1. Chapter 18: Real Estate Appraisal
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2. PURPOSE AND USE OF APPRAISALS
An appraisal is a necessary part of most real
estate transactions.
 The decision to buy, sell, or grant a loan on
real estate hinges on property value.
Appraisals are also used to set prices on
property listed for sale, to set premiums on
fire insurance policies, used by government to
acquire and manage public property, & to
establish property tax levels.
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3. APPRAISAL
 An estimate of value.
 Three value approaches:
 Market – comparable sales data
 Cost – construction cost plus land value
 Income – monetary returns of property capitalized
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4. VALUING A HOUSE MARKET COMPARISON
APPROACH
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5. MARKET VALUE DEFINED
• the most probable price that 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,
knowledgeably, and assuming
the price is not affected by
undue stimulus.
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6. SALES COMPARISON APPROACH
 LOT FEATURES AND LOCATION
 COMPARABLES
 SALES RECORDS
 VERIFICATION
 NUMBER OF COMPARABLES
 ADJUSTMENT PROCESS
 TIME ADJUSTMENTS
 HOUSE SIZE
 GARAGE AND PATIO ADJUSTMENTS
 BUILDING AGE, CONDITION, AND QUALITY
 LANDSCAPING
 TERMS AND CONDITIONS OF SALE
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7. COMPETITIVE MARKET
ANALYSIS
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8. COMPETITIVE MARKET
ANALYSIS
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9. CALCULATING GROSS RENT MULTIPLIER
Building Sales Price Gross
Annual
Rents
Gross Rent
Multiplier
No.1 $245,000 $34,900 = 7.02
No.2 $160,000 $22,988 = 6.96
No.3 $204,000 $29,352 = 6.95
No.4
As a Group:
$196,000
$805,000
$27,762
$115,002
= 7.06
= 7.00
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10. COSTS APPROACH TO VALUE
Step 1: Estimate land as vacant
$ 30,000
Step 2: Estimate new construction
cost of similar building $120,000
Step 3: Less estimated depreciation -12,000
Step 4: Indicated value of building
$108,000
Step 5: Appraised property value
$138,000
by the cost approach
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11. SQUARE-FOOT METHOD OF COST ESTIMATING
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12. ESTIMATING DEPRECIATION
Loss in value due to depreciation since
construction.
Physical deterioration
Functional obsolescence
Economic obsolescence.
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13. INCOME APPROACH
Variation by Direct Capitalization
Income / Rate = Value
$18,000 / 0.09 = $200,000
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14. PROJECTED ANNUAL OPERATING STATEMENT
( P R O F O RMA S T A T EME N T )
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15. DIRECT CAPITALIZATION USING AN
OVERALL RATE
Income
= Value
Overall Rate
$45,400
0.09376
= $484,215
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17. OVERALL RATES - 10-YEAR HOLDING
PERIOD, 25-YEAR LOAN FOR 75% OF THE
PURCHASE PRICE, 10% INVESTOR RETURN
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18. RECONCILIATION
Market Approach $180,000 x 75% =
$135,000
Cost Approach $200,000 x 20% = $
40,000
Income Approach $160,000 x 5% =
$ 8,000
Final Indicated Value
$183,000
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19. TYPES OF APPRAISALS AND
REPORTING OPTIONS UNDER USPAP
Types of Appraisals
• Complete appraisal
• Limited appraisal
Reporting Options
• Self-contained appraisal report
• Summary report
• Restrictive report
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20. FORMATS OF APPRAISAL REPORTS
1. Letter report
2. Form report
3. Narrative report
4. Review appraisals
5. Real estate analysis
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21. APPRAISER LICENSE
 Cer tified General Appraiser
 Cer tified Residential Appraiser
 State l icensed appraiser
 Provisional l icensed real estate appraiser
 Appraiser trainee
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22. Principles of Value
 Principle of Anticipation
 Principle of Substitution
 Highest and best use of a property
 Principle of competition
 Principle of supply and demand
 Principle of change
 Principle of contribution
 Principle of conformity
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23. VALUE
Market value
Assessed value
 Insurance value
 Loan value
Estate tax value
Plottage value
Rental value
Replacement value
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24. MARKETS
Buyer’s market – excess supply
of housing for sale.
Seller’s market – demand
exceeds supply.
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25. PROFESSIONAL APPRAISAL SOCIETIES
The American Institute of Real Estate
Appraisers (AIREA)
MAI
SRA
Society of Real Estate Appraisers
NATIONAL Association of Independent Fee
Appraisers
Farm Managers and Rural Appraisers
National Society of Real Estate Appraisers
American Society of Appraisers
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26. Key Terms
 Appraisal
 Capitalize
 Comparables
 Cost approach
 Depreciation
 FIRREA
 Gross rent
multiplier (GRM)
 Highest and best use
 Income approach
 Market approach
 Market value
 Operating expenses
 Scheduled gross
(Projected gross)
 USPAP
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