1 Chapter 18
CHAPTER 18: Real Estate Appraisal
I. Define Appraisal
II. Explain Real Property Valuation Process
A. Value Approaches
B. Market Value Defined
III. Discuss the Market Comparison Approach
A. Comparables
B. Sales Records
C. Verification
D. Number of Comparables
E. Adjustment Process
F. Time Adjustments
G. House Size
H. Garage and Patio Adjustments
I. Building Age, Condition, and Quality
J. Landscaping
K. Lot Features and Location
L. Terms and Conditions of Sale
M. Adjusted Market Price
N. Correlation Process
O. Unique Issues
1. Condominiums, Townhouses, and
Cooperatives
2. Discuss the Market Approach to Vacant
Land Valuation
3. 4-3-2-1 Rule
P. Competitive Market Analysis
Q. Homes for Sale
R. Buyer Appeal
S. Discuss Gross Rent Multipliers
IV. Cost Approach
A. Estimating New Construction Costs
1. Square Foot Method
2. Cost Handbooks
B. Estimating Depreciation
1. Physical Deterioration
2. Functional Obsolescence
3. Economic Obsolescence
C. Final Steps in the Cost Approach V.
Income Approach
A. Income and Expense Forecasting
B. Operating Expenses
C. Reserves
D. Net Operating Income
E. Operating Expense Ratio
F. Capitalizing Income
G. Discuss Depreciation as Fictional
Depreciation
!”#$
!”
%&!$”
’
$
%&!
”(
“#
Chapter 18 2
VI. Discuss the Choice of Approaches and
Reconciliation of Differences
VII. Appraiser’s Best Estimate
VIII. Appraisal Regulation
A. The Appraisal Foundation
B. Federal Regulation
C. Developing the Appraisal
D. Departure Provisions
E. Reporting Options
F. Reporting Standards
G. Formats of Appraisal Reports
1. Letter Report
2. Form Report
3. Narrative Report
H. Review Appraisals
I. Real Estate Analysis
J. Appraiser Qualifications
K. Appraisal License
IX. Characteristics of Value
A. Demand
B. Utility
C. Scarcity
D. Transferability
X. Principles of Value
A. Anticipation
B. Substitution
C. Highest and Best Use
D. Competition
E. Supply and Demand
F. Change
G. Diminishing Marginal Returns
H. Conformity
XI. Multiple meanings of the word Value
A. Plottage Value
B. Rental Value
C. Replacement and Salvage Value
XII. Buyer’s and Seller’s Markets
XIII. Professional Appraisal Societies
A. The Appraisal Institute
B. National Association of Independent Fee
Appraisers
C. Farm Managers and Rural Appraisers
D. National Society of Real Estate
Appraisers
E. American Society of Appraisers
)&!*&(
&(+%&!+
!!
”
)
“
,
”
-
#”!
‘
.!
/
”0’
$$’
’$
’’
3 Chapter 18
1”2
)
-!’
!’
296 306
296 306
Topic
3”
2‘
4’,
4’
5
296 307 5!
297 307 -
2
297 308
,
297 308
301 310
301 313
”
Start!””
””$
$!”!
!$!
”Local
Distinction: 4’!6
”
Local Distinction: #
$!
Stress7#
”654’ 854 9$
$
!$$”
:
Stress: !$”$
!$”$”#
/”
Expanding the Text: 3!$
”!$
$!’;”$”!$
;
/’*
Stress7.)<458.49
=>?.@4 8.49=A??B
/
Stress7C!
$!!$
C$
!4)’7D
!8
!9$+!+
Stress7+$+/
!!!
6&’”
5!!
Expanding the Text: ’!
$
”+”+
”C
!$
Stress754 54
1
EFFGA?H”
“$
5$
5
1
5
4’
Chapter 18 4
Page Ref.
Hard Soft
back back Topic Teaching Tips
302 313 Homes for Sale Expanding the Text: Discuss the theory that neighboring
properties “for sale” are competition and that neighboring “sold”
properties are more reflective of the market value. Expired
listings can indicate a high price buyers are not willing to pay.
303 314 Emphasis of CMA Stress: The CMA emphasizes visual (non-factual) data and may
only be the consensus of the agent and the seller.
304 315 Gross Rent Stress: The GRM is an economic comparison between the
Multipliers property’s gross rent and its purchase price.
Summary: Sales Price : Gross Rent = GRM.
Stress: According to the theory of the GRM, a property’s value is
the GRM (e.g., 7) times its Gross Annual Rents.
Example: GRM x Gross Annual Rents = Value.
