Real Estate REE 3043 Chapter 7 Material Value Concepts Market Value o Most probable selling price assuming normal sale conditions o Value the typical market participant places on a property Investment Value o Value each particular individual places on a property Transaction Price o Price actually paid for a specific property Why Estimate Market Value In Real Estate o Every property is unique heterogeneous o Markets are local illiquid highly segmented and informationally inefficient Who Uses Market Value Appraisals Buyers Sellers Corporate acquisitions mergers or dissolutions Courts o Divorces o Eminent domain cases o Settlement of estates o Bankruptcy Mortgage Lenders Uniform Standards of Appraisal Practice USPAP Maintained by the Appraisal Foundation the Uniform Standards of Professional Appraisal Practice USPAP are required followed by all states and federal regulatory agencies To comply with USPAP appraisers must follow the following framework or process The Appraisal Process 1 Identify the appraisal problem Client intended use of appraisal Date of the assignment date of valuation Purpose of Assignment o Market Value o Insurance Value o Taxable Value Important assumptions or conditions 2 Determine the Scope of the Work Time personal requirements Data procedures used to complete required tasks Outline of proposed appraisal report 3 Collect Data and Describe Property Market area data Subject property data Comparable property data 4 Perform Data Analysis Market Analysis o Demand supply and marketability studies Highest best use o As through vacant considers any possible use o As improved must consider any cost of demolition 5 Determine Value of Land Important to value separately from improvements 6 Apply the three approaches to valuation Sales Comparison Approach Cost Approach Income Approach 7 Reconcile indicated values from the three approaches Reconcile based on the estimates from each approach Reconcile based on the relative reliability of the three approaches 8 Report Final Value Estimate Report writing is an extremely important function Must meet requirements of 1 of 3 reporting options o Self contained Report Contains full detail and information Usually a full narrative approach o Summary Report Majority of data and analysis kept in appraisers work file o Restricted Report Provides minimal info discussion Client does not intend to provide appraisal to anyone else Three Approaches of Estimating Value Sales Comparison Approach Cost Approach Income Approach Basic Idea o Value of subject property determined by analyzing the sale prices of similar properties o Assumes that in a competitive market close substitutes sell for similar prices Sales Comparison Approach Selecting Comparables o Must be properties that prospective buyers would consider substitutes o Should be arms length transactions Fairly negotiated prices that occurred under normal conditions e g not a distressed sale sale between related parties or sale that includes other assets o Select to minimize required physical and location adjustments Make adjustments to the comparables to estimate of subjects value Adjustments to Comparable Sale Prices o Sequence of adjustments Transactional adjustments Property rights conveyed not typical Financing terms not typical Conditions of Sale not typical Market conditions Property Adjustments Location Physical characteristics Economic characteristics not typical Use not typical Non real estate items in sale price not typical Example of Sales Comparison Approach o You are asked to determine the value a single family house The home is a one story frame dwelling with 8 rooms and 2 baths in a total area of 2 000 sq ft The home is of average quality construction and was in good condition at time of inspection The floor plan items of equipment are typical for this class of property The home is located adjacent to a high speed freeway o Info on 4 Comparables Comp 1 2 400 sq ft home not adjacent to freeway sold 1 year ago for 160 000 This bldg is otherwise similar to subject in all but size Comp 2 2 400 sq ft home not adjacent to freeway sold this year for 150 500 This bldg is otherwise similar to subject in all but size Comp 3 2 000 sq ft home not adjacent to the freeway sold 1 year ago for 150 000 The bldg is otherwise similar to subject in all but size Comp 4 2 400 sq ft home located next to the freeway sold this year for 140 300 This bldg is otherwise similar to subject except for size Determine the indicated value of the subject o Problem Subject as 2011 yes 2 000 Comp 1 160 000 2010 no 2 400 Comp 2 150 500 2011 no 2 400 Comp 3 150 000 2010 no 2 000 Comp 4 140 300 2011 yes 2 400 Sale Price Sale Date year Location freeway Size of Property SF o Required Adjustments Time Location Size o Adjustment Factors o Time Comp 1 1 year ago 160 000 Comp 2 current 150 500 o Location o Size Difference Comp 2 not adjacent to freeway 150 500 Comp 4 adjacent to freeway 140 300 10 200 Difference Comp 1 2 400 sq ft 160 000 Comp 3 2 000 sq ft 150 000 10 000 Difference 9 500 Summary Data Grid Sale Price Sale Date year Location freeway Size of Property SF Subject as 2011 yes 2 000 Comp 1 160 000 2010 no 2 400 Comp 2 150 500 2011 no 2 400 Comp 3 150 000 2010 no 2 000 Comp 4 140 300 2011 yes 2 400 Sale Price Adjustment Grid Sale Price Sale Date year Location freeway Size of Property SF Adjusted Sale Price Subject Comp 1 160 000 9 500 10 200 10 000 130 300 Comp 2 150 500 0 10 200 10 000 130 300 Comp 3 150 000 9 500 10 200 0 130 300 Comp 4 140 300 0 0 10 000 130 300 130 300 Indicated Value using the Sales Comparison Approach Note Adjustments can be positive or negative They are all negative here because subject property is inferior to the comparables in all ways that matter to the market In the Real World o In real life situations indicated values never line up identically as in previous example o Property prices consist of many attributes and sales prices include some personal preferences Only those attributes deemed to be material to the value can be adjusted Take a look at exhibits 7 8 7 12 Exhibit 7 6 Sequence of Adjustments Adjustment Grid for 2380 Appletree Ct Reconciliation of Adjusted Sale Prices Procedure Cost Approach o Estimated reproduction costs of improvements Estimated accrued depreciation Depreciated cost of building improvements Estimated value of site Indicated value of the cost approach Major Assumption o The cost of creating a good equals its value Two Concepts of cost o Replacement cost