Xtra - Study Notes Flashcards
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
Principles Impacting Real Property Value
anticipation change supply demand competition substitution balance contribution surplus productivity conformity externalities
Principles Impacting Real Property Value
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
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
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
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
Bundle of Rights
- Sell or give away
- Occupy
- Lease
- Mortgage
- Create a life estate
- Do nothing
Bundle of Rights
six rights
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
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
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
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
Three Approaches to Value
- Direct Comparison
- Cost Approach
- Income Approach
Three Approaches to Value
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.
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.
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
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
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
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
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
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
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
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)
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
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 Analysis
- Problem Definition
- Preliminary screening of alternative uses
- Analysis of alternative uses to determine highly probably uses
- Identify the most probable use with respect to:
• Land use
• Timing of the use
• Market participants of that use
• Financial analysis
Highest and Best Use Analysis
- Problem Definition
- Preliminary screening of alternative uses
- Analysis of alternative uses to determine highly probably uses
- 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
- Research
- Verify
- Select
- Adjust the price
- 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
- Value of site as vacant
- Reproduction cost or replacement cost?
- Estimate direct and indirect costs of the improvements
- Estimate entrepreneurial profit
- direct costs + indirect costs + entrepreneurial profit = cost of improvements
- Estimate depreciation
- Deduct estimated depreciation for total cost of improvements
- Contributory value of site improvements
- Add to cost of improvements
- 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
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.
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
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.
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
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
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
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
- Market Conditions (Time) adjustments
- Other adjustments
- Order of the adjustments
- Time adjusted
- Write a reconciliation
• Find the best comparable (don’t average)
Direct Comparison Approach
- Market Conditions (Time) adjustments
- Other adjustments
- Order of the adjustments
- Time adjusted
- Write a reconciliation
• Find the best comparable (don’t average)
Income Approach
- 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 - Calculate the Gross Income Multiplier (GIM)
- Calculate the Capitalization Rate
• Using the net income and sale price of comparable properties
Income Approach
- 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 - Calculate the Gross Income Multiplier (GIM)
- 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.
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.
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
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.
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.
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.
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.
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.
