Cost v. Value & The Appraisal Process The Search for Balance
Cost v. Value <ul><li>“ Appraisal”, or “real estate appraisal”,   means an analysis, opinion or conclusion relating to the...
Comparative Market Analysis <ul><li>Appraisal statutes allows a broker to prepare an “estimate of value” which is not repr...
Cost v. Value <ul><li>Seven Types of Value </li></ul><ul><ul><li>Market Value Equilibrium Value </li></ul></ul><ul><ul><li...
Cost v. Value <ul><li>Item   Year   Cost   Resale Value  Return </li></ul><ul><li>Kitchen (Major) 1999 $ 30,468  $ 18,031 ...
Cost v. Value <ul><li>Item   Year   Cost   Resale Value  Return </li></ul><ul><li>Kitchen (Major)  2003 $42,112  $28,000  ...
Cost v. Value <ul><li>Item   Year   Cost   Resale Value  Return </li></ul><ul><li>Kitchen (Minor)  2004 $ 41,859  27,000  ...
Cost v. Value <ul><li>Item   Year   Cost   Resale Value  Return </li></ul><ul><li>Kitchen (Minor)  2005 $14,509  $11,398  ...
Cost v. Value <ul><li>Item   Year   Cost   Resale Value  Return </li></ul><ul><li>Kitchen (Minor)  2006 $ 17,517  13,429  ...
Cost v. Value <ul><li>Item   Year   Cost   Resale Value  Return </li></ul><ul><li>Kitchen (Minor)  2007 $ 20,634  17,139  ...
Cost v. Value <ul><li>Item 1999 2003 2004 2005 2006 2007 </li></ul><ul><li>Kitchen Remodel  59% 66.5% 64.5% 78.6% 76.7% 83...
Cost v. Value <ul><li>Segmented Costs </li></ul><ul><li>Average Quality Home, 2-Story,  </li></ul><ul><li>1,700 Sq. Ft., C...
Cost v. Value <ul><li>Segmented Costs </li></ul><ul><li>Good Quality, Ranch Style Home  </li></ul><ul><li>1,600 Sq. Ft., C...
Cost v. Value <ul><li>The Cost v. Value problem will always be influenced by the: </li></ul><ul><li>Purchasers motivation ...
Types of Appraisals <ul><li>Current lending practices have established a number of appraisal forms that aid in assessing a...
Types of Appraisals <ul><li>Please refer to the inserted page for a list of some of the most prevalent forms used in today...
Types of Appraisals <ul><li>Uniform Residential Appraisal Report </li></ul><ul><li>(Form 1004 - URAR)  </li></ul><ul><li>T...
Types of Appraisals <ul><li>Uniform Residential Appraisal Report </li></ul><ul><li>(Form 2055 - FNMA)   </li></ul><ul><li>...
Types of Appraisals <ul><li>Uniform Residential Appraisal Report </li></ul><ul><li>(Form 2075)   </li></ul><ul><li>This fo...
Types of Appraisals <ul><li>Appraisal Valuation Model </li></ul><ul><li>This is a computer generated report based on a  </...
Types of Appraisals <ul><li>Small Residential Income Report </li></ul><ul><li>Used specifically for 2-4 residential units,...
Types of Appraisals <ul><li>Receive the assignment; Establish Scope of Work </li></ul><ul><li>Conduct preliminary survey <...
Basic Theory & Practices <ul><li>Dominate Features </li></ul><ul><li>The Three C’s </li></ul><ul><li>The Three D’s </li></...
Dominate Features <ul><li>Any feature of the subject property (or comparable) that positively or negatively affects the va...
Dominate Features <ul><li>Any feature of the subject property (or comparable) that positively or negatively affects the va...
The Three C’s <ul><li>What defines a good comparable? </li></ul><ul><li>Close   </li></ul><ul><li>Within one mile of the s...
The Three D’s <ul><li>When good comparables are scarce……. </li></ul><ul><li>Distant </li></ul><ul><li>Over one mile away o...
Matched Pair Analysis <ul><li>When two comparables are identical or very similar in all but one characteristic, the differ...
