Categories of value Value in exchange Value in use Objective value Subjective value Investment value Going-concern value Insurable value Assessed value

Valuation Process (Scope of Work) 1. Identification of the Problem 2. Scope of Work Determination 3. Data Collection and Property Description 4. Data Analysis 5. Site Value Opinion 6. Application of the Approaches to Value 7. Reconciliation of Value Indications and Final Opinion of Value 8. Report of Defined Value

Valuation Process (Scope of Work) 1. Identification of the Problem 2. Scope of Work Determination 3. Data Collection and Property Description 4. Data Analysis 5. Site Value Opinion 6. Application of the Approaches to Value 7. Reconciliation of Value Indications and Final Opinion of Value 8. Report of Defined Value

Scope of Work (aka Valuation Process) The specific tasks and items necessary to complete the assignment include: assembly and analysis of relevant information pertaining to the property being appraised, listing and acquisition particulars if acquired within three years prior to the effective date of the appraisal, an inspection of the subject property and the surrounding area, assembly and analysis of pertinent economic and market data,

Scope of Work (aka Valuation Process) The specific tasks and items necessary to complete the assignment include: assembly and analysis of relevant information pertaining to the property being appraised, listing and acquisition particulars if acquired within three years prior to the effective date of the appraisal, an inspection of the subject property and the surrounding area, assembly and analysis of pertinent economic and market data,

Scope of Work, continued analysis of land use controls pertaining to the subject property, a summary discussion of “highest and best use”, or most probable use, a discussion of the appraisal methodologies and procedures employed in arriving at the indications of value, photographs, maps, graphics and addendum/exhibits when deemed appropriate, reconciliation of the collected data into an estimate of market value or market value range as at the effective date of the appraisal.

Scope of Work, continued analysis of land use controls pertaining to the subject property, a summary discussion of “highest and best use”, or most probable use, a discussion of the appraisal methodologies and procedures employed in arriving at the indications of value, photographs, maps, graphics and addendum/exhibits when deemed appropriate, reconciliation of the collected data into an estimate of market value or market valu

Market Analysis Property productivity analysis Market delineation (geographic extent of the demand for a specific property) Demand analysis and forecast Competitive supply analysis and forecast Supply and demand study Capture estimation

Market Analysis Property productivity analysis Market delineation (geographic extent of the demand for a specific property) Demand analysis and forecast Competitive supply analysis and forecast Supply and demand study Capture estimation

Highest and best use What would the land be worth if it were vacant and awaiting development What is the site worth as presently developed with the existing improvements

Study notes Flashcards by Helen Hegedus

Four Forces Affecting Land Valuation

Physical – geographic and environmental
e.g., climate, topography, transportation, schools

Economic
e.g., employment, supply, rental rates, construction costs

Government and Legal
e.g., public services, zoning, environmental protection

Social
e.g., population characteristics, lifestyle

P E G S

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Principles Impacting Real Property Value

anticipation
change
supply
demand
competition
substitution
balance
contribution
surplus productivity
conformity
externalities

Principles Impacting Real Property Value

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Four Forces of Value

•	Supply
o	Utility
•	Ability to satisfy want, need desire
o	Scarcity
•	Present or forecasted supply

•	Demand
o	Desirability
•	Purchaser’s wish to satisfy need/want
o	Effective Purchasing Power
•	Ability to participate in market

Four Forces of Value

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Six Conditions of Market Value

Most probable price
Competitive market
Fair sale
Buyer and Seller knowledgeable
No undue stimulus
Reasonable time

Six Conditions of Market Value

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First Principles of Value

1.	Problem Identification
•	Understand assignment objective
2.	Property Content
•	Physical, legal, financial, location
3.	Property Rights
4.	Function/Purpose
5.	Highest and Best Use
6.	Land Use Regulations
7.	Economic Variables
8.	Legal Issues
9.	Research

First Principles of Value

1.	Problem Identification
•	Understand assignment objective
2.	Property Content
•	Physical, legal, financial, location
3.	Property Rights
4.	Function/Purpose
5.	Highest and Best Use
6.	Land Use Regulations
7.	Economic Variables
8.	Legal Issues
9.	Research

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Professional Competencies

Market Analysis
• Ability to collect and analyze information and statistics regarding the market characteristics of the area that one practices in

Integrity
• Ability to consistently take actions that match stated values and standards

Critical Thinking
• Ability to analyze problems systematically, organize information, identify key symptoms and causes and apply solutions

