Chapter 16 - Direct Comparative And Cost Approaches Of Appraisal Flashcards
What is the objection to using reproduction cost?
The objection to using reproduction cost is that it may be impossible to provide an identical reproduction of an older building.
Often the material and equipment used years ago are not available today.
If they are available, the specialized labour required may no longer exist, and with changes in construction techniques, designs and tastes also change.
Therefore, an exact replica might cost more to construct than its contemporary equivalent, but worth less when finished.
In appraisal, two properties are similar if:
the actual differences between the properties will not have a material effect on their selling price.
Corner lots have greater value than inside lots.
True or false
True
- preferred because they may offer extra light and air
- corner lot may have lack of privacy and quietness
- maybe a narrower lot.
- inside lots maybe wider
The appraiser maybe guided by their knowledge of an imperfect market since there is no definitive rule to follow
What is an incurable depreciation?
Is depreciation caused by wear and tear (PHYSICAL) or outmoded (FUNCTIONAL) design which can only be corrected at considerable expense and, in fact, correction may be cost prohibitive e.g. narrow hallways.
In appraisal, recent is defined as:
that time period just prior to date of valuation over which the demand and supply conditions have remained relatively stable
REPRODUCTION COST = REPLICA
REPLACEMENT COST = MODERN EQUIVALENT
REPRODUCTION COST is the cost of providing an exact REPLICA of the subject property, while the REPLACEMENT COST is the cost of a building a MODERN EQUIVALENT of the subject property
We subtract from the sale price of the comparable property is superior to the subject property
IASS
Outmoded design that is economically feasible to correct is an example of CURABLE DEPRECIATION.
The actual amount of money spent at the time the asset was PURCHASED or the improvements were BUILT is known as the HISTORIC COST.
IASS Formula for comparative Appraisal
IA - Inferior ADD (Comparable Property)
SS - Superior Subtract
If comparable has something more superior to offer than you:
Subtract from the Sale Price of that property. Has one extra Bathroom value is 4,000
Comparable Sold for $500,000. Has one more bedroom worth 5,000 Comp Price 500,000 Less: 1 extra bed. -5000 Add: 1 extra bath. +4,000 Subject Comp Value. $499,000
Cost Method of Appraisal. Think of buildings like Least used Method
Unusual or Unique Properties like churches, tree house, mill
Infrequency of Used. Least used method
Because the assumption that cost equals value is not necessarily correct
Formula for Cost Method
Cost of Building less depreciation. (Sq ft times cost per sq ft less Depreciation)
Plus: Land (Site) Value
Equals Market Value
Physical Depreciation
Curable — can be fixed
Incurable — cannot be fixed
Curable (Can be Fixed) ex: Paint, Wallpaper
Incurable (Cannot Fix) ex: foundation, structural problems. Floor plan.
Functional Depreciation (Outdated)
Curable (Can be Fixed) ex: Can be replaced Cost Effectively - eg bathroom Fixtures.
Incurable (Can not Fix) ex: like the FLOOR PLAN or narrow hallways.
The loss in value caused by outmoded (old design brass taps )or inadequate design in building is
1/ salvage value
2/ physical depreciation
3/ functional depreciation
4/ capital value allowance
Answer:
2/ Functionall depreciation
Repacement Cost
Historic Cost - cost incurred when the building was erected
Current Cost - cost to construct building date of appraisal
Reproduction Cost - Exact Replica ***on exam
Replacement Cost - modern Equivalent *** on exam
Historic Cost - cost incurred when the building was erected
Comparative Method
Based on the theory of Principle of substitution; grid method
The market value of subject property is equal to prices recently paid for similar properties.
Need decent comparable sales.
— arms length
— recent no defining number. As recent as possible. Can make market adjustments if no recent sales
— need similar but not necessarily identical.
IASS
If Comparable is INFERIOR then you(ADD) value
If the Comparable is SUPERIOR then you (SUBTRACT) value.
Comparable Method “Recent “ means
To the period immediately preceding the appraisal date during which values have remained stable.