Bracketing <ul><li>A technique of selecting some comparables  </li></ul><ul><li>that are slightly superior to the home and...
Market Value <ul><li>Fundamental assumptions regarding market value are: </li></ul><ul><li>Buyer and Seller are motivated ...
Market Value <ul><li>Factors that are prevalent when you are appraising in appreciating markets: </li></ul><ul><li>Compara...
Comparable Sale <ul><li>Most recent sale date </li></ul><ul><li>Similar appeal to the subject property </li></ul><ul><li>T...
Highest Sale in the Area <ul><li>Look to pending sales (obtain sales price) for comparison </li></ul><ul><li>Is it consist...
CMA Pitfalls <ul><li>Common questions that can back you into a corner…… </li></ul><ul><li>I live in ______ neighborhood. W...
CMA Pitfalls <ul><li>My neighbor’s house two houses over just sold their home for ______ dollars. What’s my house worth? <...
CMA Pitfalls <ul><li>I just put $10,000 in brand new windows in my home. I’ll get all that back if I sell today, right? </...
CMA Pitfalls <ul><li>Mr. Jones </li></ul><ul><li>Can you tell me how much my home is worth if I sell today? </li></ul><ul>...
CMA Considerations <ul><ul><li>Please use this page as a guideline when </li></ul></ul><ul><ul><li>producing a CMA. Consid...
Final Reminder <ul><li>Any CMA completed by a licensed agent or broker must include the disclaimer found in CP 24 which st...
Questions ???
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Appraisal Process

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The process of appraising real property and some of the determinations an appraiser has to make.

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Appraisal Process

  1. 1. Cost v. Value & The Appraisal Process The Search for Balance
  2. 2. Cost v. Value <ul><li>“ Appraisal”, or “real estate appraisal”, means an analysis, opinion or conclusion relating to the nature, quality, value, or utility of specified interests in, or aspects of, identified real estate. Such terms include a valuation, which is an opinion of the value of real estate…..” </li></ul><ul><li>Cost = That amount of money, barter or exchange given for a good or commodity; the identified sales price or asking price for a particular item. </li></ul>
  3. 3. Comparative Market Analysis <ul><li>Appraisal statutes allows a broker to prepare an “estimate of value” which is not represented as an appraisal and is not used to obtain financing. </li></ul><ul><li>Appraisal statutes allows a broker to prepare what are termed “evaluations” in federal banking regulations. This provision is very narrow in scope — a broker may prepare such an evaluation only for a federally regulated bank, savings and loan or credit union with whom they have a contract. (Sections 12-61-02(2) and 12-61-718, CRS). </li></ul>
  4. 4. Cost v. Value <ul><li>Seven Types of Value </li></ul><ul><ul><li>Market Value Equilibrium Value </li></ul></ul><ul><ul><li>Use Value Investment Value </li></ul></ul><ul><ul><li>Insurable Value Assessed Value </li></ul></ul><ul><ul><li> Appraised Value </li></ul></ul><ul><ul><li>Four Tests for Highest and Best Use </li></ul></ul><ul><ul><li>Legally permissible Physically possible </li></ul></ul><ul><ul><li>Financially Feasible Maximally profitable </li></ul></ul><ul><ul><li>Three Approaches to Value </li></ul></ul><ul><ul><li>Sales Approach Cost Approach Income Approach </li></ul></ul>