Relationship Building & Communication
• Ability to communicate with, understand and respond to others effectively

Self Development
• Being proactive in improving one’s personal capability

Professional Competencies

Market Analysis
• Ability to collect and analyze information and statistics regarding the market characteristics of the area that one practices in

Integrity
• Ability to consistently take actions that match stated values and standards

Critical Thinking
• Ability to analyze problems systematically, organize information, identify key symptoms and causes and apply solutions

Relationship Building & Communication
• Ability to communicate with, understand and respond to others effectively

Self Development
• Being proactive in improving one’s personal capability

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Bundle of Rights

Sell or give away
Occupy
Lease
Mortgage
Create a life estate
Do nothing

Bundle of Rights

six rights

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Ownership of Real Property Rights

• Physical Elements
o quality and quality of the property

• Legal Elements
o highest is unencumbered fee simple

• Financial Elements
o arms-length, or vendor financing

Ownership of Real Property Rights

three elements

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Economic Foundation for Value of Real Estate
is represented by Four Agents of Production

Land
Labour
Capital
Entrepreneurial coordination

Economic Foundation for Value of Real Estate

is represented by Four Agents of Production

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Joint Tenancy – ownership is unseparated in that one owner cannot sell without the other’s permission. This type of tenancy carries with it a right of survivorship.

Tenancy-in-common – a situation where two or more parties can own a property in different percentages. Each person can sell their interest without the other’s permission.

Joint Tenancy

Tenancy-in-common

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Economic life is the period over which the property remains economically useful and viable.

Physical life is the period of time the structure is in existence until it becomes physically unstable.

Economic life

Physical life

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Three Approaches to Value

Direct Comparison
Cost Approach
Income Approach

Three Approaches to Value

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Market value is defined as the most probable price which a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller each acting prudently and knowledgeably, and assuming the price is not affected by undue stimulus.

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Categories of value

Value in exchange
Value in use
Objective value
Subjective value
Investment value
Going-concern value
Insurable value
Assessed value

Categories of value

Value in exchange
Value in use
Objective value
Subjective value
Investment value
Going-concern value
Insurable value
Assessed value

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Valuation Process (Scope of Work)

Identification of the Problem
Scope of Work Determination
Data Collection and Property Description
Data Analysis
Site Value Opinion
Application of the Approaches to Value
Reconciliation of Value Indications and Final Opinion of Value
Report of Defined Value

Valuation Process (Scope of Work)

Identification of the Problem
Scope of Work Determination
Data Collection and Property Description
Data Analysis
Site Value Opinion
Application of the Approaches to Value
Reconciliation of Value Indications and Final Opinion of Value
Report of Defined Value

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Scope of Work (aka Valuation Process)

The specific tasks and items necessary to complete the assignment include:

assembly and analysis of relevant information pertaining to the property being appraised,
listing and acquisition particulars if acquired within three years prior to the effective date of the appraisal,
an inspection of the subject property and the surrounding area,
assembly and analysis of pertinent economic and market data,

Scope of Work (aka Valuation Process)

The specific tasks and items necessary to complete the assignment include:

assembly and analysis of relevant information pertaining to the property being appraised,
listing and acquisition particulars if acquired within three years prior to the effective date of the appraisal,
an inspection of the subject property and the surrounding area,
assembly and analysis of pertinent economic and market data,

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Scope of Work, continued

analysis of land use controls pertaining to the subject property,
a summary discussion of “highest and best use”, or most probable use,
a discussion of the appraisal methodologies and procedures employed in arriving at the indications of value,
photographs, maps, graphics and addendum/exhibits when deemed appropriate,
reconciliation of the collected data into an estimate of market value or market value range as at the effective date of the appraisal.

Scope of Work, continued

analysis of land use controls pertaining to the subject property,
a summary discussion of “highest and best use”, or most probable use,
a discussion of the appraisal methodologies and procedures employed in arriving at the indications of value,
photographs, maps, graphics and addendum/exhibits when deemed appropriate,
reconciliation of the collected data into an estimate of market value or market valu

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Plottage is a value increment resulting from the assembly of two or more smaller sites. The result is that the combined utility is proportionately greater than the sum of the individual sites.

Assemblage is the merging of adjacent properties into one common ownership or use without necessarily increasing the utility.

