RESN-Nevada-Pre-licensing-Chapter 3.pptx

- You will have 10 minutes to get into the class. Once the class has
been going on for 10 minutes you will have to wait for the first
break to enter.
- You will have 10 minutes to cancel your seat or there will be a
balance on your student account, and you will be counted as no
call/ no show.
- If you miss more than 2 days of class, the rest of your seats will
be canceled .
-At this time we cannot allow you to register for both morning and
evening classes held on the same day. If you do not contact the
school on this matter BOTH seats you reserve will be canceled out.
-The school has a dress code of business casual. If you are not in
dress code, you will not be allowed to enter the class

CHAPTER 3
Property Value and Appraisal

CONCEPT OF VALUE
1. DEMAND:
• Little or no demand = lower value
• High demand and high desirability = greater value
2. UTILITY:
• Must be useful in the eyes of the market
• If not useful (doesn’t serve a purpose), it has little or no value

CONCEPT OF VALUE
3. SCARCITY
• Supply will have an influence on the value
• Little inventory means higher prices
• High amount of inventory leads to diminished values
4. TRANSFERABILITY
• Property must be able to be sold (transferred)
• If cannot be sold due to restrictions on ownership, such as a burden on title, value is
greatly diminished
“DUST”

PRINCIPLES OF VALUE
HIGHEST AND BEST USE
• Most profitable, legal use for the property
THEORY OF SUBSTITUTION
• The market will not pay substantially more for a property over another if the properties
are virtually the same
• Buyer will elect to purchase a substitute instead of overpaying

PRINCIPLES OF VALUE
CONFORMITY
• Property should be consistent with other surrounding properties
• If significantly better, its value will regress downward toward the value of surrounding
properties
• If significantly lesser, will progress upward as a result of the higher value of the
surrounding properties
SUPPLY AND DEMAND
• High Demand + Low Supply = Higher Values
• Low Demand + High Supply = Lower Values

PRINCIPLES OF VALUE
CONTRIBUTION
• Appraiser must determine what the market will pay for a feature or amenity
• Contribution is not necessarily equal to its cost
• If the increase in value is greater than cost: law of increasing returns
• If the cost is more than the increase in value: law of decreasing returns
Example: A swimming pool costs $45,000 to construct, will the presence of a swimming pool
add $45,000 to the value of the property? What is the increased value contributed by the
swimming pool?

PRINCIPLES OF VALUE
ANSWER: NO
• An appraiser would do a Paired Sales
Analysis
• Done by finding recent, similar sales in
close proximity with pools, compared to
those without pools
• All other amenities being fairly equal, the
difference in price should represent the
value the market considers the pool adds
• Paired Sales Analysis

PRINCIPLES OF VALUE
LAW INCREASING AND DECREASING RETURNS
• Whether or not the cost of making an improvement or repair adds more to the value
than cost
• Increasing Return = Cost is LESS THAN value added
• Decreasing Return = Cost is GREATER THAN value added
PLOTTAGE AND ASSEMBLAGE
• Several smaller parcels combined into one larger parcel
• If the resulting larger parcel has a greater value than the sum of smaller parcels, the
increase in value is called Plottage
• The act of bringing the parcels together is called Assemblage

PRINCIPLES OF VALUE
CHANGE AND ANTICIPATION
• Available uses for parcels may be changing
o Increased traffic
o Local economic considerations
o Opening of new industries or the closing of sources of employment
• Appraiser considers these issues

PRINCIPLES OF VALUE
APPRAISER
• An individual licensed or certified to estimate the current value of property
APPRAISAL
• An estimate of the price to be paid by an informed buyer and accepted by a seller acting
under normal motivations
ARM’S LENGTH
• No special pricing because of the relationship of the parties
o Best indicator of market value is that price at which an informed seller and buyer
ultimately agree to

METHODS OF VALUATION
• Three commonly accepted methods in determining value
• Method used is determined by the type of property being appraised:
• Market Data (Comparable Sales Approach)
• Cost Approach
• Income Approach

