This is an interactive "internet-based"
course which will grant you 22.5 hours of New York State
approved continuing education credit for
your real estate salesperson or broker license renewal.
It will take you approximately 22.5-25 hours
to complete the program. Follow the directions as
you read through and make sure to log
in the LAST FOUR digits of your social security number to
confirm your "attendance and active participation"
in the program.
Please read each section then respond to
the questions that follow based on your careful reading of
the material. No grade will be granted.
Students receive an "S" for satisfactory completion of the
program on their official transcript.
We remind you, according to the NYS regulations for real
estate agent & broker continuing education,
exams CANNOT be a requirement for successful
completion of a CE program [however, in
order to fullfill the time requirements and show active
participation in the course, students
must attempt to answer all questions]. REMEMBER to sign ON & OFF each time
so we can electronically track your timing for the program!
Call if you have any questions at the numbers
above. We recommend that you print each segment
and retain the valuable information for
future reference. Good luck and enjoy!
PLEASE NOTE: YOU MUST CONTACT OUR STAFF
AT THE NUMBER ABOVE TO
REGISTER AND DISCUSS SECURITY PROCEDURES
FOR THIS ON-LINE COURSE!
(only at the initial start of the program).
{1 hour}
Your timing and participation in this program is based on a number of items including: your detailed responses, participation in threaded discussions and article summaries throughout the program, your research and summaries of links on the world-wide-web and test responses and questions throughout the program. Special SCRIPTING software (in conjunction with our SQL SERVER which provides "active script time frames") document then reports the location you are working from as well as the time of day or night you are responding to tasks required to complete this program successfully.
It should be noted, however, to act as a certified or licensed real estate appraiser, it is not necessary or even mandated by any state, that you hold a real estate salesperson's or broker's license. Many agents feel it is a prerequisite to be a real estate agent for a number of years before one can become certified to act as a real estate appraiser.
The preceding paragraph brings up a number of important points that must be clarified before we may continue. Some of them include:
A) What is a Real
Estate Appraisal Board?;
B) When does a
person have to be certified to do an appraisal?; and
C) What is required
to be certified as a real estate appraiser?.
Before we begin, a real estate appraisal should be defined so we're all on an even playing field. A real estate appraisal is accomplished anytime a specific value estimate for a real property interest is quoted. It is an unbiased estimate of market value (or any other type of value that may be sought by the client). A real estate appraisal varies from a comparative market analysis (CMA) because a range of value is provided in a CMA with a listing price suggested. The traditional real estate appraisal does not quote a range of value, it pinpoints a specific dollar amount for the type of value being sought.
In addition, CMA's are provided
in conjunction with the potential listing of a property for sale purposes.
Although appraisals may be used to determine an asking price for a property
that will be listed, typically, an owner will request something less, such
as a CMA to determine an appropriate list price.
REAL ESTATE APPRAISAL BOARD
Real estate appraisal board's
were established through federal legislation known as the Financial
Institutions Reforms, Recovery
and Enforcement Act (FIRREA), Title XI of 1989. Through various
subsections of this act, all
states were to establish a separate board or department that would oversee
the
licensing and policing procedures
of state certified and/or licensed real estate appraisers. This board
was
intended to be separate from
the department that regulates and polices real estate agents and brokers.
Once you have done this, click on the "RESPONSE" link and put your answers in the text area of the box that opens - remember to enter your last name & last 4 digits of your social security number so we can electronically track your timing & participation for this program!
1. Complete a minimum
of 90 hours of classroom training in approved real estate appraisal
courses (of the total 90 hours, a
15 hour National & State USPAP course [or its equivalent](Uniform Standards of Professional Appraisal Practice taught by
a NYS & AQB Qualified Instructor) must be successfully completed;
2. Have each appraisal
assignment co-signed by a State Certified or Licensed Real Estate
Appraiser (who accepts
full responsibility for the contents of your report);
3. Pay your state's required license/application fee; and
4. Pass the state's licensing examination (this is optional in New York State. Assistants can renew indefinitely , but only the last 5 years of consecutive experience will count on your application to the State. The New York State Department of State is the specific agency empowered with the enforcement and application of New York State rules and regulations for real estate appraisers, agents, brokers and other related fields.
