CHP 14 - The appraisal Process Flashcards
Appraisal Steps
- Identify
- Assimilate
- Assess (Identify most profitable use)
- Estimate (land value)
- Apply 3 approaches to estimating value
- Reconcile the values
- Compile report
3 Approaches to value
- Sales Comparison
- Cost
3.
Sales Comparison approach AKA
Market Data
Coast Approach
Mostly used for new construction and special purpose buildings
Types of Cost Approaches
Reproduction Cost (duplicate) Replacement cost (functional equivalent)
When is replacement cost used
older structions
Why is reproduction cost preferable
calculates depreciation on structure
Cost Approach Steps
- Estimate land value
- Estimate reproduction/replacement
- Estimate accrued depreciation
- Subtract accrued depreciation from reproduction.replacement
- Add land value to depreciated reproduction/replacement
Methods for estimating reproduction/replacement costs
- Unit comparison method /Square foot method
- Unit in place
- Quantity Survey Method
- Cost indexing method
Disadvantages to cost approach
Depreciation is difficult to measure & cost to create improvements isn’t same as market value
1st step in cost approach
Estimate land value
Income Capitalization Approach Steps
- Estimate potential gross income
- Estimate effective gross
- Estimate net operating
- Select a capitalization rate
- Apply the cap rate
Potential Gross Income
Scheduled rent + Other income
Effective Gross Income
potential gross income - vacancy & Credit losses
Net operating income
Effective gross income - total operating expenses
Gross rent multiplier =
Market value/Annual Gross income
Estimated value =
GRM X Subject monthly rent
Last step of income captitalization approach
apply the cap rate
USPAP
Uniform Standards of Professional Appraisal Practice
What legislation initiated the appraisal regs
Financial LInstitutions Reform, Recovery and Enforcement Act
Net Operating Income (NOI) is equal to
potential gross income minus vacancy and credit loss minus expenses
Weakness of the sales comparison approach
There may be no recent sale price data
Central concept of cost approach
Add estimated land value and cost of improvements & Subtract accrued depreciation
Difference between appraisal and morgage value
mortgage value - value a lneder imputes to the property as collateral
Net income 20K with a cap rate of 5% =
value = $400,000
After data is assimilated appraiser must
assess highest and best use
Weakness of cost approach
marke value isn’t always the same as property cost
Act requiring federally-realted appraisals to be conducted by certified appraiser
FIRREA (Financial institutions reform, recovery and enforcement act)
4th step in the appraisal process (after determining highest and best use)
estimate land value of subject