MARKET DATA APPROACH
(Comparable Sales Approach)
• Most common for residential properties
• Properties have sold recently, close in proximity, and comparable in features and
amenities to the subject
• Appraiser is working with comparable
• Recently sold properties that resemble the subject property
• But are not identical, therefore adjustments may be required
• Need for, and extent to which adjustments are made, are judgment calls by the
appraiser

• Appraiser determines contribution of
features which differ
• Will adjust the price of the comp upward, if it lacks amenities which the subject property has
• Will adjust the price of the comparable downward, if comp is superior
Note: The appraiser adjusts the comparable upward or downward – not the subject property
***There is no price of the subject to adjust!
If superior, SUBTRACT
If inferior, ADD

EXAMPLE: The subject property has
3 bedrooms, 2 baths, and a pool.
• The COMP sold two weeks ago for
$387,500.
• The comp has 3 bedrooms, 2.5
baths, and no pool.
• The appraiser has determined the
market will pay $32,000 for a pool
and the value of a ½ bath is $2,200.

SOLUTION:
• The number of bedrooms is the
same with both homes, so - no
adjustment
• The comp is superior by an extra
half bath, so subtract a half bath,
$2,200

SOLUTION: The comp is inferior to
the subject by having no pool.
• Must have pool, $32,000, added to
the sale price
• $387,500 Comp Sale Price
• + 32,000 Pool
• - $2,200 Half Bath
• $417,300 Value

SUGGESTIONS FOR CHOOSING THE BEST COMPS
• Location, Location, Location
• Use Recent Comps
• Use most similar in features and amenities
PRICE PER SQUARE FOOT METHOD
• Sale price divided by the living area square footage
• Apply that figure to the square footage in the subject property
• Adjustments will need to be made for differences in features

• Price per front foot
• Whenever land dimensions are given, the first dimension is always the front footage’
• A lot 60’ X 100’ has a front footage of 60 feet.
• Property can be expressed as a dollar amount per front foot
60’ X $200 = $12,000
100’
EXAMPLE: If a 60’ X 100’ lot is priced at
$200 per front foot … what is the price
of the lot?
SOLUTION: 60 X $200 = $12,000

COST APPROACH
• Appraiser determines what it would cost to replace the subject property as if it were being built from
the land up
• Subject property is “rebuilt” on paper
• Normally, the appraiser uses replacement cost
o Represents theoretical building of a substantially similar property, using currently available
materials and construction techniques
• Could use reproduction cost
o Used if the building was so unique that using available materials and techniques would not
produce a substantially similar building
o If the building has unique features not commonly used in current-day construction, the appraiser
would use reproduction costs
• Cost approach is used when the property does not produce income, and when there are not recent
comparable sales

STEPS IN THE COST APPROACH
1. Determine the value of the land
a. recently comparable parcels of land
b. we rebuild the property from the “ground up”, so we
start with the value of the land
2. Determine replacement cost of the structure
a. appraiser uses resource material to determine cost of
materials and labor to construct a similar structure
b. we acquired the land on paper and now we rebuild it
on paper

3. Determine accumulated depreciation –
Depreciation is the reduction in value as a result of:
• Age
• Poor state of repair
• Poor design, etc.
• We depreciate the building on paper to mirror the subject property.

IN APPRAISAL, THERE ARE 3 SOURCES OF DEPRECIATION (OBSOLESCENCE)
1. Physical Depreciation
• Property is in a bad state of repair, or
• Some of the components of the property are nearly worn out
2. Functional Depreciation
• Property is out of style for the marketplace, or
• Features of the property, although working properly, are inadequate
• Outdated floor plan
3. External/Environmental/Locational/Economic Obsolescence
• Property is located in an undesirable location

IS THE DEPRECIATION CURABLE OR INCURABLE?
• Curable depreciation consists of 2 elements:
• The depreciation can be cured (fixed or repaired), and
• The added value by curing the depreciation will be more than the cost to cure it
• Not just that the depreciation can be remedied; law of increasing returns must apply
• Incurable Depreciation - loss in value is either unfixable or not cost effective to make the
repairs
• Physical Depreciation – can be curable or incurable.
• Functional Depreciation – can be curable or incurable.
• Environmental or Locational Obsolescence is always incurable; cannot move the land

• Subtract the accumulated depreciation
from the replacement cost.
• Add in the land value. Land is not depreciable and is added after the structure’s
depreciation is subtracted.

