Valuation And Market Analysis

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Appraisal

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A formal opinion of value that a real estate appraiser assigns, based on supportable evidence, for a specific purpose, party, and property, as of a specific, and in accordance with Uniform Standards of Professional Appraisal Practice (USPAP).Appr

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Appraisers

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Estimate the value of a building or a piece of land. Appraiser appraise property before it’s sold, mortgaged, or taxed

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Valuation (Formal Appraisal)

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The process of forming an opinion of a property’s value. The real estate and mortgage industries rely on appraisals to ensure that the value of a mortgaged property is sufficient to support the loan amount

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USPAP

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Appraisers follow the Uniform Standards of Professional Appraisal Practice

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Appraisal Steps

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State the problem, identify the specific property

Identify data needed

Gather and analyze data

Determine highest and best use

Estimate the land value as if the land were vacant

Use one or more of the three approaches to valuation

Reconcile values to determine the final appraised value

Develop and deliver the appraisal report

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FIRREA

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The Financial Institutions Reform, Recovery, and Enforcement Act of 1989 requires that appraisals performed in conjunction with federally related transactions must be completed by state certified or licensed appraisers

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Market Value

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The most probable price a property will sell for in an open market if neither the buyer nor the seller is under duress

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Value

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A property’s objective worth and may not equal price or cost

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Cost

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The amount to recreate that property if it disappeared off the face of the earth today

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Market Price

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The amount a buyer paid for a property and the seller accepted

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Types of value that appraisers may be asked to estimate:

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Market value, insurance value, and replacement value

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The principle of highest and best use refers to:

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A property’s legal and feasible use that would be the most profitable

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Four characteristics of value

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Demand, utility, scarcity, and transferability DUST

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Demand

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How popular or desirable a property is

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Utility

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The property’s function

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Scarcity

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Related to market supply

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Transferability

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The ease with which another person can purchase the property; a property with a title defect may suffer a loss of value because of the difficulty of being able to transfer title to another

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Value in use

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What a property is worth to the person using it

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Assessed Value

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What the local taxing authority thinks a property is worth

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Mortgaged Value

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Price at which the property can be loaned on or sold for at a foreclosure sale

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Insured Value

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Cost to replace or rebuild a property

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Investment Value

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The return on investment a property may provide

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The value of property is affected by certain:

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Economic principles of value

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Economic Principle of Value:

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Conformity, competition, substitution, contribution, plottage, assemblage, regression, progression, and anticipation

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Conformity

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How well a property’s value conforms to its surrounding area (how similar it is to other properties in the neighborhood)

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Competition

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A property’s value is determined in part based on what else is available

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Substitution

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A reasonable person will not pay more for a property if a comparable one can be had for less

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Contribution

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The value of any given change to the property is dependent on the value of the property as a whole. Because of this, the same improvement to different houses may result in an increase in value in one, while the other sees no appreciable change

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Plottage

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An increase in value that occurs by combining adjacent parcels of land into a single parcel

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Assemblage

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The process of combining the parcels

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Regression

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A decline in value due to the decline in value of neighboring properties

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Progression

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The increase in property value from increased surrounding property values

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Anticipation

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Changes in value may be caused by the expectation of events. A suburban residential property that is located near the site of a proposed public transportation facility may see an increase in value before the actual benefit is realized

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Comps or Comprables

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The similar properties during the sales comparison approach

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Subject property

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The property being appraised

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Bracketing

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A process in which an appraiser uses both superior and inferior units of comparison such as age, transaction price, etc to determine a probable range of values for a property

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There are two categories of comparison:

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Elements which look at physical and locational characteristics and units which look at the numbers

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Appraisers will make adjustments for a number of factors, applying the elements of comparison in the specific order:

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Financing terms and cash equivalency

Conditions of sale

Market conditions at the time of contract and closing

Location

Physical Characteristics

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Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA) of 1989

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Requires that appraisals performed in conjunction with federally related transactions must be completed by state certified or licensed appraisers

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Federally Related Transactions

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Are not FHA insured or VA guaranteed and will not be sold to a GSE such as Fannie Mae or Freddie Mac. Residential properties valued at $400,000 or less are exempt from federal appraisal requirements

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Purchases financed with a loan insured by the Federal Housing Administration (FHA)

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Must be appraised by a state licensed appraiser who’s approved by the US Department of Housing and Urban Development

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Purchases financed with a loan guaranteed by the US Department of Veteran Affairs

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Must be appraised by a VA certified, state licensed appraiser

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Appraiser Independence Requirements (AIR)

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Key mortgage industry players including Fannie Mae, Freddie Mac, and the Federal Housing Finance Agency (FHFA) implemented AIR in 2010

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AIR’s Intent

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To ensure that appraisals reflect an accurate, unbiased property value by requiring appraisers to be certified or licensed in the state in which the appraised property is located, knowledgeable about the local real estate market, qualified to appraise the subject property