  5. 5. Cost v. Value <ul><li>Item Year Cost Resale Value Return </li></ul><ul><li>Kitchen (Major) 1999 $ 30,468 $ 18,031 59% </li></ul><ul><li>Bathroom Addition $ 13,640 $ 7,678 56% </li></ul><ul><li>Bathroom Remodel $ 8,952 $ 4,386 49% </li></ul><ul><li>Family Room Addition $ 30,341 $19,902 66% </li></ul><ul><li>Window Replacement $ 7,380 $ 4,166 56% </li></ul><ul><li>Deck Addition $ 7,862 $ 2,986 38% </li></ul><ul><li>(All figures taken from REALTOR Magazine 1999 December edition) </li></ul>
  6. 6. Cost v. Value <ul><li>Item Year Cost Resale Value Return </li></ul><ul><li>Kitchen (Major) 2003 $42,112 $28,000 66.5% </li></ul><ul><li>Bathroom Addition $14,481 $ 9,600 66.3% </li></ul><ul><li>Bathroom Remodel $ 9,982 $ 7,300 73.1% </li></ul><ul><li>Family Room Addition $50,916 $35,000 68.7% </li></ul><ul><li>Window Replacement $ 9,050 $ 5,000 55.2% </li></ul><ul><li>Deck Addition $ 6,516 $ 2,900 44.5% </li></ul><ul><li>(All figures taken from REALTOR Magazine 2003 December edition) </li></ul>
  7. 7. Cost v. Value <ul><li>Item Year Cost Resale Value Return </li></ul><ul><li>Kitchen (Minor) 2004 $ 41,859 27,000 64.5% </li></ul><ul><li>Basement Remodel $ 48,199 21,714 45.1% </li></ul><ul><li>Bathroom Remodel $ 10,023 6,143 61.3% </li></ul><ul><li>Family Room Addition $ 52,130 30,000 57.5% </li></ul><ul><li>Window Replacement $ 9,319 6,643 71.3% </li></ul><ul><li>Deck Addition $ 6,798 3,571 52.5% </li></ul><ul><li>Home Office Remodel $ Data Not Provided </li></ul><ul><li>Roof Replacement $ 11,363 5,286 46.5% </li></ul><ul><li>(All figures taken from REALTOR Magazine 2004 December edition) </li></ul>
  8. 8. Cost v. Value <ul><li>Item Year Cost Resale Value Return </li></ul><ul><li>Kitchen (Minor) 2005 $14,509 $11,398 78.6% </li></ul><ul><li>Basement Remodel $48,878 $45,956 92.1% </li></ul><ul><li>Bathroom Remodel $10,233 $ 8,649 84.5% </li></ul><ul><li>Family Room Addition $53,646 $47,868 89.2% </li></ul><ul><li>Window Replacement $ 9,302 $ 6,863 73.8% </li></ul><ul><li>Deck Addition $11,302 $ 8,486 75.1% </li></ul><ul><li>Home Office Remodel $12,349 $ 7,008 56.7% </li></ul><ul><li>Roof Replacement $ 9,215 $ 6,300 68.4% </li></ul><ul><li>(All figures taken from REALTOR Magazine 2005 December edition) </li></ul>
  9. 9. Cost v. Value <ul><li>Item Year Cost Resale Value Return </li></ul><ul><li>Kitchen (Minor) 2006 $ 17,517 13,429 76.7% </li></ul><ul><li>Basement Remodel $ 55,336 41,715 75.4% </li></ul><ul><li>Bathroom Remodel $ 12,588 9,770 77.6% </li></ul><ul><li>Family Room Addition $ 73,110 53,546 73.2% </li></ul><ul><li>Window Replacement $ 9,862 8,369 84.9% </li></ul><ul><li>Deck Addition $ 14,672 10,740 73.2% </li></ul><ul><li>Home Office Remodel $ 19,191 10,469 54.6% </li></ul><ul><li>Roof Replacement $ 12,768 9,644 75.5% </li></ul><ul><li>(All figures taken from REALTOR Magazine 2006 December edition) </li></ul>
  10. 10. Cost v. Value <ul><li>Item Year Cost Resale Value Return </li></ul><ul><li>Kitchen (Minor) 2007 $ 20,634 17,139 83.1% </li></ul><ul><li>Basement Remodel $ 56,297 47,167 83.8% </li></ul><ul><li>Bathroom Remodel $ 14,955 12,289 82.2% </li></ul><ul><li>Family Room Addition $ 76,068 51,781 68.1% </li></ul><ul><li>Window Replacement $ 10,055 7,665 76.2% </li></ul><ul><li>Deck Addition $ 10,717 9,244 86.3% </li></ul><ul><li>Home Office Remodel $ 26,503 14,601 55.1% </li></ul><ul><li>Roof Replacement $ 15,902 10,853 68.2% </li></ul><ul><li>(All figures taken from REALTOR Magazine 2007 December edition) </li></ul>