INCOME APPROACH
• Value of an income producing property is a result of the Investor’s required rate of return
and the income the property generates
• The IRV Circle

• IRV is used in the following way:
• “I” = Income (net operating income);
• “R” = Rate (rate of return or capitalization rate);
• “V” = Value

• The “I” is Net Operating Income (NOI)
• NOI is the gross scheduled income of the property minus the property’s annual
operating expenses and also minus the annual vacancy and bad debt the property
experiences
• The following equation is used to determine NOI:

GROSS SCHEDULED INCOME
(Potential Gross Income)
• Income the property should have earned had there not been vacancies or bad debts
• And before the operating expenses were calculated
VACANCIES AND BAD DEBTS
• Due to units being vacant; rents not collected
• When expressed as a percentage, a percentage of the GSI
EFFECTIVE GROSS INCOME
(Adjusted Gross Income)
• Income actually collected or earned
• The GSI less the V/BD

OPERATING EXPENSES
• Costs associated with operating the building such as:
o Insurance, taxes, management fees, etc.
o Should not be confused with “Debt Service Fees”
o When expressed as a percentage, expressed as a percentage of the EGI
CAPITALIZATION RATE, CAP RATE, DESIRED RATE OF RETURN, OR RETURN
ON INVESTMENT
• Yield to the investor for investing in the income property
• May be determined from income and value of the property, or
• The rate the investor demands
• Rate will be compared to alternate investments such as stocks, bonds, mutual funds, and
anything the investor may have an interest in

EXAMPLE:
An apartment building has 300 units which rent for an average of $1400 per month. 8%
of the units are vacant or represent bad debts. The operating expenses of the property
are 28% of the rents received. An investor is considering the apartment building but
requires an annual return of 8.2% on any real estate investment he makes. How much
would this investor be willing to pay for this property?

GSI
• 300 units x $1,400 avg. rent per month x 12 months = $5,040,000
V/BD
• $5,040,000 x .08 = $403,200 V/BD
EGI
• $5,040,000 GSI - $ 403,200 V/BD = $4,636,800 EGI
OE
• $4,636,800 EGI x .28 OE = $1,298,304 OE
NOI
• $4,636, 800 EGI - $1,298,304 Operating Expenses =
$3,338,496 NOI ÷ .082 Rate of Return =
$40,713,365 Value
3,338,496
.082

GRMs AND GIMs
• GRM is used on smaller, residential property
• GIM is used on a grander scale
• appraiser knows the “multiplier” for the market
GRM
• GRM = Sale Price ÷ Gross, Monthly, Rent
• Value = Monthly Rental Income x GRM
GIM
• GIM = Sale Price ÷ Gross, Annual, Rent or Income
• Value = Annual Income x GIM

• If possible, all three appraisal approaches should be used
RECONCILIATION:
• Appraiser assigns weights to the various results
• “Weighted average”

METHODS OF VALUE

COMPARATIVE MARKET ANALYSIS
• Market analysis taken from data in the local multiple listing service
• Sold Listings: show recent trends in the prices of property; the comparables
• Active Listings: show properties currently for sale in the market; the competition
• Expired Listings: show properties that did not sell; usually overpriced
• Days on Market: shows the length of time from list date to sale

BROKER PRICE OPINION
• “Opinion” of value, requested by a third party such as:
• The lender in the case of foreclosure
• A relocation company in the event of an executive transfer that will result in a buyout
• Generally performed by agents/ brokers for a nominal fee
• More detailed than a CMA; less detailed than an appraisal

RESN-Nevada-Pre-licensing-Chapter 3.pptx

Recommended

Recommended

More Related Content

Similar to RESN-Nevada-Pre-licensing-Chapter 3.pptx

Similar to RESN-Nevada-Pre-licensing-Chapter 3.pptx (20)

Recently uploaded

Recently uploaded (20)

RESN-Nevada-Pre-licensing-Chapter 3.pptx