This document provides an overview of real estate appraising and valuation. It defines key terms like appraisal, appraiser, highest and best use, and market value. It describes the three approaches to value - sales comparison, cost, and income approaches. Under each approach, it explains the basic steps and calculations involved. It also covers topics like measuring square footage, types of properties, regulation of appraisers, and principles of value.

1. 1

2. 2

3. 3

4. 4
Lancaster County, PA
March 2023
Avg. Sale Price
$321,556
% Change (YOY)
+ 5.3%
SOURCE: Bright MLS for all residential property

5. 5

6. The Real Estate School
U N I T 2 0
APPRAISING
REAL ESTATE
6
Page 391

7. OVERVIEW
• Real estate licensees must be aware of the fundamental principles
of valuation in order to complete an accurate and effective
Competitive Market Analysis
7
Page 391

8. APPRAISING
• Appraisal – An estimate or opinion of value based on supportable
evidence and approved methods
• Appraisal Report – An opinion
of market value on a property
given to a lender or client with
detailed and accurate
information
8
Page 392

9. APPRAISING
• Appraiser – An independent professional trained to provide an
unbiased estimate of value in an impartial and objective manner
according to the appraisal process
• Appraising is a
professional
service performed
for a fee
9
Page 392

10. APPRAISING
• Regulation of Appraisal Activities
• Appraisals used in connection with
federally related transactions must
be performed by a competent
individual who is subject to
supervision and regulation
10
Page 392

11. APPRAISING
• Regulation of Appraisal Activities (cont’d)
• Appraisers follow the Uniform Standards of
Professional Appraisal Practice (USPAP)
which define the education, examination,
and experience required
11
Page 392

12. APPRAISING
• The Number of Real Estate Appraisers
12

13. APPRAISING
• Automated Valuation Model (AVM)
• Growing in acceptance
• Rely on statistical models
• Can be quite accurate, particularly when
used in a very homogeneous area
• Not as reliable in rural areas or when
property does not conform well to the
neighborhood
13

14. APPRAISING
• Regulation of Appraisal Activities (cont’d)
• Three classes of certification:
1. Certified General Real Estate Appraiser – Appraise any
residential or nonresidential property
2. Certified Residential Real Estate Appraiser – Appraise only
residential property
3. Broker/Appraiser – Appraise properties valued under
$250,000 not involved in federally related transactions (no
longer available)
14
Page 392-393

15. APPRAISING
• Comparative Market Analysis – A written analysis or opinion
relating to the probable sales price of a specific property
15
Page 393

16. APPRAISING
• Licensees may prepare
a CMA to help determine
an asking price to secure
a listing or an offering
price for a buyer’s offer
16
Page 393

17. APPRAISING
• Broker’s Price Opinion (BPO) – Less expensive alternative of
valuating property often used by lenders working with home
equity lines, refinancing, portfolio management, loss mitigation,
and collections
17
Page 393

18. APPRAISING
• Broker’s Price Opinion (BPO) (cont’d)
• Pennsylvania allows licensees to
perform BPO’s in certain situations
and only after taking specific BPO
education
18
Page 394

19. APPRAISING
• Broker’s Price Opinion (BPO) (cont’d)
• BPO’s may be performed in situations that are not transaction
related:
1. Property owned by lender after an
unsuccessful sale at a foreclosure auction
2. Modification of a mortgage or line of
credit
3. Short sale
4. Evaluation of a portfolio of properties
19
Page 394

20. APPRAISING
• Broker’s Price Opinion (BPO) (cont’d)
• The chart comparing a CMA to a BPO has a mistake:
• A fee may NOT be charged for a CMA
20
Page 395

21. THE APPRAISAL PROCESS
• Data is divided into two basic classes:
1. General Data – Covers the nation, region, city, and
neighborhood
2. Specific Data – Covers details
of the subject property as well
as comparative data
21
Page 395

22. THE APPRAISAL PROCESS
• Eight steps in the appraisal process:
22
Page 396
State the
Problem
List the Data
Gather,
Record,
Verify,
Analyze
Highest &
Best Use
Estimate the
Land Value
Estimate
Value Under
Three
Approaches
Reconcile Report
Figure 20.1
1 8
5 6
2 3 4 7

23. THE APPRAISAL PROCESS
• Appraisal reports should contain the following:
• Identify the property being appraised
• State purpose of intended use
• Define the value to be estimated
• Effective date of report
• State the extent of the process
• List all assumptions and limiting conditions
23
Page 396