Assistants must follow the most current rules as set forth for the "Licensed Residential Appraiser" category. 2,000 hours of experience over a period of not less than 24 months, 75% (1,500 hours) of which must be from appraisals of residential properties listed on the Appraisal Experience Report [Attachment C], or appropriate teaching experience. Please refer to the latest application to become certified as an appraiser for a complete breakdown of items. The Certified Residential category of licensure is 2,500 hours and for Certified General Appraisers, the minimum number of qualifying hours is 3,000.
Single-family homes earn you 6 hours
of experience credit, two-four units earn 12 hours of experience credit, etc. The
purpose of the assistant program is to allow serious and career-minded
individuals, the opportunity to get into the field of real
estate appraising. Contact the New
York State Department of State for an application and additional
information if
you're interested.
WHEN DOES A PERSON HAVE TO
BE CERTIFIED?
******************************************************************
In general, an individual must be certified or licensed when preparing a real estate appraisal under the following conditions:
1. He or she resides in
a mandatory state. A mandatory state is a state that requires
all real estate appraisals
to be performed only by certified or licensed real estate
appraisers. (New York
State is not a mandatory state, it is a voluntary state).
2. The appraisal assignment
may or will be sold to the secondary mortgage market
(like Fannie Mae).
3. Certain appraisals that involve the Federal Deposit Insurance Corporation (FDIC), Office of Comptroller of the Currency, Internal Revenue Service, Department of Transportation, Department of Agriculture, Federal Reserve Board, National Credit Union Administration, Office of Thrift Supervision and the Office of Management and Budget.
4. The appraisal exceeds a minimum threshold amount (currently $250,000 for residential prop erty and $500,000 for non-residential property).
5. The client requires a state certified or licensed appraiser to perform the assignment.
6. Certain state agencies require appraisals to be performed only by state certified or licensed real estate appraisers.
Some professional organizations
like the National Association of Realtors (NAR) also require that
their members
refrain from preparing real
estate appraisals, unless their member is dually licensed to practice as
a real estate
appraiser in that state.
Violation of this rule may lead to expulsion from their group and the loss
of benefits
associated with their membership.
Check with the professional
organizations with which you are may be affiliated to make sure you're
in
compliance with their regulations
if you have any questions.
{1 hour}
WHAT IS REQUIRED FOR CERTIFICATION
In general, as with most professional
licenses, you cannot have a felony or related criminal record.
Individuals who receive an
executive pardon or letter of good-standing from the issuing agency may
be
permitted under very specific
circumstances to become eligible for licensure.
Other requirements include: completion of the required state approved course work, experience which must be substantiated equaling two years of full-time experience as a real estate appraiser (this will be increased to three years for certain types of appraisal licenses) and continuing education every two years [which will also increase another 8 hrs - every two years for licenses renewing after January 1, 2000].
If an individual worked as an apprentice for the statutory period and meets the requirements noted above, he or she will simply convert over to full-licensed status and no longer require a co-signer on each appraisal. For those individuals who worked as an appraiser outside the state apprenticeship program (i.e., real estate agents, brokers and others who live and work in a voluntary state or prepare appraisals that are not subject to mandatory preparation by a state certified individual), they may submit to the Board of Real Estate Appraisal, a listing of all appraisal assignments along with their proof of education and the appropriate fee then sit for their state examination (if their paperwork is satisfactory to their Real Estate Appraisal Board).
All states have at least two categories of full-licensure as a real estate appraiser. They are broken down into a residential category and non-residential category (often referred to as commercial).
New York State is one of many states that has three levels of licensure for real estate appraisers. They are:
2).Certified Residential Real Estate Appraiser, and
3. Certified General Real
Estate Appraiser.
1). Licensed Real Estate Appraiser,
CHARACTERISTICS OF REAL ESTATE
There are some basic characteristics
of land that influences its value, they are:
(1) Scarcity.
There is only so much land available. The supply is fixed.
(2) Location.
People prefer certain locations to others for certain various reasons (possibly
one location is closer to shopping and supporting facilities than another,
therefore, it has greater demand and value than a lot farther away).
(3) Type of Improvements. Certain improvements to the land can affect area property values more than others or even reduce values in an area. This relates to terms known as regression and progression.
The principle of regression states that surrounding properties tend to be inferior with regard to condition as compared to the subject house. In this case, the subject does not benefit - it's the best home on the street.
Your timing and participation in this program is based on a number of items including: your detailed responses, participation in threaded discussions and article summaries throughout the program, your research and summaries of links on the world-wide-web and test responses and questions throughout the program. Special SCRIPTING software (in conjunction with our SQL SERVER which provides "active script time frames") document then reports the location you are working from as well as the time of day or night you are responding to tasks required to complete this program successfully.