  11. 11. Cost v. Value <ul><li>Item 1999 2003 2004 2005 2006 2007 </li></ul><ul><li>Kitchen Remodel 59% 66.5% 64.5% 78.6% 76.7% 83.1% </li></ul><ul><li>Basement Remodel N/A N/A 45.1% 92.1% 75.4% 83.8% </li></ul><ul><li>Bathroom Addition 56% 66.3% N/A N/A N/A N/A </li></ul><ul><li>Bathroom Remodel 49% 73.1% 61.3% 84.5% 77.6% 82.2% </li></ul><ul><li>Family Room Addition 66% 68.7% 57.5% 89.2% 73.2% 68.1% </li></ul><ul><li>Window Replacement 56% 55.2% 71.3% 73.8% 84.9% 76.2% </li></ul><ul><li>Deck Addition 39% 44.5% 52.5% 75.1% 73.2% 86.3% </li></ul><ul><li>Home Office Remodel N/A N/A N/A 56.7% 54.6% 55.1% </li></ul><ul><li>Roof Replacement N/A N/A 46.5% 68.4% 75.5% 68.2% </li></ul>
  12. 12. Cost v. Value <ul><li>Segmented Costs </li></ul><ul><li>Average Quality Home, 2-Story, </li></ul><ul><li>1,700 Sq. Ft., Comp Roof, Garage </li></ul><ul><li>1-Car Attached 2-Car Attached </li></ul><ul><li>$22.66 PSF *280 SF = $6,344 $19.58 PSF *440 SF= $8,617 </li></ul><ul><li> Fireplaces </li></ul><ul><li>Single $3,050 ~ $3,750 </li></ul><ul><li> Unfinished Basements </li></ul><ul><li>800 SF , 8” poured Concrete * $17.01 PSF = $13,608 </li></ul>
  13. 13. Cost v. Value <ul><li>Segmented Costs </li></ul><ul><li>Good Quality, Ranch Style Home </li></ul><ul><li>1,600 Sq. Ft., Comp Roof, Frame Construction </li></ul><ul><li>1-Car Attached $36.17 PSF *280 SF = $10,127 </li></ul><ul><li>2-Car Attached $29.10 PSF *440 SF = $12,804 </li></ul><ul><li>Fireplaces Single $3,925 ~ $4,775 </li></ul><ul><li>Unfinished Basement </li></ul><ul><li>1200 SF , 8” poured Concrete * $19.61 PSF = $23,532 </li></ul>
  14. 14. Cost v. Value <ul><li>The Cost v. Value problem will always be influenced by the: </li></ul><ul><li>Purchasers motivation </li></ul><ul><li>Intended use of the property </li></ul><ul><li>Functional Utility </li></ul><ul><li>Ability of the Purchaser to qualify </li></ul><ul><li>Condition of the property </li></ul><ul><li>Location </li></ul><ul><li>Opinion of value as determined by a disinterested 3 rd party (Appraiser) </li></ul>
  15. 15. Types of Appraisals <ul><li>Current lending practices have established a number of appraisal forms that aid in assessing a properties value. This value is then translated into the marketability of the loan, i.e. its value when it is combined with other similar products for sale on the secondary market. If the loan (or servicing) is not transferred, it becomes an asset to the institution that holds the note. </li></ul>
  16. 16. Types of Appraisals <ul><li>Please refer to the inserted page for a list of some of the most prevalent forms used in today’s mortgage-based portfolio’s. </li></ul>
  17. 17. Types of Appraisals <ul><li>Uniform Residential Appraisal Report </li></ul><ul><li>(Form 1004 - URAR) </li></ul><ul><li>This is the most complete and most widely </li></ul><ul><li>recognized report for SFR. Includes a sketch, </li></ul><ul><li>photo’s, disclosures, scope of work, comparables </li></ul><ul><li>and more. </li></ul>
  18. 18. Types of Appraisals <ul><li>Uniform Residential Appraisal Report </li></ul><ul><li>(Form 2055 - FNMA) </li></ul><ul><li>This is a ‘Short-Form’ and used mostly for </li></ul><ul><li>Single Family Residences. This form does </li></ul><ul><li>not usually include any sketch, but still </li></ul><ul><li>includes photo’s, disclosures, scope of work, </li></ul><ul><li>& comparables. </li></ul>
  19. 19. Types of Appraisals <ul><li>Uniform Residential Appraisal Report </li></ul><ul><li>(Form 2075) </li></ul><ul><li>This form is called a ‘Drive-By’ appraisal and </li></ul><ul><li>can be used for a variety of reasons. This report does </li></ul><ul><li>not include any sketch, but still includes photo’s, </li></ul><ul><li>disclosures, scope of work, & comparables. No </li></ul><ul><li>condition report can accurately be provided therefore </li></ul><ul><li>maximum value is not the objective here. </li></ul>