24. THE APPRAISAL PROCESS
• Appraisal reports should contain the following: (cont’d)
• Describe information considered, appraisal
procedures followed, and reasoning
to support conclusion
• Opinion of highest and best use
• Describe additional information used
• Signed certification
24
Page 396-397

25. • To have value in the real estate market, a property must have the
following characteristics:
• Demand – Need or desire for possession backed up by
financial means
• Utility – Capacity to satisfy needs and desires
• Scarcity – Finite supply
• Transferability – The ease with which ownership can
be transferred
VALUE
25
Page 397
D
U
S
T

26. • Market Value – The most probable price that a property should
bring in a fair sale
• The definition makes three assumptions:
1. Competitive and open market
2. Parties are acting prudently and
knowledgeably
3. Not affected by unusual
circumstances
VALUE
26
Page 397

27. • Market Value (cont’d)
• The most probable price is not the average or highest price in a
CMA or appraisal
• Parties are unrelated and acting
without undue pressure
• Parties are informed about the
property’s use and potential
VALUE
27
Page 397

28. • Market Value (cont’d)
• Reasonable time for exposure on the market
• Payment made in cash or equivalent
• Unaffected by special financing,
services, fees, costs, or credits
in the transaction
VALUE
28
Page 397-398

29. • Market Value (cont’d)
• Market Value vs. Market Price – Opinion of value based on analysis of
data vs. actual sales price
• Market Value vs. Cost – Cost (usually) does not equal market value
VALUE
29
Page 398

30. • Market Value (cont’d)
VALUE
30

31. • Market Value (cont’d)
• Basic Principles of Value
• Anticipation – Value is created by the expectation that certain
benefits will be realized in the future
• Change – No physical or economic condition remains constant
• Competition – Interaction of supply and demand
VALUE
31
Page 398

32. • Market Value (cont’d)
• Basic Principles of Value (cont’d)
• Conformity – Maximum value is realized when a property is in
harmony with its surroundings
• Contribution – Value of any part of a property is measured by
its effect on the value of the whole parcel
VALUE
32
Page 399

33. • Market Value (cont’d)
• Basic Principles of Value (cont’d)
• Highest and Best Use – The most profitable single use that is:
• Legally permitted
• Financially feasible
VALUE
33
Page 399
• Physically possible
• Maximally productive

34. • Market Value (cont’d)
• Basic Principles of Value (cont’d)
• Increasing and Diminishing Returns – The addition of
improvements increases value only to the asset’s maximum
value
• Plottage – Merging adjacent lots into a single larger one
produces a greater land value than the sites would separately
VALUE
34
Page 399

35. • Market Value (cont’d)
• Basic Principles of Value (cont’d)
• Regression and Progression – The worth of a higher-quality
property is adversely affected by the presence of a lower-
quality property (regression) and the worth of a lower-quality
home is favorably affected by the presence of a higher-quality
property (progression)
VALUE
35
Page 400

36. • Market Value (cont’d)
• Basic Principles of Value (cont’d)
• Substitution – Property’s maximum value tends to be set by
how much it would cost to purchase an equally desirable
property
• Supply and Demand – When supply increases, value
decreases; when demand increases, value increases
VALUE
36
Page 400

37. • All measurements are taken from
exterior walls
• Unfinished areas are not included
• Areas below grade or partially below
grade are not included
• Unheated areas are not included
• Square footage is only counted on areas
that you can walk on
MEASURING SQUARE FOOTAGE
37

38. • Rancher (1 story)
MEASURING SQUARE FOOTAGE
38

39. • 2 story
MEASURING SQUARE FOOTAGE
39

40. • Cape Cod (1½ story)
MEASURING SQUARE FOOTAGE
40

41. • Bi-level (Raised Ranch)
MEASURING SQUARE FOOTAGE
41

42. • Split Level
MEASURING SQUARE FOOTAGE
42

43. 1. Sales Comparison Approach
2. Cost Approach
3. Income Approach
THE THREE APPROACHES TO VALUE
43
Page 400

44. 1. Sales Comparison Approach – An estimate of value is obtained
by comparing the subject property with recently sold
comparable properties
THE THREE APPROACHES TO VALUE
44
Page 400

45. 1. Sales Comparison Approach (cont’d)
• Comparable properties are analyzed for differences between it
and the subject property
• Approach relies heavily on the principle of substitution
THE THREE APPROACHES TO VALUE
45
Page 400

