Chapter 16 Real Estate Appraisal

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R

Back 1

T

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T

Back 2

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R

Back 3

H

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Appraisal

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Estimate of the value of the property

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Other types of valuations /Not as detailed as appraisal

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BPO = Brokers Price Opinion (not as detailed as CMA)

CMA = Comparitive Market Analysis (Can be a sales person)

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Appraiser Qualifications

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Must be a member of:

Uniform Standards of Professional Appraiser Practice (USPAP)

Appraisal Standards Board (ASB)

Appraisers Qualifications Board (AQB)

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Appraisal Process

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1. Gather General Data

2. Specific Data

3. Apply all three approaches to appraisal (BPO, CMA, APPRAISAL)

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Characteristics of Value

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Demand - need or desire of property

Utility - properties usefulness

Scarcity - finite supply

Transferability - ease of which ownership rights can be transferred.

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Market Value vs Market Price

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Value = the actual worth of property

Price = Amount sold for

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Basic Principals of Value

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Anticipation: Anticipation of an event occurring

Change: Any change to the property (Natural Disaster, etc.)

Competition: supply and demand

Conformity: Changing to the standards of its surroundings

: Changing to the standards of its surroundings

Contribution: Money put into updating the essentails of property (kitchen, bathroom, etc.)

Highest and Best Use: most profitable and single use of property

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Increasing and diminishing returns

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Law of increasing returns: as long as money is spent improving the property, the value continues to increase until it reaches it's full potential

Law of diminishing returns: Once a property reaches its highest point of value (nothing more can be done to the property) then the value starts to diminish.

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Plottage / Assemblage

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Assemblage: Consolidating adjacent lots into a single larger property.

Ex: Selling a much larger unit could get more money than selling two smaller units. Two owners may decide to consolidate their property and sell it as one for more money.

Plottage: The value merged property

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Regression and Progression

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Value of property can either go up (Profression) or go down (Regression).

Ex: Surroundings can affect value of property. HOA

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Three approaches to value

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Sales Comparison Approach: Best used for existing property of residence.

EX: Using existing surrounding property to determine value.

Cost Approach: How much it will cost to update the property

Depreciation: Factors that adversely affect value

a prison near your home or homeless shelter

(wear and tear - my mom's house)

2. Functional Obselecense - No longer functional

Ex: Building a prison near your home or homeless shelter 1. Physical deterioration (wear and tear - my mom's house)2. Functional Obselecense - No longer functional Ex: Separate kitchen (people prefer open concepts now)Ex: Wheelchair ramp3. External Obselence - Neighborhood or surrounding area

1. Physical deterioration (wear and tear - my mom's house)2. Functional Obselecense - No longer functional Ex: Separate kitchen (people prefer open concepts now)Ex: Wheelchair ramp3. External Obselence - Neighborhood or surrounding area

Ex: Separate kitchen (people prefer open concepts now)

Ex: Wheelchair ramp

3. External Obselence - Neighborhood or surrounding area

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Income Approach

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** Best suited for apartment buildings and office complexes **

Definition: Assumes the income generated by property determines the value of property.

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Gross Rent or Gross Income Multipliers

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 Used as a guideline for estimation of value (Based on sales price and rental income) o Gross Rent Multiplier (GRM): Approximation of value based on monthly  GRM = Sales Price / Monthly Gross Rent o Gross Income Multiplier (GIM): Approximation based on annual income  GIM = Sales Price / Annual Gross Income

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Reconciliation

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Uses all three approaches to value property 1. Sales Comparison Approach 2. Cost Approach 3. Income Approach

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Estate For Years

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Has a STARTING DATE and END DATE (could be 1 month, 3 month, 1 year, etc.)

Has a STARTING DATE and END DATE (could be 1 month, 3 month, 1 year, etc.)

