Day 1: Valuation Process/Cap Rates Flashcards
COST APPROACH
Cost Approach is the cost of production not value in exchange (like the sales comparison approach). Works well for new property that doesn’t have much depreciation.
INCOME APPROACH
The income capitalization approach measures the present value of the future benefits derived from property ownership.
After income and expenses are estimated, the appropriate income stream may be: capitalized into a value opinion by applying an appropriate rate or factor (direct cap). This typically involves income over a one- year period.
Yield-Cap (DCF) involves income for more than one year.
WHO IS THE CLIENT?
Need to know how sophisticated your client is.
HYPOTHETICAL CONDITION: I know it’s not true but I’m going to assume it is for my appraisal (used in eminent domain)
“Assumptions in general are things taken to be true and are a normal part of every appraisal assignment. An extraordinary/special assumption is a unique assumption and must be treated more carefully by the appraiser.”
EXTRAORDINARY ASSUMPTIONS- “An assignment-specific assumption as of the effective date regarding uncertain information used in analysis which, if found to be false, could alter the appraiser’s opinion or conclusions.” P. 11
SPECIAL ASSUMPTION: an assumption, directly applicable to a specific service, which, if found to be false, could alter the opinions or conclusions in an appraisal or review.
EXERCISE IN JUDGMENT
EXERCISE IN PERFORMANCE OR EXECUTION
Answer
IDENTIFICATION OF THE PROBLEM - IDENTIFY THE CLIENT
BANK AND ITS REPRESENTATIVES: client and user
HUD/FHA: Intended user
APPRAISAL MANAGEMENT CO.: May or may not be an intended user
BORROWER: Not an intended user
THE VALUATION PROCESS - STEP 1: IDENTIFICATION OF THE PROBLEM
Intended use affects both appraisal development (scope of work, type and extent of research and analysis) and reporting (type of report, report content and level of information).
Identify the CLIENT and INTENDED USERS Identify the INTENDED USE Identify the PURPOSE Identify the EFFECTIVE DATE Identify the CHARACTERISTICS Identify ASSIGNMENT CONDITIONS
REVIEW QUIZ: The relevant characteristics of a property are part of identifying the problem.
HYPOTHETICAL CONDITION: This is a condition that is contrary to what exists by is supposed for the purpose of analysis.
A hypothetical condition is often a “what if” scenario intended to clarify a value issue such as the appraisal of proposed construction on a vacant site with the value opinion effective as of a current date.
OTHER ASSIGNMENT CONDITIONS: might include laws, regulations, guidelines, and other conditions that can affect the scope of work. For example, an FHA appraisal assignment would have assignment conditions based on regulations issued by HUD.
THE VALUATION PROCESS-
Step 3: DATA COLLECTION AND PROPERTY DESCRIPTION
MARKET AREA DATA: General characteristics of a region, city and neighborhood.
SUBJECT PROPERTY DATA: subject characteristics of land use and improvements, PP, business assets, etc.
COMPARABLE PROPERTY DATA: Sales, listings, offerings, vacancies, cost and depreciation, income and expenses, capitalization rates, etc.
APPRAISAL/VALUATION PROCESS
The process provides a checklist for both appraisers and users of appraisal services - and covers the requirements of an appraisal that complies with professional appraisal standards.
COMPARABLE SALES
A good way to look at potential comparables is: if these properties were on the market, would/how would they compete with the subject property.
HIGHEST AND BEST USE
The reasonably probable use of property that results in the highest value. The four criteria that the highest and best use must meet are legal permissibility, physical possibility, financial feasibility, and maximum productivity. Alternatively, the probably use of land or improved property- specific with respect to user and timing of the use- that is adequately supported and results in the highest present value.
HIGHEST & BEST USE - Review of Decision Process
Land as though vacant - Options
Improve
Leave vacant
Property as Improved - Options
Leave as is
Alter
Demolish
43,560 sq ft/ acre
5280 linear ft/ mile
640 acres/section
43,560 sq ft/ acre
5280 linear ft/ mile
640 acres/section
Highest and Best Use
The appraiser analyzes the ideal improvement to the property.
SIX PROCEDURES FOR ANALYZING LAND:
Sales Comparison (preferred method) Extraction Allocation (alternative method) Land Residual Technique (not tested) Ground rent capitalization (not tested) Subdivision development analysis (not tested)
Answer
LAND VALUE OPINION- Sales Comparison
Appraiser searches for sales of similar vacant parcels.
Each selected sale is analyzed and compared to the subject parcel and then adjusted for salient differences.
Sales comparison is the most common and preferred method of valuing land, assuming sufficient data is available.
You must organize your data for further analysis.
METHOD FOR VALUING LAND - EXTRACTION - When vacant sales are unavailable, the appraiser can analyze improved property sales similar to the subject property in land characteristics.
Sale Price - Contributory Value of the Improvements (Depreciated Cost) = Extracted Value of Land
When this procedure is applied, it can provide reliable data to assist the appraiser in forming a value opinion of the improved land. However, ample sales should be used, and the appraiser must be experienced in the use of cost and depreciation methodology.
This procedure is most applicable when improvements can be reliably valued, such as when the improvements are either new or very old (that is nearing the point when the improvements will be demolished).
COST APPROACH-
You don’t want to overbuild - that is called super adequacy.
SALES PRICE ADJUSTMENT PROBLEM (p.28)
Look at gross adjustments to determine whether it is truly comparable. If you have gross adjustments of $200 and net is zero, is it really a good comparable?
METHOD FOR VALUING LAND - ALLOCATION
As the name implies, the appraiser analyzes improves property sales and allocates prices paid between the improved land and total property, usually on a ratio basis.
The process can be based on vacant improved land sales that are compared to improved property sales, or the appraiser can use an executive process by isolating the depreciated cost of improvements from the improved land.
This procedure is rarely used as a primary improved land valuation technique, but it has secondary applications in the analysis of subdivision lots when there is a uniform ratio of land value to total value.
The procedure also might be useful in tax assessment studies.
COMMONLY USED ELEMENTS OF SALES COMPARISON
Real property rights conveyed
Financing terms (compared to cash equivalency)
Conditions of sale (consider motivation)
Expenditures made immediately after purchase
Market conditions (commonly known as “time adjustment)
Location
Physical characteristics (including energy efficiency, high-performance, and green feat.)
Economic characteristics
Use (based on comparable zoning, highest and best use, and utility)
Non-realty components of value (eg, business value, franchises)
THE VALUATION PROCESS - STEP 3: DATA COLLECTION AND PROPERTY DESCRIPTION
MARKET AREA DATA: General characteristics of region, city, and neighborhood.
SUBJECT PROPERTY DATA: Subject characteristics of land use and improvements, PP, business assets, etc.
COMPARABLE PROPERTY DATA: Sales, listings, offerings, vacancies, cost and depreciation, income and expenses, capitalization rates, etc.