46. 1. Sales Comparison Approach (cont’d)
• Elements of comparison:
• Property Rights
• Financing Concessions
• Market Conditions
• Conditions of Sale
THE THREE APPROACHES TO VALUE
46
Page 400-401
• Market conditions since
the date of sale
• Location
• Physical features and
amenities

47. 1. Sales Comparison Approach (cont’d)
• Considered the most reliable approach when appraising
single-family homes
• Most appraisals include a minimum of three comparable sales
THE THREE APPROACHES TO VALUE
47
Page 401

48. 1. Sales Comparison Approach (cont’d)
• TIP - A dollar value is assigned to each difference
between the subject property and the comparable
properties (comp)
• TIP - Adjustments are always made to comps NOT
subject:
• If comp better than subject – decrease comp
• If comp worse than subject – increase comp
THE THREE APPROACHES TO VALUE
48
Page 401

49. THE THREE APPROACHES TO VALUE
49
Page 401
Sales Price ----- $ 150,000 $ 160,000 $ 157,000
Square
Footage
1,500
1,350
+ $2,500
1,690
- $2,500
1,550
Garage 1 car
None
+ $4,000
2 car
- $2,500
1 car
Fireplace Yes
No
+ $1,000
Yes Yes
Acreage .25 acres .20 acres .32 acres .29 acres
Net
Adjustments
+ $7,500 - $5,000 -0-
Adjusted
Value
$ 157,500 $ 155,000 $ 157,000
#1 #2 #3
1. Sales
Comparison
Approach
Figure 20.2
(condensed)

50. 50
• Use the comparable properties provided
to fill-in each property’s attributes
• Make adjustments:
o If comp is better than subject –
decrease comp
o If comp is worse than subject –
increase comp

51. 51

52. APPRAISING
• Broker’s Price Opinion (BPO) (cont’d)
• The chart comparing a CMA to a BPO has a mistake:
• A fee may NOT be charged for a CMA
52
Page 395

53. 2. Cost Approach
• Also based on the principle of substitution
• Most useful when appraising newer or special-purpose
buildings
• Usually not enough local sales
to use as comparables and
because the property does
not generate income
THE THREE APPROACHES TO VALUE
53
Page 402

54. 2. Cost Approach (cont’d)
• The cost approach contains five steps:
1. Estimate the value of the land
2. Estimate the current cost of constructing building
3. Estimate the accrued depreciation
4. Deduct accrued depreciation from current cost
5. Add land value to depreciated cost of building
THE THREE APPROACHES TO VALUE
54
Page 402

55. 2. Cost Approach (cont’d)
• Construction costs can be calculated in two ways:
1. Reproduction Cost – Cost to construct an exact duplicate
with both benefits and drawbacks
2. Replacement Cost – Cost to
construct a similar property
using current materials and
techniques
THE THREE APPROACHES TO VALUE
55
Page 402

56. 2. Cost Approach (cont’d)
• Determining Reproduction/Replacement Cost NEW
• Square Foot Method – The cost/square foot of recently
built structures multiplied by the number of square feet
• The most common and
easiest method of cost
estimation
THE THREE APPROACHES TO VALUE
56
Page 403

57. 2. Cost Approach (cont’d)
• Determining Reproduction/Replacement Cost NEW
• Unit-in-Place Method – The construction cost per unit of
measure of individual components
THE THREE APPROACHES TO VALUE
57
Page 403

58. 2. Cost Approach (cont’d)
• Determining Reproduction/Replacement Cost NEW
• Quantity Survey Method – The quantity and quality of all
materials and the labor are calculated on a unit-cost basis
then added to indirect costs to arrive at a total cost
• Most time consuming and most accurate
THE THREE APPROACHES TO VALUE
58
Page 403

59. 2. Cost Approach (cont’d)
• Determining Reproduction/Replacement Cost NEW
• Index Method – A factor representing the percentage
increase to the present time is applied to the original cost
of the property
THE THREE APPROACHES TO VALUE
59
Page 403

60. 2. Cost Approach (cont’d)
• Depreciation – Loss in value due to any cause
• Land does not depreciate
but retains its value
indefinitely
THE THREE APPROACHES TO VALUE
60
Page 404

61. 2. Cost Approach (cont’d)
• Depreciation is divided into three classes:
1. Physical Deterioration – Items in need of repair
THE THREE APPROACHES TO VALUE
61
Page 404
Curable Incurable

62. 2. Cost Approach (cont’d)
• Depreciation is divided into three classes:
2. Functional Deterioration – Outmoded or unacceptable
design features
THE THREE APPROACHES TO VALUE
62
Page 404
Curable Incurable

