Appraisals Flashcards
What is an appraisal?
An estimation of value.
Based on the property inspection date.
Real estate agents give what kind of appraisals?
BPO. (Broker price Opinion)
Lender may ask for it for market pricing in anREO or short sale.
Provides an actual value
CMA. (Comparative market Analysis) is not an appraisal
Compares recent sales, pending sales and current listings of similar properties of the same neighborhood to establish property value
Provides a range of values
Types of Value
- Market Value
- Assessed Value. Tax. Depends on mileage rate is amt. per thousand
- Book Value: accounting purposes
Original cost of structure minus depreciation ( 27.5 yrs. for residential and 39
Years for commercial)
Add value for improvements
Add the value of the land to value of depreciated structure together with
Improvements - Insurance Value: Insurance value determines the insurance value needed for
Improvements. - Mortgage Loan Value: loan value compared to property value
- Leased Fee Value: This value is the fee simple interest encumbered by a lease. This is lessor’s interest.
- Leasehold Value: this value is the interest held by tenant. This is the lessee’s interest.
Together the leased fee value + the lease hold value= fee simple valu.
Principals for Determining Value
S T U D
S: scarcity
T: transferability
U: utility
D: demand
Basic Principles for Appraising Property
- Principle of Highest and Best Use
- Principle of Contribution
- Principle of Substitution valuing residential property in neighborhood
- Principle of Change
- Principle of Competition
- Principle of Conformity. Similar properties given a market. Similarities include
Type, size, style, age, quality etc. Conformity maximizes value. - Principles of Progression and Regression
- Principle of Supply and Demand
- Principle of Anticipation
- Principle of Increasing and Decreasing Returns
Types of Depreciation
- Deterioration
- Functional Obsolescence(out-dated) this depreciation is “curable”
- Economic(external or Environmental) Obsolescence is “incurable”
Owner has no control of outside influences.
Appraisal Approaches
- Market Sales Approach aka Market Data aka Market Comparison Approach
- The Cost Approach
- The income Approach
- capitalization
- gross rent multiplier
What is Market Sales Approach
Comparison of sold properties to subject property
Calculating comparable properties
CIA
C: comparable
I: inferior
A: add
CBS
C: comparable
B: better
S: subtract
Cost Approach to appraisal (summation)
Based on construction
Used for new construction
Reproduction vs. replacement
Follows ANSI method
Income Approach income producing properties
2 approaches to valuation
- Capitalization
2. Gross Rent Multiplier
Formula for Capitalization.
Most widely used for valuation of in come producing property
More accurate approach as it takes into consideration expenses.
Capitalization Rate= Net Operating income / sales price (value)
Formula for Gross Rent Multiplier (GRM)
GRM=. Sales Price / Gross annual Rent
Capitalization Approach computes
Present value extended over a period of time.
- Economic life (remaining useful life)
- Capitalization Rate (cap rate) rate of interest used to calculate present value of future periodic payments . how quickly an investment will pay for itself
- Net Operating Income. Income generated from the business after operating expenses
Need to know how to be able to calculate,
Cap rate
The net operating income
Value
Net Operating Income= sales Price (value) x Capitalization Rate
Sales Price (Value) =. Net Operating Income / Capitalization Rate
To figure out Net operating expense
Gross income =
Step 1. # of units x rent x 12 mos. = total yearly rent
Step 2. Vacancy rate% x total yearly rent and deduct from yearly rent
Step 3. Deduct expenses =
Net operating income
Non deductible expenses are
DIM
D. Depreciation
I. Income taxes
M. Mortgage loan payments. ( principal and interest)
How is capitalization rate calculated?
1) Investor wants to receive 6% rate of return ON his investment.
2) calculating a return OF his investment through depreciation.
For example if improvement has a 25 yr economic life then 100%. / 25=4%
Adding the return ON his investment(6%) to the rate of return OF his investment (4%)= 10% capitalization rate.
If land is vacant it cannot be depreciated therefore the capitalization rate is the interest rate alone. (Return ON investment)
3 formulas needed for CAPITALIZATION
NOI= sales value x cap rate
Sales value = NOI / cap rate
Cap rate= NOI / sales value
GROSS RENT MULTIPLIER formula
GRM=. Sales Price (value) / Gross annual income
This is 1-4 family
GIM= Sales Price (value) / Gross Annual
This is for multi- family, commercial, industrial and can include all income
SALES (Value) = GROSS annual Income. X. GRM
GROSS INCOME MULTIPLIER
GIM=. gross income multiplier.
Used for multi-family, commercial or industrial
It is based on gross annual income. And can include other sources of income
