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400

  1. 1. Welcome to the International Right of Way Association’s Course 400 Principles of Real Estate Appraisal 400-PT – Revision 3 – 06.30.06.USA1
  2. 2. Introductions Who we are… What we do… Where we do it… How long we’ve been doing it… Our goals for the course...2
  3. 3. Objectives(1) At the end of the two days, you will be able to... • Express an understanding of basic real estate terms and principles • Demonstrate a basic knowledge of the valuation process and its components3
  4. 4. Objectives(2) At the end of the two day, you will be able to... • Discuss the definitions of and steps in each of the three (cost, sales comparison and income capitalization) approaches to value • Solve problems that show an understanding of the three approaches to value4
  5. 5. Housekeeping5
  6. 6. Schedule Day One (1) 8:00 - 8:15 Introductions, Etc. 8:15 - 9:45 Characteristics of Real Estate and Real Property. Definitions. Documents. 9:45 - 10:15 Cost, Price and Value6
  7. 7. Schedule Day One (2) 10:30 - 11:00 Factors that Create and Affect Value 11:00 - 12:00 Value Principles 1:00 - 5:00 Valuation Process7
  8. 8. Schedule Day Two (3) 8:00 - 8:15 Recap 8:15 - 2:30 Three Approaches to Value 2:45 - 3:15 Partial Acquisitions 3:15 - 4:00 Summary and Review 4:00 - 5:00 Final Exam8
  9. 9. Real Estate and Real Property Real estate is the physical land and appurtenances to the land. Real property is all the rights, interests and benefits inherent in the ownership of the real estate. It is the bundle of rights.9
  10. 10. Personal Property, Fixtures, and Trade Fixtures (1) Personal property is the items that are not affixed to the real estate. Fixtures are items that were once personal property but have since been permanently attached to the real estate.10
  11. 11. Personal Property, Fixtures, and Trade Fixtures (2) Tests: Manner affixed Adaptation Intent Trade fixtures are not part of the real estate.11
  12. 12. Appraisal An appraisal is the act or process of developing an opinion of value. An opinion of value. An appraisal is a written statement … setting forth an opinion of value … supported by the presentation and analysis of relevant market information.12
  13. 13. Controlling Documents Uniform Standards of Professional Appraisal Practice (USPAP) “The Yellow Book” The Uniform Act13
  14. 14. Cost, Price, and Value Cost is the amount spent to construct an improvement. Price is the amount paid for a good or service. Value is the worth of a good or service.14
  15. 15. Market Value Market value is a type of value, stated as an opinion, that presumes the transfer of a property … as of a certain date, under specific conditions … relationship, knowledge, and motivation; terms of sale; conditions of sale).15
  16. 16. D.U.S.T. (Factors that create value) Demand: The desire or need for real estate. Utility: Usefulness. Scarcity: The supply of real estate in relation to demand. Transferability: Title must be able to pass.16
  17. 17. E.E.G.S. (Factors that affect value) Economic: the relationship among demand, supply, and utility.Environmental: the natural and developed environment.Governmental: related to the government. Social: related to demographics.17
  18. 18. Value Principles (Principle of Substitution) When several similar goods or services are available, the one with the lowest price will attract the greatest demand.18
  19. 19. Value Principles (Highest and Best Use) The reasonably probable and legal use that is physically possible, appropriately supported, and financially feasible, and that results in the highest value.19
  20. 20. Value Principles (Principle of Supply and Demand) The price of a good or service varies directly with demand and inversely with supply.20
  21. 21. Value Principles (Principle of Anticipation) Present value is created by the expectation of future benefits.21
  22. 22. Other Principles • Change • Consistent Use • Contribution22
  23. 23. Valuation Process Appraisal Problem Definition Scope of Work Data Collection and Analysis Land Value Opinion Three Approaches to Value Reconciliation and Final Value Opinion Defined Value Opinion Report23
  24. 24. Valuation Process Appraisal Problem Definition • Identification of the client, intended use, and users • Value to be developed • Date of the value opinion • Identity and location of the subject property • Property rights to be valued • Limiting conditions24