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AIR Prohibits

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Lenders from attempting to influence or coerce an appraiser with respect to the opinion of value

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Lenders who want to sell their conventional mortgage loans to Fannie Mae must comply with:

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AIR

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AIR Permits

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Lenders to select residential appraisers from an approved list or panel of the lender employee involved in the selection have no involvement in loan approval

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Cost Approach

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Is based on the concept that the entire property is worth the sum of the value of the land and the value of the improvements on that land

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Cost Approach

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Appraisers use and rely on this when the property is unique and is not being used to generate rental income. A movie theater, hospital church or school fall into this category. It is also used in newly constructed or unique high value homes. Assumes the land is vacant and bases the opinion of value on highest and best use

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There are 3 causes of depreciation which are unrelated to tax depreciation:

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External depreciation, functional obsolescence, and physical depreciation

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External Depreciation

Also known as economic obsolescence

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Caused by factors outside the property such as an airport nearby causing noise

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Functional Obsolescence

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A form of depreciation or loss in value caused by defects in design and can occur with outdated structures or systems or when a property is overbuilt for the area

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Physical Deterioration

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Occurs with wear and tear, damage, and improper maintenance

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Functional Obsolescence

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A form of depreciation or loss in value caused by defects in design and can occur with outdated structures or systems or when a property is overbuilt for the area

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Physical Deterioration

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Occurs with wear and tear, damage, and improper maintenance

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Curable Depreciation

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Refers to an item of physical deterioration or functional obsolescence where the cost to cure the item is less than or the same as the anticipated increase in the property’s value after the item is cured

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Incurable Depreciation

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Includes items not practical to correct

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Replacement Cost Approach

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Bases value on the cost to build a functionality equivalent property

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Reproduction Cost Approach

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Determines the cost to build an exact replica of the property with the same materials and deficiencies

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Income Analysis Approach

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Bases the current property value on potential income that the property can generate for residential investment rental properties such as single family homes or residential buildings that compromise of 2-4 family units

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Income Analysis Approach cont

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Used when the property being appraised is primarily used to generate rental income, which includes shopping centers, apartment buildings, and office buildings

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Income Analysis Approach cont

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Used when the property being appraised is primarily used to generate rental income, which includes shopping centers, apartment buildings, and office buildings

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Investment Value

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Can tell an investor the expected rate of return for a property

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Income Analysis Approach cont

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Used when the property being appraised is primarily used to generate rental income, which includes shopping centers, apartment buildings, and office buildings

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Investment Value

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Can tell an investor the expected rate of return for a property

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There are three different methods for estimating value within the income approach:

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Gross rent multiplier, Gross income multiplier, and the capitalization rate or cap rate

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Gross Rent Multiplier GRM

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Used for the appraised value of 4 or fewer units

GRM=Sales Price/Gross Monthly Rent

Gross Monthly Rent x GRM=Value

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Gross Income Multiplier

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Used for the appraised value of five or more units (considered commercial property). GIM=Sale Price\Gross Annual Income. Gross Annual Income x GIM=Value

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Capitalization Rate or Cap Rate

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An annual rate of return from an income producing property. Used by appraisers to estimate value of rent generating properties. Used by investors to compare one investment to another

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Capitalization Rate or Cap Rate

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An annual rate of return from an income producing property. Used by appraisers to estimate value of rent generating properties. Used by investors to compare one investment to another

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Determine Cap Rate

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Divide net operating income by value (or sales price) I/V=R

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Comparative Market Analysis

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Help clients make price decisions. Help seller clients decide how to price the property and buyer clients decide how much they’re willing to pay. This is considered an informal estimate or market value

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Comparable Property (Comparable or Comp)

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One that’s quite similar to the subject property in terms of size, style, condition, number of rooms, and location.

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Comps cont

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Properties sold as foreclosures, short sales, or other distressed property sales shouldn’t be used as comps unless the licensee is pricing a property for sale under similar conditions

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Arms Length

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Properties used as comps should also be arms length transactions, which means that the parties to the sale are unrelated and that no one is under duress or pressure to complete the sale.

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Seller Concessions

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Closing cost paid by seller or creative or special financing considerations

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Active Listings

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Current competition or comparables that are currently on the market

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Expired Listings

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Properties that listed but did not sell. These give licensees an idea of how pricing impacted the listing.

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Pending

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Information about under contract pending properties may provide insights about the number of days on the market compared to price as well as general market conditions. These properties aren’t true comparables because the final sales price isn’t yet known

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Adjusting Comparables

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Licensees adjust the comparable sales price, not the subject property’s list price or potential list price. The comparables sales price is a known factor, and the goal is to determine a price or price range for the subject based on what the comparable would have sold for with the same characteristics as the subject property

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Adjusting Comps

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If a comparable is inferior to the subject property such as next to a busy street, adjust the comp upward. If it’s superior like in a secluded neighborhood adjust the comp downward. The goal is to determine what the comp would have sold for if it were identical to the subject