Plottage

Assemblage

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Excess land is not needed to serve or support the existing improvement. HABU of the excess land may or may not be the same as the HABU of the improved parcel. Excess land has the potential to be sold separately and must be valued separately.

Surplus land is not currently needed to support the existing improvement, but cannot be separated from the property and sold off. Surplus land does not have independent HABU and may or may not contribute value to the improved parcel.

Excess land

Surplus land

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Building Standards

aka Building Codes – are regulations governing the health and safety of building construction

Structural instability
Fire resistance
Emergency egress
Adequacy of space, air, and light
Performance of mechanical and electrical systems

Building Standards

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Zoning is a means of regulation of property whereby lands are divided into districts for the purpose of assigning restrictions on land use and on the use, bulk, and appearance of buildings on the land.

Legal non-conforming: uses and buildings that existed prior to the enactment or amendment of a zoning bylaw and do not conform and are accorded special status.

Legal conforming: uses and buildings that conform to existing bylaws.

Zoning

Legal non-conforming

Legal

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Gross Living Area (GLA) is total area of finished, above-grade residential space; used for single-unit residential.

Gross Building Area (GBA) is total floor area of a building, including basement; used for multi-family, and industrial.

Gross Leasable Area (GLA) is total floor area designed for the occupancy and exclusive use of tenants including basements and mezzanines; used for shopping centres.

Gross Living Area (GLA)

Gross Building Area (GBA)

Gross Leasable Area (GLA)

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Market Analysis

Property productivity analysis
Market delineation (geographic extent of the demand for a specific property)
Demand analysis and forecast
Competitive supply analysis and forecast
Supply and demand study
Capture estimation

Market Analysis

Property productivity analysis
Market delineation (geographic extent of the demand for a specific property)
Demand analysis and forecast
Competitive supply analysis and forecast
Supply and demand study
Capture estimation

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Highest and best use

What would the land be worth if it were vacant and awaiting development
What is the site worth as presently developed with the existing improvements

Highest and best use

What would the land be worth if it were vacant and awaiting development
What is the site worth as presently developed with the existing improvements

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Highest and Best Use Analysis 1. Problem Definition 2. Preliminary screening of alternative uses 3. Analysis of alternative uses to determine highly probably uses 4. Identify the most probable use with respect to: • Land use • Timing of the use • Market participants of that use • Financial analysis

HABU as though Vacant ``` Test legal permissibility Test physical possibility Test financial feasibility Test maximum productivity What is the “ideal” improvement? ```

HABU as though Vacant

HABU Improved Property Test continuation of existing use Test modification of existing use Test demolition of existing use, and redevelopment

HABU Improved Property

Principle of Consistent Use Land cannot be valued on the basis of one use while the improvements are valued based on another use. Improvements must contribute to land value to have value themselves. Improvements that do not represent the land’s HABU can have value as an interim use; alternatively, they can have no value or even negative value.

Principle of Consistent Use

Advantages of Direct Comparison Approach Generally accepted by courts and tribunals People understand it, and when listing or selling properties, often use it When data is available, this is the most straightforward and simple way to explain and support an opinion of value It is a good test of value for all types of properties, provided enough comparables are available Works well for owner-occupied commercial and industrial properties

Advantages of Direct Comparison Approach

Disadvantages of Direct Comparison Approach Sometimes there are few or no current sales that can be logically used Comparisons are sometimes difficult and no two properties are ever exactly alike Data is always historical and may not accurately predict future imminent, significant upward or downward trends It is often difficult to ascertain all the pertinent information regarding individual sales, particularly terms of sale, motivation, etc.

Disadvantages of Direct Comparison Approach

The major principle that applies to the direct comparison approach is the principle of substitution: the value of a given property should be no more than the cost of buying another substitute property. The major principle that applies to the cost approach is the principle of substitution: a property’s value will tend to be equal to the cost of acquiring an equally desirable substitute property; acquisition cost is the cost to construct this substitute property.

The major principle that applies to the direct comparison approach is the principle of ... The major principle that applies to the cost approach is the principle of ...

