Appraisal Flashcards
Comp sales approach
1-Find comps
2- Adjust them over time and based on certain characteristics to reflect the subject more accurately
3- Estimate market value
Gross Income Multiplier (GIM) (And NIM)
Estimates relationship between immovable’s PGI and its sales price
Must use EGI
Sales price ÷ annual PGI, apply mean of value to subject’s annual PGI
NIM is same but uses NOI
Mortgage/Equity Method
Estimate value of unit by capitalizing on NOI prior to financing, takes into account an imposed Debt-to-equity ratio
- Capitalization rate (k) is imposed by conditions
- Value = NOI/k
- k = (m x f) + (E x y)
- m = Loan-to-value ratio
- f = mortgage constant = (pmt * 12 months)/mortgage loan
- E = equity-to-value ratio expressed as a %
- y = required return on equity as %
When solving for f without loan amount, any loan amount can be used
Cost approach
Used when comp. sales approach is not possible due to a lack of data
Can only be applied by a chartered appraiser
- Costs of reproduction
- Cost of replacing a building with an identical one (recent construction for which materials still exist or a historical building)
- Replacement costs as new (RCN)
- Cost of replacing a building with another with the same purpose
- Not necessarily with the same materials as they may no longer exist
Construction cost search
Comparative market analysis (comp. sales approach)
Compare with similar properties that were built and sold recently
Based on sq.ft.
(actual cost of recent build) ÷ sq.ft. = x
x*total sq.ft. of subject
Adjustments may be needed
Quantity Survey Method
Most detailed, most complex, most time-consuming
Used by builders when bidding on projects
Calculate individual costs of all materials, evaluate labour costs, add MGMT fees and a reasonable profit
Unit-in-place method
Calculate cost of units in place as they relate to parts of the building
Examples of units of measurement
- Linear wall price
- Wall price per sq.ft.
- Roof price per sq.ft.
- Flooring price per sq.ft.
- Excavation price per m^3
- Kitchen cabinetry price per linear foot
- Fixed price for each piece of equipment
Main Steps in Cost approach
- Measuring value of land as though vacant, and for its highest and best use
- Estimate replacement cost of building and improvements as tough new
- Estimate overall depreciation
- Estimate depreciated value of building and improvements
- Establish market value
Construction Cost Reference Manual
Relies on use of market-recognized construction cost indices
Components of Value
- Supply and Demand
- Property’s perceived needs and utility
- Rarity
- Purchasing Power
- Transferability
- Environmental Factors
Factors influencing the RE market
Economic
Social and Demographic
Political
Physical
Law of supply and demand?
Supply ↑ price↓ and vice versa
Seller’s market 8 or less properties per buyer, balanced 8-10, buyer’s 10+
Law of substitution
A cautious buyer will not pay more for a property than they would pay for another equally desirable, useful and productive property
Law of highest and best use
Use of the property which is, at time of appraisal, most likely to produce best financial performance or services over a given period of time
Principle of consistent use
Immovable cannot be appraised for two competing uses when it is transitioning to optimal use
In other words, a building and its land cannot be considered to have different uses (e.g. residential building on commercial land)
Principle of conformity
Property’s value is more likely to be upheld if it conforms with neighbouring properties
Principle of progression and regression
Regression: Value of a higher-quality property decreases due to its proximity to lower quality properties in same neighbourhood
Progression: inverse
Principle of contribution
Presence or absence of an element which distinguishes subject immovable from comp. either increases or decreases value
Principle of anticipation
Value depends on benefits that a buyer expects to derive from it
Principle of surplus productivity
- Makes it possible to assess profitability of a plot of land
- Represents NOI after deducting all operating expenses and capital invested in improvements
- Residual income is attributable to land and assigned to it to establish value
- Supports residual income approach
- In the absence of recently sold comps, allows to assess NOI attributable to a building and NOI attributable to land
Principle of competition
High net profit margin attracts large number of competitors, thus decimating above-normal profits
Principle of balance
Value of property remains balanced when there is a proper ratio between similar services offered and demand of inhabitants served
Principles of increasing and decreasing returns
Increasing prod. = increased returns. However, once prod. max is reached, no investment will lead to higher ROI (decreasing returns)
Stages of the appraisal process
Defining the appraiser’s problem or mission
Collecting information and data
Using techniques (comp sales, cost, income)
Using techniques (comp sales, cost, income)
Conciliating techniques and statements with regard to value and price
Criteria for comps
- Located in same sector
- Same age and style
- Similar sized areas (for both land and buildings)
- Sold recently
- Same type of configuration (# of beds, baths, etc)
Methods to appraise a lot (site)
- Allocation method (can refer to comp sales, cost or both)
- Developer’s method (mainly cost method, but not exclusively)
- Net ROI method (income approach)
- Residual revenue method (income approach)
- Sales price (comp sales, but adjustments must be made based on a unit price depending on area, and not on the aggregate price)
Factors to consider for land appraisal
- Measurement units
- Facade
- Depth
- Public services
- Shape
- Corner lot
- Improvements
- Economic obsolescence
- Location
- Other factors that may affect land value
Reproduction vs replacement
Reproduction = replacing a building with an identical one
Replacement = replacing building with another with same purpose. Preferable for older buildings, or if same materials no longer exist
Total Depreciation
Sum of all types of depreciation
Calculate three sequential depreciations in following order: physical, functional and economic
- Physical calculated on RCN
- Subtract from new cost to determine functional
- Repeat to obtain depreciated replacement cost as new (DRC)
Appraisal report documents
- Copy of COL
- Necessary parts extracted from deed of sale to identify seller(s). Deed of sale kept in the brokerage file
- Seller’s declaration
- Information on the subject, provided by the seller(s)
- Notes you have taken while visiting the property
- Photos of the subject (you will be able to use them later if you are entrusted with the listing
- Description sheets of comps
- Info on the market
- Info on neighbourhood of the property to be assessed
- Table of comps
- Table of contributive values
- Table of adjustments
- Justification for the items selected to determine contributive values
- Spreadsheets and calculation tables supporting application of selected methods
- Appraisal report linked to the estimated market value
- Any other required or useful docs