  20. 20. Types of Appraisals <ul><li>Appraisal Valuation Model </li></ul><ul><li>This is a computer generated report based on a </li></ul><ul><li>database of thousands of reports. Basic residential </li></ul><ul><li>information such as Bed / Bath / Bsmt / Spaces, </li></ul><ul><li>etc. is provided, a location is given and the computer </li></ul><ul><li>searches the database for comparables or matches. Specific use criteria is established by the lender for </li></ul><ul><li>use of this report. </li></ul>
  21. 21. Types of Appraisals <ul><li>Small Residential Income Report </li></ul><ul><li>Used specifically for 2-4 residential units, this </li></ul><ul><li>report generates a ‘Gross Rent Multiplier’ as </li></ul><ul><li>well as the Cost Approach (if required) to the </li></ul><ul><li>lender for income analysis on the property. This </li></ul><ul><li>is a more costly and time consuming report </li></ul><ul><li>based on the nature of the loan being made. </li></ul>
  22. 22. Types of Appraisals <ul><li>Receive the assignment; Establish Scope of Work </li></ul><ul><li>Conduct preliminary survey </li></ul><ul><li>Data Collection / Analysis / Time Mgmt </li></ul><ul><li>Application of the Three Approaches </li></ul><ul><li>Reconcile Indications of Value </li></ul><ul><li>Finalize and Issue Appraisal Report </li></ul>
  23. 23. Basic Theory & Practices <ul><li>Dominate Features </li></ul><ul><li>The Three C’s </li></ul><ul><li>The Three D’s </li></ul><ul><li>Matched Pairs </li></ul><ul><li>Bracketing </li></ul><ul><li>Market Value </li></ul>
  24. 24. Dominate Features <ul><li>Any feature of the subject property (or comparable) that positively or negatively affects the value of the property </li></ul><ul><li>What do you believe some dominate features might be? </li></ul><ul><li>___________________________________ </li></ul><ul><li>___________________________________ </li></ul>
  25. 25. Dominate Features <ul><li>Any feature of the subject property (or comparable) that positively or negatively affects the value of the property </li></ul><ul><li>What do you believe some dominate features might be? </li></ul><ul><li>Central Air, 3-Car Garage, Enclosed Patio, </li></ul><ul><li>Finished Basement, 22 year old roof, etc. </li></ul>
  26. 26. The Three C’s <ul><li>What defines a good comparable? </li></ul><ul><li>Close </li></ul><ul><li>Within one mile of the subject property </li></ul><ul><li>Current </li></ul><ul><li>Sold within the most recent six months </li></ul><ul><li>Clone </li></ul><ul><li>Similar dominate features </li></ul>
  27. 27. The Three D’s <ul><li>When good comparables are scarce……. </li></ul><ul><li>Distant </li></ul><ul><li>Over one mile away or in different market area </li></ul><ul><li>Dated </li></ul><ul><li>Over six months old </li></ul><ul><li>Dissimilar </li></ul><ul><li>Does not share dominate features </li></ul>
  28. 28. Matched Pair Analysis <ul><li>When two comparables are identical or very similar in all but one characteristic, the difference in the value accounts for that characteristic. </li></ul><ul><li>The principle that supports this technique is contribution (the value of a particular component is measured in terms of its contribution to the value of the whole property.) </li></ul><ul><li>In practice, several match pairs should be used because no two sets of comparables will result in the exact dollar difference for the same characteristic. A range should be established. </li></ul>