Appraisal Principles basic to the direct comparison approach * Anticipation * Change * Supply and demand * Substitution * Balance * Externalities

Appraisal Principles basic to the direct comparison approach

Direct Comparison Procedure 1. Research 2. Verify 3. Select 4. Adjust the price 5. Reconcile

Direct Comparison Procedure

Elements of Comparison / Order of Adjustments ``` Transactional adjustments 1. Real property rights conveyed 2. Financing terms 3. Conditions of sale 4. Expenditures made immediately after purchase 5. Market conditions Property adjustments 6. Location 7. Physical characteristics 8. Economic characteristics 9. Use or zoning 10. Non-realty components of value ```

Elements of Comparison / Order of Adjustments Transactional adjustments Property adjustments

Unit of Comparison A unit of comparison is used to compare dissimilar properties. It reduces the complex traits and characteristics of different properties into a common basis that facilitates comparison. e.g., value per square foot, or square meter, or by frontage (either in feet or meter).

Unit of Comparison

IASS Inferior-Add, Superior-Subtract Comparable Property Adjustment If a feature of the Comparable Property is INFERIOR to the Subject Property – ADD to the Sale Price of the Comparable Property If a feature of the Comparable Property is SUPERIOR to the Subject Property – SUBTRACT from the Sale Price of the Comparable Property

IASS

Reconciliation Process by which the appraiser evaluates and selects, from among two or more alternative conclusions or indications of value, a single value estimate that is most applicable to the property being appraised.

Reconciliation

Principles that influence land value Anticipation: expectation of benefits to be derived in the future creates value Change Supply and demand: no object can have value unless scarcity is coupled with utility Substitution: the greatest demand will be generated for the lowest-priced site with similar utility Balance: when the various elements of a particular economic mix or a specific environment are in a state of equilibrium, land value is sustained; when the balance is upset, values change

Principles that influence land value

Land is valued by: * Identifying the real estate and property rights * Encumbrances * Physical characteristics * Functional characteristics * Economic characteristics * Available utilities * Site improvements * Highest and best use

Land is valued by: | eight characteristics

Land Valuation Techniques * Direct Comparison * Market Extraction * Allocation * Income Capitalization Techniques * Subdivision development methods

Land Valuation Techniques | five techniques

Extraction Method to Find Land Value ``` Current Sale Price - RCN of House-new Less Estimated Depreciation + Depreciated Value of Site Improvements = Land Value ```

Extraction Method to Find Land Value

Cost Approach to Value Market value of the site (land) + Replacement or Reproduction Cost of New Building(s) and Site Improvement - Depreciation of Building(s) and Site Improvements = Market Value of Property

Cost Approach to Value

Principles of Cost Approach Substitution: No one would pay more for a property that the cost to buy land and building something equivalent, assuming a normal time to complete the development. Supply and demand: changes in prices, costs, or demand for the improvements under analysis Contribution: improvements should not be too large or too small for the site and should be what the market wants in the way of new properties Externalities: ensure that no external factors will impact the value of the finished project or increase the projected costs HABU: optimal project is being built on the site, resulting in the highest return for the longest period of time Conformity: cost and value are likely to be equal only when the cost represents the kind of expenditures which conform to the wishes and tastes of the market

Principles of Cost Approach | six principles

Cost Approach Steps 1. Value of site as vacant 2. Reproduction cost or replacement cost? 3. Estimate direct and indirect costs of the improvements 4. Estimate entrepreneurial profit 5. direct costs + indirect costs + entrepreneurial profit = cost of improvements 6. Estimate depreciation 7. Deduct estimated depreciation for total cost of improvements 8. Contributory value of site improvements 9. Add to cost of improvements 10. Adjust the value conclusion if any personal property are included

Cost Approach Steps | 10 steps

Direct costs (hard) * Related to construction activity * Profit margin of builder or contractor * Entrepreneurial profit Indirect costs (soft) * Administrative * Professional fees * Financing and interest * Taxes * Insurance

Direct costs (hard) (three items) Indirect costs (soft) (five items)

Advantages of Cost Approach Useful for the valuation of special-purpose or unique properties The cost approach can work well for newer buildings Can be useful to determine “contributory value” of construction Useful when the function of the report is to estimate value for insurance purposes

Advantages of Cost Approach | four advantages

Disadvantages of Cost Approach Assumes cost represents value, however, this is only likely when the building is new and represents HABU Difficult to determine the cost of improvements Difficult to estimate depreciation Less effective for older buildings because of the difficulties of reliably estimating accrued depreciation May be unable to estimate site value accurately Does not reflect market behavior unless the market is in equilibrium Cannot be used to value leasehold interests, or cases in which the property possesses latent value

Disadvantages of Cost Approach | seven disadvantages

Reproduction cost: the cost to reproduce an exact replica of the subject improvements Replacement cost: the cost of replacing the subject property with a structure that provides a similar level of utility

