject Property Comparable Property

Vacant lot Vacant lot Location cul-de-sac Interior lot on through-street ( less desirable)Size Average Size Larger

Sale price $27,000

$27,000+ 5,000- 4,000$28,000 Adjusted sale price of the comp

Location value $5000 Size value $4000 Adjusted sale price of the comp? (CBS-CIA)

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Comparable Adjusted Sale Price Weight Assigned Weighted Value

Comp 1 $334,500 35% $117,075Comp 2 $338,700 45% $152,415Comp 3 $369,200 20% $ 73,840

$343,330

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Cost Approach

• A knowledgeable purchaser will pay no more for a property than the cost of acquiring a similar site and constructing an acceptable substitute structure (principle of substitution)

• The maximum value can be measured by determining the cost to acquire an equivalent site and to reproduce a structure as if new, and subtract for depreciation

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Cost Approach Formula

1. Estimate reproduction cost

2. Subtract accrued depreciation (to derive depreciated value of the structure)

3. Estimate the value of the land

4. Add land value to depreciated value of the structure to derive indicated value

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Step 1: Estimate Reproduction Cost

• Reproduction cost – Cost to duplicate a structure exactly

• Replacement cost – Cost to build structure with same use and function but

not exact copy• Estimate cost using

– Comparative square-foot• Comparative unit or unit comparison• Cost estimation handbook• Cost estimate based on current cost to construct a

building of same size, design and quality

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Figure 16.2 Comparative Square Foot Method

Estimated Reproduction cost:

Main dwelling 2110 sf@ $80 per = $168,800Utility room 117sf@ $52 per = 6,084Entrance porch 75 sf@ $32 per = 2,400Garage 412sf@ $45 per = $18,540

Total estimated reproduction cost of structure $195,824

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Step 2: Subtract Accrued Depreciation

• Accrued depreciation represents the loss in value between the subject and an exact new replica

• Land is not depreciated

• A defect is curable if it is cost-effective to correct (increase in value is at least equal to cost to correct)

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Types of Depreciation

• Physical deterioration– Loss in value due to ordinary wear and tear– Caused by use, lack of maintenance, exposure to

elements• Functional obsolescence

– Loss due to operational inadequacies, poor design, or changing tastes

– Overimprovement is also functional obsolescence• External obsolescence

– Loss in value due to something outside of property lines

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Age-Life Method

• Majority of appraisers take into account the observed condition of the subject property

• Based on a ratio of property’s effective age (age indicated by structure’s condition and utility) to its economic life (total years a structure is profitably useful)

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Accrued Depreciation Formula

• Effective age ÷ Total economic life ×Reproduction cost new = Accrued depreciation

• Alternative method

– Reproduction cost new ÷ Total economic life = Annual depreciation

– Annual depreciation × Effective age = Accrued depreciation

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Accrued Depreciation Example line 10 page 386

Age Life Method

Effective age ÷ total economic life X reproduction cost new = Total accrued depreciation

10-year-old bldg. has an effective age of 4 yearsReproduction cost as though new is $225,00060-year economic lifeWhat is the accrued depreciation?

4 ÷ 60 (Economic life) X 225,000 (Repro cost new) = $15,000 Accrued Depreciation

Age life method also called straight line

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Steps 3 and 4: Cost Approach

• Estimate land value using sales comparison approach (include non-structural site improvements)

• Add land value to arrive at a final value

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Income Approach

• Measures a flow of income projected into the future

• Market value is estimated based on the present worth of future income

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Types of Income

• Potential gross income

– Annual income if fully rented, no collection loss

• Effective gross income

– PGI less vacancy and collection losses (plus non-rental income)

• Net operating income

– EGI less operating expenses

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Operating Expenses

Three types of expenses that contribute to operation of property

1. Fixed expenses• Property taxes and hazard insurance

2. Variable expenses• Maintenance, utilities, supplies, etc.

3. Reserve for replacements• Allowance for future replacement of building

components

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Operating Expenses

• Not included in operating expenses

– Depreciation

– Costs of mortgage

– Personal expenses

– Income taxes

– Any expense that does not contribute to the operation of the property

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Formulas

Effective Gross Income (EGI) formula

Potential Gross Income (PGI) – VC + other miscellaneous income = EGI

Net Operating Income (NOI) formula

Effective Gross Income (EGI) – Operating expenses = NOI

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Income Capitalization Approach

Potential Gross Income PGI- Vacancy & Collection Losses -V&C+ Other non rental Income +OIEffective Gross Income EGI- Operating Expenses -OENet Operating Income NOI

46

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IRV Formula

• I = Net Operating Income (NOI)

• R = Capitalization Rate

• V = Value (or sale price)

I

• Rate × Value = NOI R x V

• NOI ÷ Value = Rate

• NOI ÷ Rate = Value

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Reconciliation of Final Values

• The appraiser gives weight to each approaches value (usually a percentage)

• An appraiser who used all three approaches for a single-family house

– May give a higher percentage to the sales comparison approach than to the other two approaches

– Actual sales of comps are a better indicator of the property’s value

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Practice Question 22 page 391.