305 316 Cost Approach Stress: The types of properties for which this approach is most
suited are “one-of-a-kind” and new construction. It can be applied
only to depreciable assets, i.e., it is not applicable to land.
Local Distinction: If you are demonstrating the standard FNMA/
FHLMC form report, stress the relatively insignificant role this
approach serves (as compared to the market approach).
306 317 Square-Foot Method Class Activity: Perform several basic square-foot arithmetic problems.
306 317 Cost Handbooks Local Distinction: Acquire a cost handbook for demonstration:
1. Marshall & Swift Publications, 1617 Beverly Blvd., L.A. CA 90026
2. Boeckh Publications, 525 E. Michigan St., Milwaukee, WI 53201
3. National Construction Estimator
4. Dow Building Cost Calculator
306 319 Estimating Summary: Physical Deterioration
Depreciation 1. Occurs within the property’s boundaries
2. Normal wear and tear
3. Usually curable (owner can change one’s own property)
4. May be incurable, i.e., cheaper to tear down and start over
Functional Obsolescence
1. Occurs within the property’s boundaries
2. Loss in value due to a change in style and taste
3. Usually curable (owner can change one’s own property)
4. If not curable, then there will be a loss in value
Economic Obsolescence
1. Occurs outside property’s boundaries
2. Use of property and economy of area are not in harmony
3. Usually incurable (because property owner cannot change other
people’s property.
5 Chapter 18
1”
2
)-
!’ !’ ”
G?I GE? Stress7
!”$”$
:”
$
-72
!
8”$9
Local Distinction:
!
’”
G?I GE? 5 7)’!
”
& &7B?:!
JK??;(>?
.” :!JLK?;(EB:!
JF??;
LM”:!(EM
”
:!(FM”
:!
3”&JGA$KK>K?;
5”-N7
AJK??&B?OJE?$???&AEOJEB?$???
EJLK?&>?OJBK$K??&AEOJKBL$???
GJF??x 24 = $21,600 x AEOJEKF$E??
JA$?BK$E??
5,7
AJEB?$???&??LOJAB$B??
EJKBL$???&??EOJA?$FE?
GJEKF$E??&??FOJEG$GEI
JBI$LBI
5Operating Expense: JGA$KK>K?&AEO
JG>I$LF?
-N:,O#N:
3”
&ONOI
JA$?BK$E??:JBI$LBIOJFFL$KKE:JG>I$LF?OJLA>$ILE
Operating Expense Rate: JG>I$LF?PFFL$KKEOGIM
C52AEM$JLA>$ILEP?AEO
Page Ref.
Hard Soft
back back Topic Teaching Tips
311 323 Choice of Stress: The importance of selecting the appropriate approach for
Approaches the type of property being appraised. Also, stress that more than
one approach can usually be used on any given property.
312 324 Appraiser’s Best Stress: Despite all this work, the end result remains subjective.
Estimate
313 325 Appraisal Regulation Memory Hook: DUST
Demand
Utility
Scarcity
Transferability
318 331 Anticipation Example: In anticipation of the new connector road being built,
property values across the river rise.
318 331 Substitution Example: Why one buys “pretty” apples instead of bruised ones.
318 331 Highest and Best Use Expanding the Text: Stress that the Preamble of the
REALTORS® Code of Ethics addresses the highest and best use of
the land … see Chapter 19, Code of Ethics).
319 332 Supply and Demand Example: Relate the value of a cup of water in your classroom to
its value in the desert.
319 332 Diminishing Marginal Expanding the Text: Adding a fifth bedroom to a house in a
Returns three-bedroom neighborhood will rarely increase the value of the
home. Likewise adding a swimming pool in an area where swim-
ming pools are novelties may even be a detriment to a sale.
319 331 Conformity Expanding the Text: Additional principles include regression
when surrounding properties lower the value of the subject prop-
erty and progression when the value is raised by neighboring
properties. For example, a buyer might pay somewhat more fox a
smaller house located in an area of larger, higher priced homes.
That same house located in a different neighborhood would prob-
ably sell for less.
320 333 Buyer’s and Seller’s Summary:
Markets Buyer’s Market = more properties for sale than available buyers
Seller’s Market = more buyers than sellers
Broad Market = many buyers and many sellers
Thin Market = few buyers and few sellers
Chapter 18 6
1”2
)-
!’!’ ”
GEAGGB C: Appraising*8.
estimate of value’$!
$
9
E@7Market$
Cost$Income
G’!”
*8$!
!9
B$
$
!*89
K!
!*8.!!
!’’
!”9
L”CMA’
> GRM
”
*89
I”*
8.
!!
9
FValue”!
”
*89
A?