  29. 29. Bracketing <ul><li>A technique of selecting some comparables </li></ul><ul><li>that are slightly superior to the home and </li></ul><ul><li>others that are slightly interior in regard to </li></ul><ul><li>dominate features. </li></ul>
  30. 30. Market Value <ul><li>Fundamental assumptions regarding market value are: </li></ul><ul><li>Buyer and Seller are motivated by self-interests. </li></ul><ul><li>Buyer and Seller are well informed and are acting prudently. </li></ul><ul><li>The property is exposed for a reasonable time on the open market. </li></ul><ul><li>Payment is made in cash or its equivalent or in specified financing terms. </li></ul><ul><li>Specified financing, if any, may be the financing actually in place or on terms generally available for the property type in its locale on the effective appraisal date. </li></ul><ul><li>The effect, if any, on the amount of market value of typical financing, services, or fees shall be clearly and precisely revealed in the appraisal report. </li></ul>
  31. 31. Market Value <ul><li>Factors that are prevalent when you are appraising in appreciating markets: </li></ul><ul><li>Comparable sales are available </li></ul><ul><li>When the Subject is the highest sale in the neighborhood </li></ul><ul><li>Properties are selling above list price </li></ul><ul><li>Properties are in multiple offer situations </li></ul>
  32. 32. Comparable Sale <ul><li>Most recent sale date </li></ul><ul><li>Similar appeal to the subject property </li></ul><ul><li>Time adjustments, if a dated sale </li></ul>
  33. 33. Highest Sale in the Area <ul><li>Look to pending sales (obtain sales price) for comparison </li></ul><ul><li>Is it consistent with trends in the market? </li></ul><ul><li>Is it in a competitive area? </li></ul><ul><li>Is the property physically conforming to other homes in the neighborhood? </li></ul>
  34. 34. CMA Pitfalls <ul><li>Common questions that can back you into a corner…… </li></ul><ul><li>I live in ______ neighborhood. What’s my house worth? </li></ul>
  35. 35. CMA Pitfalls <ul><li>My neighbor’s house two houses over just sold their home for ______ dollars. What’s my house worth? </li></ul>
  36. 36. CMA Pitfalls <ul><li>I just put $10,000 in brand new windows in my home. I’ll get all that back if I sell today, right? </li></ul>
  37. 37. CMA Pitfalls <ul><li>Mr. Jones </li></ul><ul><li>Can you tell me how much my home is worth if I sell today? </li></ul><ul><li>Mr. Realtor </li></ul><ul><li>Why yes I can Mr. Jones. When can I stop over to view your home? </li></ul><ul><li>Mr. Jones </li></ul><ul><li>Why do you need to see it? </li></ul>
  38. 38. CMA Considerations <ul><ul><li>Please use this page as a guideline when </li></ul></ul><ul><ul><li>producing a CMA. Consider the purpose of the </li></ul></ul><ul><ul><li>CMA, the motivations of the seller/owner and the </li></ul></ul><ul><ul><li>adjustments you should make when evaluating a </li></ul></ul><ul><ul><li>property. This process will aid you in producing </li></ul></ul><ul><ul><li>a more realistic product and help you </li></ul></ul><ul><ul><li>understand how to integrate value models into </li></ul></ul><ul><ul><li>you real estate practice. </li></ul></ul>
  39. 39. Final Reminder <ul><li>Any CMA completed by a licensed agent or broker must include the disclaimer found in CP 24 which states… </li></ul><ul><li>” NOTICE: The preparer of this appraisal is not registered, licensed or certified as a real estate appraiser by the State of Colorado”. </li></ul>
  40. 40. Questions ???

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