Reproduction cost Replacement cost

Methods of Estimating Reproduction or Replacement cost new Quantity survey method: detailed breakdown Unit-in-Place Method: pricing of each component Comparative Method: estimate RC by comparing to costs of similar buildings to find a rate per unit Cost Services Method: uses information from cost services company Cost index trending: uses historical data to find cost indexes

Methods of Estimating Reproduction or Replacement cost new | five methods

Causes of Depreciation Physical deterioration – wear and tear from regular use, the impact of the elements or damage Functional obsolescence – flaw in the structure, materials or design that diminishes the function, utility and value of the improvement External obsolescence – a temporary or permanent impairment of the utility or saleability of an improvement or property due to negative influences outside the property

Causes of Depreciation | three causes

In appraising, depreciation is a loss in property value from any cause. The type of depreciation analyzed in an appraisal report is referred to as accrued depreciation. This is the difference between the reproduction or replacement cost [new] of the improvements on the effective date of the appraisal and the market value of the improvements on the same date.

In appraising, depreciation is ... The type of depreciation analyzed in an appraisal report is referred to as ... This is the difference between the ... and the ... on the same date.

Effective Age is based on the property’s present condition and general overall maintenance. Effective age can be the same as, or lesser or greater than the actual age at the date of appraisal. It is an estimate and has to be justified by the appraiser.

Effective Age

Economic Life refers to the period of time over which the improvements will contribute to the overall property value. Economic Life is normally shorter than physical life. It is an estimate. Considerations in estimating economic life include: * Physical age, quality and condition of subject * Dependent upon economic cycles * When similar buildings undergo major renovation or rehabilitation * When similar lands have been rezoned to more intensive uses * When demolition permits are issued for similar buildings

Economic Life Considerations in estimating Economic Life include: (five examples)

Total Economic Life and Useful life is the length of time that the improvements contribute to the value of the property and ends when the use for which it was original intended is no longer HABU. Economic Life is normally shorter than physical life.

Total Economic Life and Useful life

Remaining Economic Life (REL) and Remaining Useful Life: is the remaining expected (future) economically productive life span of the structure. It is the difference between Economic Life and Effective Age.

Remaining Economic Life (REL) and Remaining Useful Life

Short-lived items are usually building components or equipment such as furnaces, hot water tanks, carpets, roofing, kitchen cupboards, electrical fixtures, and windows and doors, i.e., those items whose life expectancy is less than the original structure. Long-lived items are those building components with an expected remaining economic life that is the same as the remaining economic life of the entire structure, e.g., foundation, structural framing of floors, walls and roof structure.

Short-lived items Long-lived items

Curable: items of physical deterioration or functional obsolescence are economically feasible to cure if the cost to cure is equal to or less than the anticipated increase in the value of the property. Incurable: if the cost to cure is more than the anticipated increase in value, the item is incurable