  25. 25. Valuation Process Scope of Work • Degree to which the property is inspected or identified • Extent of research into physical and economic factors • Extent of data research • Type and extent of analysis applied to arrive at opinions or conclusions25
  26. 26. Valuation Process Data Collection and Selection • Market area data • Comparable property data • Subject property data26
  27. 27. Valuation Process Data Analysis • Market analysis • Highest and best use analysis27
  28. 28. Valuation Process Highest and Best Use The reasonably probable and legal use that is physically possible, appropriately supported, and financially feasible, and that results in the highest value. • Physically possible? • Legally permissible? • Financially feasible? • Maximally productive?28
  29. 29. Valuation Process Land Value Opinion • Allocation • Extraction • Ground rent capitalization • Land development • Land residual • Sales comparison29
  30. 30. Recap Day One30
  31. 31. Recap Yesterday and Look at Today31
  32. 32. Valuation Process Three Approaches to Value • Cost Approach • Sales Comparison • Income Capitalization Approach32
  33. 33. Valuation Process Cost Approach • Develop a value opinion for the land • Estimate the cost new of the improvement • Deduct depreciation • Add land value opinion to the depreciated improvement value33
  34. 34. Valuation Process Cost Approach Depreciation: Age-Life Method Depreciation Percentage = Effective Age Total Economic Life34
  35. 35. Valuation Process Sales Comparison Approach • Research the market for comparable data • Develop relevant units of comparison • Compare the sales to the subject and adjust for dissimilarities • Reconcile the value indications into a final value opinion35
  36. 36. Valuation Process Income Capitalization Approach The conversion of income into value through a rate or a ratio. • Gross Rent Multipliers • Direct Capitalization36
  37. 37. Valuation Process Income Capitalization Approach Gross Rent Multipliers Gross Rent Multiplier = Sale Price Gross Rent37
  38. 38. Valuation Process Income Capitalization Approach • Estimate the subject’s annual potential gross income • Determine a vacancy and collection loss • Subtract the vacancy and collection loss from the potential gross income • Estimate annual property expenses and subtract the expenses from the effective gross income to arrive at the net operating income • Develop a capitalization rate • Convert the net operating income into value38
  39. 39. Valuation Process Income Capitalization Approach Direct Capitalization Value = Net Operating Income or Vo = NOI Capitalization Rate Ro39
  40. 40. Valuation Process Reconciliation and Final Value Opinion40
  41. 41. Valuation Process Defined Value Opinion Report • Self-contained • Summary • Restricted-use41
  42. 42. Partial Acquisitions(1) Larger parcel is the total property before the taking. • Contiguity • Title • Use Value of the part taken is determined by multiplying the quantity taken times the before unit value of the item42
  43. 43. Partial Acquisitions(2) Damages to the remainder property represent the loss in value to the remainder property as a result of a partial acquisition Benefits to the remainder property represent the increase in value to the remainder43 property as a result of a partial
  44. 44. Partial Acquisitions(3) Federal (Before and After) Rule is the difference between the value before the acquisition and the value after the acquisition State (Summation) Rule is the value of the part taken plus (damages to the remainder property minus benefits to the remainder property [the damages minus the benefits cannot be less than zero dollars])44
  45. 45. Objectives(1) Right now, you should be able to... • Express an understanding of basic real estate terms and principles • Demonstrate a basic knowledge of the valuation process and its components45
  46. 46. Objectives(2) Right now, you should be able to... • Discuss the definitions of and steps in each of the three (cost, sales comparison and income capitalization) approaches to value • Solve problems that show an understanding of the three approaches to value46
  47. 47. Thank you! 400-PT – Revision 3 – 06.30.06.USA47

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