Net income of $60,000Sells for $400,000What's the capitalization rate?Income ÷ Value = Rate

60,000 ÷ 400,000 = .15 15% Cap rate_______________________________________________________________Practice Question 23 page 391.

Annual net income is $75,000Investor wants 15% return on investment How much should he invest?Income ÷ Rate = Value

75,000 ÷ .15 = $500,000 Investor needs to spend

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28.Reconcile the three values to estimate the value of the subject property

Approach Indicated Value Weight Weighted Value

Sales Approach $260,000 55% $143,000Cost Approach $228,000 35% $ 79,800Income Approach $220,000 10% $ 22,000

Final Estimate of Value $244,800

Practice Problem Number 28 Page 392

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Gross Multipliers

• Gross rent multiplier (GRM) is the ratio between a property’s gross monthly rent and its selling price

• Gross income multiplier (GIM) uses annual income; includes income from rent and other sources

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GRM Steps

• Estimate gross monthly rent for subject property• Calculate a market-derived GRM by taking sale

price of comparable properties and dividing by gross monthly rent

Sale price ÷ gross monthly rent = gross rent multiplier

• Calculate the average GRM from several comps• Multiply gross monthly rent of subject by GRM to

estimate value of subject propertyRental income × market area GRM = estimated market value

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Gross Income Multiplier GIM

A commercial property produces $50,000 of annual gross income. The property recently sold for $400,000. What is the property’s GIM?

$400,000 sales price ÷ $50,000 gross Annual Income = 8.0 GIM

Subject property can generate $58,000 annual gross income. Subject’s value?

$58,000 X 8.0 (GIM) = $464,000 value of subject

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Practice Question 29.

Market area GRM of 126.5Gross Monthly rent $1500Market value? 1500 rent X 126.5 = $189,750

30. Market Value? GIM 12.5Gross ANNUAL income $25,500 25,500 Income X 12.5 GIM = $318,750

31.GIM?$425,000 sale price$72,000 Gross annual income 425,000 ÷ 72,000 = 5.9 GIM

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Comparative Market Analysis (CMA)

• Licensees prepare CMAs to help buyers and sellers make informed decisions

• NOT an appraisal report

• Three major categories of comparables

1. Recently sold

2. Currently on the market

3. Recently expired listings

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VALUE OF 200 SF = $20,00

Subject Comp200 sf less 200 sf larger

If the comp is BETTER, then CBS

d. Subtract $20,000 from the COMPARABLE

Unit 16 Exam Question 8

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14.

Reproduction cost: 1800 sf + 200sf garage$48 sf + $28 sf

Site: 75 X 110 @ $3 sfEconomic Life: 50 Years House is 10 years oldValue of the property???

1800 X 48 = $86,400 House 200 X 28 = + 5,600 Garage

$92,000 Reproduction cost new

$92,000 ÷ 50 = $1840 /year X 10 years = $18,400 Accrued depreciation


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$92,000 Reproduction cost new- 18,400 Accrued depreciation$73,600 Value of depreciated structure

Land 75 X 110 = 8250 sf X $3 sf = $24,750 Value of the land

$73,600 Depreciated structure+ 24,750 Land value

$98,350 Value of the property

Unit 16 Exam Question 14 Continued

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15.

$4000 Monthly Net income1000 Monthly expenses

12% ROI (Return on Investment)Purchase price?

4,000 X 12 months = $48,000 NOI

Income ÷ Rate = Value 48,000 ÷ .12 = $400,000 Purchase price


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16.

PGI $81,420 Value is $250,000- VC 8140 Rate??EGI $73,278- OE 40,000NOI $33,278

$33,278 ÷ $250,000 = .133112 or 13.31%


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18.

Value of a two-car garage is $18,000. What’s the value of the subject property?CBS CIA

Subject property Comparable

2 car garage no garage Value? $226,000 sold price

Comparable is CIA (inferior) so add $18,000 to the comp.


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19.

Value $150,000 Rate 8% NOI is 40% of EGI What is the EGI?

$150,000 X .08 = $12,000 Partial Income

12,000 ÷ .4 = $30,000 EGI


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20.

PGI $40,000V & C 5%Operating expenses $12,920First mortgage payment $1070.75/monthCap rate 12% Properties value???

PGI $40,000-V&C 2,000

- EGI $38,000-OE 12,920

NOI $25,080

$25,080 ÷ .12 = $209,000 Value


florida real estate principles, practices & law 39th edition

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