Demand and Supply remained stable
Market Comparison Process
- Examine recent sales
- Choose good comparable
- Make adjustments for differences (IASS)
- Reconcile values.
Comparable Method - What you use to caculate SUBJECT property
Adjusted Values 1/ 100000 2/ 90000 3/ 95000 4/ 100000
Total 485,000 / 4 = 97,000. If 100,000 was used as the appraised value of SUBJECT property then that would be ok.
In comparable method what is most inportant re Subject Building
Are SIMILAR to factors judged important by BUYERS and SELLERS.
Curable functional depreciation
An outdated/outmoded feature that can be correctly economically, such as outdated fixtures.
Patent Defect
An outdated/outmoded feature that can be correctly economically, such as outdated fixtures.
P= PRESENT (you can see defect visibly) Is visible. You can see the depreciation.
From front door through hallway you can see the bathroom
Is design deficiency todays market
Not an example physical curable
Income Method
Used for income properties. Life of building is based on economic factors not depreciation. How much can i earn. The % Yield.
Investment (?Income) Method is same as
Income method and used for properties that produce rental income
Income method Yield Formula
Yield = Net Operating Income (NOI)
—————————————
Sale Price
Income Method - Sale Price / Market Value Formula (on exam)
Sale Price = Net Operating Income (NOI)
—————————————
Capitalization Yield (CAP Rate)
Average of multiple properties
Add the CAP rate of each poperty and divide by nimber of properties
Net Operating Income Formula
Gross Potential Revenue Less: Vaxancy and Bad Debt = Gross Realized Revenue Less : Expenses = Net Operating Income (NOI)
Income Method - What to do with Immediate Repairs given in the fact pattern
1/ Figure out NOI
2/ apply CAP rate to find Market Value (MV = Sales Price) of property
3/ deduct immediate repair costs from MV.
Gross Realized Income
Vacancy and Bad Debt Expenses allready deducted
Yield rate multiple Comparable
Average of both properties
Expenses deducted from Gross Realized Revenue
Usually only property taxes. Do not deduct income tax or depreciation
Which of the following is estimated using actual current rents paid on similar properties based on 100% occupancy?
1/ Gross Potential Revenue 100% Revenue since no deductions at this point.
2/Gross Realized Revenue
3/ Effective Gross Income
4/ Net Operating Income
Cost Method of Appraisal Formula
Cost of Building (sqft x cost per sqft. - Depreciation \+ Land Value (site value) —-—————————— Equals: Market Value
Functional Depreciation is things you use. Outmoded Outdated. Could be Design.
Physical is walls, structural
PHYSICAL DEPRECIATION is due to WEAR AND TEAR
- there is an accumulated loss in value
CURABLE DEPRECIATION
Items that CAN be repaired cost effectively, such as:
— LOOSE BOARDS
— PAINTING WALLS
— BROKEN WINDOW
PHYSICAL DEPRECIATION is due to WEAR AND TEAR
- there is an accumulated loss in value
INCURABLE DEPRECIATION
Items that CANNOT be repaired cost effectively, such as:
— FOUNDATIONS
— MAJOR STRUCTURAL PROBLEMS
— SLOPING FLOOR
FUNCTIONAL DEPRECIATION is loss in value to OUTMODED OR INADEQUATE DESIGN
FUNCTIONAL CURABLE DEPRECIATION
Items that CAN be replaced cost effectively, such as:
— FIXTURES AND FITTINGS like Brass Fittings or Old Chandeliers, lighting fixtures, wood Fireplace
FUNCTIONAL DEPRECIATION is loss in value to OUTMODED OR INADEQUATE DESIGN
*FUNCTIONAL INCURABLE DEPRECIATION
Changes REQUIRED TO MODERNIZE IS NOT COST EFFECTIVE such as:
— ARCHITECTURAL STYLE OF BUILDING like old churches
—Floor Plans
— Narrow Hallways
In using the COST Method of Appraisal, the MAJOR difficulty is experienced in calculating:
Incurable - Physical Depreciation like Structural Foundation problem