Curable Incurable

``` Gross Income Multiplier = Selling price of the property ÷ Actual Monthly Rent ``` or ``` Gross Income Multiplier = Selling price of the property ÷ Actual Yearly Rent ```

Gross Income Multiplier

Principal Methods of Estimating Depreciation • Market Extraction o Uses principle of contribution o Comparison to other properties o Rarely used • Age-life (or Economic Age-Life) o Often used * Modified age-life * Observed Condition (breakdown)

Principal Methods of Estimating Depreciation | four principal methods

Age-life (or Economic Age-Life) * Effective age ÷ economic life = percentage depreciation * depreciated value = depreciation * property’s total cost Modified Age-life (or Economic Age-Life) • “immediate repair or replacement” components are costed first, then the age-life method is applied to the balance cost new of the structure

Age-life (or Economic Age-Life) Modified Age-life

Breakdown Method Categories * Physical deterioration – caused by wear and tear or the passage of time * Functional obsolescence – usually the result of the property no longer conforming to the a market requirement or not in compliance with the highest and best use * External obsolescence – caused by factors outside the property

Breakdown Method Categories | three categories

Categories of Depreciation Physical deterioration • curable • incurable – short-lived • incurable – long-lived ``` Functional obsolescence • curable – deficiency • curable – modernization • curable – superadequacy • incurable – deficiency • incurable – superadequacy ``` External obsolescence • locational • economic

Categories of Depreciation Physical (three categories) Functional obsolescence (six categories) External obsolescence (two categories)

Physical Deterioration * Deferred maintenance – curable * Short-lived – not curable physically or economically feasible and requires replacement in the short term * Long-lived – not curable and include those items that were not considered under the previous two categories. Represents the accumulated loss in market value caused by physical wear and tear since the date the building was completed Is tangible, such as items that are worn, broken, or no longer fulfilling their function

Functional Depreciation Caused by a flaw in the structure, materials or design of an improvement when compared to HABU and most functional design requirements as at the effective date of appraisal * Curable caused by a deficiency requiring an addition * Curable caused by a deficiency requiring a substitution * Curable caused by a superadequacy that is economically feasible to cure * Incurable caused by a deficiency * Incurable caused by a superadequacy Is the loss in value caused by an outmoded or inadequate design, or over-improvement beyond what the market demands. Results from the perception of market participants, referring to items that may still be fulfilling their function, but the market does not demand them in their current form.

External Obsolescence * Loss in value caused by factors outside a property and may be temporary or permanent * May be localized or market wide affecting a single property or class of properties * Frequently affects both land and buildings; important to isolate and allocate effects to either or both • Methods of measuring external obsolescence o Allocation of market – extracted depreciation o Analysis of market data o Capitalization of an income loss

Physical curable deterioration - If the item has reached the end of their life expectancy, and are due for immediate replacement Physical short-lived depreciation - If the item had remaining life Physical long-lived depreciation - If the item had a remaining life the same as the building Functional curable obsolescence - If the item was outdated but still functioning with some remaining life.

Income Approach and the Appraisal Principles • Anticipation is the forecasting of income and expense levels to estimate present value o value is the present worth of future benefits * Change may reflect future changes to the quality and quantity of income * Change will affect return required by an investor and the way the investor values a property * Change will also affect supply and demand as society’s attitudes change for the type of space required * Supply and demand is related to competition or lack of it and determines present rental and vacancy rates, and future values

Income Approach and the Appraisal Principles | five principles

Capitalization Rate = Yearly Income (after fixed + variable costs) ÷ Total Value of the Property

Capitalization Rate

Potential Gross Income (PGI): The total income attributable to real property at full occupancy before vacancy and operating expenses are deducted Effective Gross Income (EGI): The anticipated income from all operations of the real property after an allowance is made for vacancy and collection losses and an addition is made for any other income (aka gross realized revenue, or what is deposited) Net Operating Income (NOI or IO): The actual anticipated net income that remains after all operating expenses are deducted from effective gross income, but before mortgage debt service and book depreciation are deducted Equity Cash Flow (IE): The portion of net operating income that remains after total mortgage debt service is paid, but before ordinary income tax on operations is deducted

PGI EGI NOI IE

Return of capital: recovery of invested capital Return on capital: the additional amount received as compensation for use of the investor’s capital

Return of capital Return on capital

Direct capitalization Uses one year’s income to establish a value Applied by using one of two basic methods * Applying an overall capitalization rate to relate value to the entire property income, i.e., net operating income * Using residual techniques that consider components of a property’s income and then applying a market-derived capitalization rate to each income component analyzed

Steps in the Income Approach * Research income and expenses for the subject and the comparables * Estimate the potential gross income (PGI) * Estimate vacancy and collection allowances * Subtract vacancy and collection allowances from the PGI to arrive at effective gross income (EGI) * Estimate total operating expenses – fixed and variable * Subtract expenses from the EGI to arrive at net operating income (NOI) * Apply the direct capitalization rate to the NOI to arrive at value

Steps in the Income Approach | seven steps

Expenses • Fixed o Property tax, insurance • Variable o Management fees, gas, water, sewer, cleaning, maintenance, decorating, etc. • Replacement allowance o Appraisal judgement o Usually for major expenditures for short-lived components, e.g., carpeting, exterior painting, roof covering

Expenses | three types

``` Overall Capitalization Rate = Net Operating Income ÷ Selling Price ```

Overall Capitalization Rate

``` Net Operating Income = Selling Price X Overall Capitalization Rate ```

Net Operating Income

``` Selling Price = Net Operating Income ÷ Overall Capitalization Rate ```

Selling Price

Rate of Return or What the Market Expects ``` Rate of Return = Income ÷ Value (or Price) ```

