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Welcome to the International Right of Way Association’s Course 400 Principles of Real Estate Appraisal. 400-PT – Revision 3 – 06.30.06.USA. Introductions Who we are… What we do… Where we do it… How long we’ve been doing it… Our goals for the course. - PowerPoint PPT Presentation
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Course 400: Principles of Real Estate Appraisal
Welcome to the International Right of Way
Association’s
© 2014 International Right of Way Association - All Rights Reserved
400PPT.R6.2014.10.20.0.0
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© 2014 International Right of Way Association - All Rights Reserved
ObjectivesAt the conclusion of course, 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 components
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 value
4
Housekeeping
© 2014 International Right of Way Association - All Rights Reserved
The schedule will proceed as follows:
Day One8:00 - 8:15 Introductions, etc.8:15 - 9:45 Characteristics of Real Estate and Real Property.
Definitions. Documents.9:45 - 10:15 Cost, Price, and Value 10:30 - 11:00 Factors That Create and Affect Value11:00 -12:00 Value Principals1:00 - 5:00 Valuation Process
Day Two8:00 - 8:15 Recap Day One and Introduce Day Two8:15 - 2:30 Three Approaches to Value2:45 - 3:15 Partial Acquisitions3:15 - 4:00 Summary and Review4:00 - 5:00 Examination
5
Schedule
6© 2014 International Right of Way Association - All Rights Reserved
Real Estate andReal 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.
7© 2014 International Right of Way Association - All Rights Reserved
Personal Property, Fixtures, and Trade Fixtures
Tests: Manner affixed Adaptation Intent
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.
Trade fixtures are not part of the real estate
8
AppraisalAn appraisal is:
The act or process of developing an opinion of value
A written statement
Setting forth an opinion of value.
Supported by the presentation
Analysis of relevant market information
9
Controlling Documents
Uniform Standards of Professional Appraisal Practice. (USPAP)
“The Yellow Book“
The Uniform Act
10
Cost, Price, Value
Cost is the amount spent to construct improvement.
Price is the amount paid for a good or service.
Value is the worth of a good or service.
11
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.
12
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
13
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
14
Value Principles (Principle of Substitution)
• When several similar goods or services are available, the one with the lowest price will attract the greatest demand.
15
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.
16
Value Principles (Principle of Supply and Demand)
• The price of a good or service varies directly with demand and inversely with supply.
17
Value Principles (Principle of Anticipation)
• Present value is created by the expectation of future
benefits.
18
Other Principles
• Change
• Consistent Use
• Contribution
19
Valuation Process
Appraisal Problem Definition
Scope of Work
Data Collection and Analysis
Land Value Opinion
Three Approaches to Value
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Valuation Process
Limiting conditions
Property rights to be valued
Identity and location of the subject property
Date of the value opinion
Value to be developed
Identification of the client, intended use, and users
Appraisal Problem Definition
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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 conclusions
22
Valuation ProcessData
Collection and
Selection
Market area data
Comparable property data
Subject property data
23
Valuation ProcessData Analysis
Market analysis
Highest and best use analysis
24
Valuation ProcessHighest 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?
25
Valuation Process
Land Value Opinion
Allocation
Extraction
Ground rent capitalization
Land development
26
Day One RecapToday, we...
Defined some terminology.
Discussed some controlling documents.
Examined the factors that create value and the factors that affect value.
Reviewed and discussed value principles as they relate to real estate valuation.
Started to examine the valuation process, specifically appraisal problem definition, scope of work, data collection and selection, and data analysis.
Day Two
27
Today, we will…
Complete the analysis of the valuation process.
Specifically the three approaches to value (cost, sales comparison, and income capitalization), the reconciliation of the value opinions into a final value opinion, and the report of the defined value.
Look briefly at partial acquisitions.
Complete the Case Studies and take the exam.
28
Valuation Process
Three Approaches to Value
Cost Approach
Sales Comparison
Income Capitalization
29
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 value
30
Valuation Process
Cost Approach
Depreciation: Age-Life Method
Depreciation Percentage = Effective Age
Total Economic Life
31
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 opinion
32
Valuation ProcessIncome Capitalization Approach
The conversion of income into value through a rate or a ratio.
Gross Rent Multipliers
Direct Capitalization
33
Valuation Process
Income Capitalization Approach
Gross Rent Multipliers
Gross Rent Multiplier = Sale Price
Gross Rent
34
Valuation ProcessIncome Capitalization Approach
Convert the net operating income into value
Develop a capitalization rate
Estimate annual property expenses and subtract the expenses from the effective gross income to arrive
at the net operating income
Subtract the vacancy and collection loss from the potential gross income
Determine a vacancy and collection loss
Estimate the subject’s annual potential gross income
35
Valuation Process
Income Capitalization Approach
Direct Capitalization
Value = Net Operating Income or Vo = NOI Capitalization Rate Ro
36
Valuation Process
Reconciliation andFinal Value Opinion
37
Valuation ProcessDefined Value Opinion Report
Appraisal Report
Restricted Appraisal Report
38
Partial Acquisitions(1)Larger parcel is the total propertybefore the taking.• Contiguity• Title• Use
Value of the part taken is determined
by multiplying the quantity taken
times the before unit value of the item.
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 remainder
property as a result of a partial acquisition.
39
Partial Acquisitions(2)
Federal (Before and After) Rule is thedifference 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 cannotbe less than zero dollars]).
40© 2014 International Right of Way Association - All Rights Reserved
ObjectivesNow 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 components
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 value
41
Thank you!