63. 2. Cost Approach (cont’d)
• Depreciation is divided into three classes:
3. External Depreciation – Negative factors external to the
property and beyond the owner’s control
THE THREE APPROACHES TO VALUE
63
Page 404
Incurable Incurable

64. 2. Cost Approach (cont’d)
• The easiest but least precise way to determine depreciation is
the Straight-Line Method
• Property’s cost is divided by the number of years of its expected
economic life
THE THREE APPROACHES TO VALUE
64
Page 404
14
13 15 17
16 18 20
19 22
21 23 24

65. THE THREE APPROACHES TO VALUE
65
Page 403
2. Cost
Approach
Figure 20.3
1. Land Valuation: 60’ x 135’ @ $450/front foot $ 27,000
Plus site improvements: driveway, landscaping, etc. 8,000
Total Land Value $ 35,000
2. Building Valuation: Replacement cost
1,500 sq. ft. @ $65/sq.ft. $ 97,500
3. Less Depreciation:
Physical Depreciation
Curable: exterior painting $ 4,000
Incurable: structural deterioration 9,750
Functional Obsolescence 2.000
External Depreciation -0-
Total Depreciation $ -15,750
4. Depreciated Value of Building $ 81,750
5. Indicated Value by Cost Approach $116,750

66. 3. Income Approach – Based on the present value of the rights to
future income
• Assumes income derived from property will control the value
of the property
• Used for valuation of
income-producing
properties
THE THREE APPROACHES TO VALUE
66
Page 404

67. 3. Income Approach (cont’d)
• The income approach contains five steps:
1. Estimate annual potential gross income
2. Deduct allowance for vacancy and rent loss – Effective
Gross Income
3. Deduct annual operating expenses – Net Operation
Income (NOI)
THE THREE APPROACHES TO VALUE
67
Page 405

68. 3. Income Approach (cont’d)
• The income approach contains five steps: (cont’d)
4. Estimate the rate of return an investor will demand for
the investment for this type of building (Capitalization
Rate -or- Cap Rate)
5. Apply the Cap Rate to the property’s Net Operation
Income to estimate value
THE THREE APPROACHES TO VALUE
68
Page 405

69. 3. Income Approach (cont’d)
• Capitalization Rate Formulas:
• Income ÷ Cap Rate = Value
• Income ÷ Value = Cap Rate
• Value x Rate = Income
• If you know two variables you can always solve for the third
THE THREE APPROACHES TO VALUE
69
Page 405

70. THE THREE APPROACHES TO VALUE
70
Page 406
3. Income
Approach
Figure 20.4
1. Potential Gross Annual Income
Market rent $ 60,000
Income from other sources 600 $ 60,600
2. Allowance for Vacancy & Rent Loss (est. 4%) -2,424
Effective Gross Income $ 58,176
3. Operating Expenses
Taxes $ 9,000
Insurance 1,000
Heat, utilities, electricity, water, gas 3,600
Repairs and decoration 2,600
Replacement of equipment 800
Legal, accounting, management 3,600 $ 27,000
Net Operating Income (NOI) $ 31,176
4. Capitalization Rate 10%
5. Estimated Value (NOI ÷ Cap Rate) $311,760

71. 3. Income Approach (cont’d)
• Gross Rent Multiplier (GRM) – Used if a one to four unit rental
property is being appraised
• Appraiser uses recent sales and rental data from at least four
properties that are similar to the subject
• Sales Price ÷ Monthly Gross Rent = GRM
THE THREE APPROACHES TO VALUE
71
Page 407

72. 3. Income Approach (cont’d)
• Gross Income Multiplier (GIM) – Used if a five or more unit
rental property is being appraised
• Sales Price ÷ Annual Gross Income = GIM
THE THREE APPROACHES TO VALUE
72
Page 407

73. THE THREE APPROACHES TO VALUE
73
Page 401
Problem:
Determine the value of the old
Bishop McDevitt High School,
Harrisburg, PA

74. THE THREE APPROACHES TO VALUE
74
Page 401

75. • Reconciliation – The art of analyzing and effectively weighing the
findings from the three approaches to find an appropriate market
value
• Not simply the average of the three estimates of value
THE THREE APPROACHES TO VALUE
75
Page 407

76. • Reconciliation (cont’d)
• Certain approaches are more valid and reliable with some kinds
of properties than others:
• Sales Comparison Approach – Single family homes
• Cost Approach – New or special-use properties
• Income Approach – Investment properties
THE THREE APPROACHES TO VALUE
76
Page 408