Rate of Return or What the Market Expects

``` Gross Income Multiplier = Selling Price ÷ Effective Gross Income ```

Gross Income Multiplier

Reconciliation criteria • Appropriateness o Single family=direct comparison o Analysis of HABU=cost approach o Income producing=income approach * Accuracy * Quantity and quality of evidence Final Opinion of value * Traditionally a point estimate * Rounded

Narrative Appraisal * Introduction * Premises of the appraisal * Presentation of data * Analysis of data and conclusions * Addenda

Narrative Appraisal | five sections

The reported conclusion of HABU must answer this question: What would the probable buyer of the subject property do with the property to maximize its value? CUSPAP’s “Reasonable Appraisal” standard is the ultimate test – ask yourself, “given the data and analysis you have presented, would another professional appraiser come to a similar conclusion?”

The reported conclusion of HABU must answer this question: ... ? CUSPAP’s “Reasonable Appraisal” standard is the ultimate test – ask yourself, ... ?

Cost Approach • Land values o Give information on land sales o Estimate land value • Cost out a house “new” o May give the cost per sq ft, and may have to work out the size of the home from the measurements given o Or, may have to derive the cost from the sales of a new homes o Divide the sales of the new home by the square footage to work out a rate per sq ft • Depreciation o Give you age of the property / economic life of the property to work out the depreciation rate

Direct Comparison Approach 1. Market Conditions (Time) adjustments 2. Other adjustments 3. Order of the adjustments 4. Time adjusted 5. Write a reconciliation • Find the best comparable (don’t average)

Income Approach 1. Understand incomes and expenses • May mean making adjustments to either the income or expenses • Expenses that shouldn’t be shown, or expenses that should be shown • Or, may ask you to derive the income based on the number of suites and based on the vacancy or expense losses 2. Calculate the Gross Income Multiplier (GIM) 3. Calculate the Capitalization Rate • Using the net income and sale price of comparable properties

HIGHEST AND BEST USE: the reasonably probable and legal use of property, that is physically possible, appropriately supported, and financially feasible, and that results in the highest value.

Market value is defined as the most probable price a property should bring in a competitive and open market, under conditions requisite to a fair sale, with the buyer and seller each acting prudently and knowledgeably, and assuming the price is not affected by undue stimulus.

Test of highest and best use In order to be considered as the highest and best use of a property, any potential use must pass a series of tests, i.e., legally allowable physically possible financially feasible maximally productive

Legally allowable Only those uses that are, or may be, legally allowed are potential highest and best uses. This may exclude uses that are not, and unlikely to become, allowed by zoning, uses forbidden by government regulations, and uses prohibited by deed restrictions or covenants. Properties with a use that predates existing zoning or other property regulations may be legally nonconforming. Such grandfathered uses are generally legal even though they do not meet current zoning or other regulations. Since their use predates these regulations, they are "grandfathered in". However, some such uses may not be reproduced if the legally nonconforming improvement is destroyed or damaged beyond a certain point. "Legally allowable" can be a tricky conceptual test, because even uses that are currently not permitted may be considered. This happens when there is a reasonable prospect (at least 50%) that the regulation, zoning, deed restriction, etc. can be changed to permit the proposed use.

Physically possible Any potential use must be physically possible given the size, shape, topography, and other characteristics of the site. For example a 40,000-square-foot (3,700 m2) single story warehouse would not fit on a 10,000-square-foot (930 m2) site; therefore, that use would fail the physical possibility test.

Physically possible Any potential use must be physically possible given the size, shape, topography, and other characteristics of the site.

Financial feasibility The highest and best use of a property must be financially feasible: the proposed use of a property must generate adequate revenue to justify the costs of construction plus a profit for the developer. In the case of an improved property, with obvious remaining economic life, the question of financial feasibility is somewhat irrelevant. In the case of an improved property with limited remaining economic life, the question of financial feasibility becomes a question of the maximally productive use of the site. If the value of the land as vacant exceeds the value of the property as improved less reversion/demolition costs, then redevelopment of the site becomes the maximally productive use of the property, and continued use of the existing improvements that do not represent the highest net value of the site is considered to be financially unfeasible.

Maximally productive use Finally, the use must generate the highest net return (profit) to the developer. A property that could hypothetically be developed with residential, commercial or industrial development might only have one of those uses as its highest and best use.

HABU Economic theory The economic concepts of utility and substitution drive the highest and best use analysis. The highest and best use of a property determines its utility to a potential purchaser. The purchaser of such a property would pay no more than a competing property with the same utility while a seller would accept no less than a seller of a comparable property. That is true to the neighbourhood.