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Estate from period to period

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Has a STARTING DATE but NO END DATE (Month to Month)

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Estate at WILL

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NO STARTING or END Date (Right to possess property for unspecified amount of time) Note: Terminated by death of tenant or landlord

NO STARTING or END Date (Right to possess property for unspecified amount of time) Note: Terminated by death of tenant or landlord

NO STARTING or END Date (Right to possess property for unspecified amount of time) Note: Terminated by death of tenant or landlord

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Estate at sufferance

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Hold over tenancy is when a tenant doesn’t give up ownership of the property at the end of the lease terms.  The landlord can accept rent offered by tenant creating a new lease  The landlord can reject the “Hold over” and tenant is then converted to month – to – month  The landlord can treat tenant as trespasser and have them removed through court

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Requirements of valid lease

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Must meet following requirements: 1. Capacity to contract: Must be of legal age and sound mind 2. Legal Objective: Must not be prohibited by law 3. Offer and Acceptance: Both parties must reach mutual agreement on lease terms 4. Consideration: Support by valid consideration – EXCHANGE OF PROMISES

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Possession of Premises

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Covenant of quiet enjoyment: Right to enjoy property because you paid for it.

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Use of Premises

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Leaser may restrict what the property is being used for. Ex: Tenant may not be allowed to run a business at the property.

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Term of Lease

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How long the lease is for.

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Security Deposit

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Deposit held by landlord in event of damage/non-payment, etc. Must be held in escrow account Note: If deposit is not returned within 45 days, tenant has right to sue for 3x amount.

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Improvements

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Can not do any improvements without the land lords permission Accessibility

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Accessibility

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Reasonable accommodation for disabled persons (Americans with Disabilities Act)

Reasonable accommodation for disabled persons (Americans with Disabilities Act)

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Maintenance of Premises

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 Requirement for land lord to ensure that the property maintains habitable dwelling units

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Destruction of Premises

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Obligation to pay for damages

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Assignment and Subleasing

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- Assignment: Transferring entire lease to someone else, with no other obligation to original tenant - Subleasing: Transferring less than entire lease, original lease holder still responsible for unit

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Recording the Lease

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 You don’t have to record a lease  Leases 7+ years must be in writing (Maryland State Law)  Leases go with the land (If owner of land changes, lease remains)  All leases MUSTS be in writing – Unless is LESS THAN 1 YEAR

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Non-Disturbance Clause

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You have the right to use apartment with respect to neighbors (Noise, etc.)

You have the right to use apartment with respect to neighbors (Noise, etc.)

You have the right to use apartment with respect to neighbors (Noise, etc.)

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Options

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Example of UNILATERAL CONTRACT - only one party making promise and bound until other party accepts.  “Right of Refusal: Allows tenant the opportunity to buy the property before owner accepts offer from another part  Ex: At the end of the lease, tenant has “OPTION” to purchase (No Option) Bilateral Contract: Exchange of promises, both are bound.

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Gross Lease

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 Tenant pays fixed rent and some utilities

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Net lease

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 Tenant pays ALL or MOST expenses associated with property (Rent, Taxes, Insurance, etc.) o Mainly commercial property

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Percentage Lease

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 Rent is based on minimum fixed rental fee plus percentage of gross income received by tenant doing business.

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Variable Lease

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 Graduated Lease: Increase at the end of lease term  Indexed Lease: Allows rent to increase or decrease, based on market.

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Ground Lease

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 Lease of unimproved land, allowing tenant to build structure on the property. Often used in commercial property.

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Oil and Gas Lease

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 When an oil company leases land to explore for oil and gas.

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Purchase lease

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Used when a tenant wants to purchase property but not yet able to do so. (Almost like Lease to Own) The purchaser may put a down a down payment and pay rent, which may be applied to the future purchase of the property.

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Sale and leaseback

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 Property owners sell the property and lease it back.

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Discharge of a lease

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 By agreement.  Through expiration of lease

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Breach of Lease

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When tenant violates lease provision

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Suit for possession – Actual Conviction

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Suit for possession: First process, filing of suit

Actual Conviction: Process of eviction

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Tenants Remedies - Constructive Eviction

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 Tenant Remedies: When the landlord breaches any clause of a lease agreement  Constructive Eviction: When the property becomes unusable

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Protenant Legislation

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 Protects the Tenant (All aspects)