The principle of progression
considers that the subject property is inferior to that of other property's
in the area and therefore benefits in value. The superior condition of
the homes on the street bring up the subject's value.
ECONOMIC CHARACTERISTICS OF REAL ESTATE
The forces of supply and demand
affect all items traded in an active market place. Real estate is
no
exception. In general, as demand
increases and supply decreases, assuming other things equal, real estate
prices should go up. The converse is also true. As demand decreases and
supply increases, prices for real estate are
pushed down.
There are numerous other conditions
that affect real estate such as: governmental actions, construction costs,
labor availability, population trends, vacancy rates, wage levels and overall
employment stability.
Give 3 examples of each - once you have done this, click on the "RESPONSE" link and put your answers in the text area of the box that opens - remember to enter your last name & last 4 digits of your social security number so we can electronically track your timing & participation for this program!
{30 minutes}
Your timing and participation in this program is based on a number of items including: your detailed responses, participation in threaded discussions and article summaries throughout the program, your research and summaries of links on the world-wide-web and test responses and questions throughout the program. Special SCRIPTING software (in conjunction with our SQL SERVER which provides "active script time frames") document then reports the location you are working from as well as the time of day or night you are responding to tasks required to complete this program successfully.
ESSENTIALS OF REAL ESTATE APPRAISING
Depending on the type of property being appraised, there are a variety of techniques available to the professional real estate appraiser to estimate a value. In general, there are three main approaches (or methods) utilized:
1.
The Direct Sales Comparison Approach;
2. The Cost Approach;
and
3. The Income Capitalization
Approach.
THE DIRECT SALES COMPARISON APPROACH
The Direct Sales Comparison Approach, sometimes referred to as the Sales Approach or Market Approach, is the most widely accepted and utilized method of valuation for most types of real property. The sales approach works particularly well when there are an ample supply of similar sales that have recently sold within the subject's neighborhood (or a similar neighborhood).
SUBJECT: The subject property, sometimes referred to as the subject, is the property you're trying to put a price on or estimate a value for. This is basic appraisal terminology widely used in real estate and finance circles.
Many real estate people think there is some magic number as far as how close comparable sales must be to the subject to be considered "acceptable". This is simply not true. Ideally, selecting sales that are within one mile or less of the subject is "textbook perfect". In the real world of real estate sales and appraisal, however, you often must go many miles away (particularly in rural and suburban areas). Some things to consider when deciding whether a neighborhood is comparable or not include:
>< Similar
quality school districts
>< Similar
access to shopping, schools, fire and police
>< Similar
municipal services and supporting facilities
>< Similar
public utilities (like water, sewer and natural gas)
>< Similar
access to highways, freeways and thruways
>< Similar
style, age, quality and prices of homes
>< Similar
proximity to commercial influences
>< Similar
or equivalent tax base
>< Similar
proximity to parks, lakes and other recreational facilities
>< Similar
desirable areas as the subject
The sales comparison approach
to valuation is based on the principle of substitution which states: the
worth of any real estate is directly influenced by the cost of acquiring
an equally desirable substitute property. To utilize the sales approach,
at least three or more comparable sales must be selected. Once you
have selected the best sales, careful adjustments are made to the sales
for items of deviation from the subject property.
In general, of the similar
properties that are available, the properties having the lowest price will
attract the greatest demand. A prudent buyer will not want to pay
more for one property than for another that is considered equally desirable.
THE MARKET SETS THE PRICE - NOT THE REAL ESTATE PROFESSIONAL
Prices for any items traded or sold in an active marketplace are set by the marketplace. One may ask, "Why do you spend $1.25 for a loaf of bread? Why not $5.50 or $7.25?". The basic law of economics (supply & demand) states that prices tend to increase as supply falls and prices tend to fall when supply increases [assuming demand is held constant]. Most people would agree that there are ample supplies of bread available for less than $2.00, so why would the active market be willing to pay more than twice the amount otherwise? Simply stated, a person pays $1.25 for a loaf of bread because similar loaves of bread sell for $1.25.
The logic is no different for real estate. If five typical buyers pay $75,000-$80,000 for 1,200 square foot ranch style homes in the Brook Gardens subdivision; a homeowner hoping to get $100,000 (in this same subdivision) will not have much luck.
Many homeowners who engage the services of a real estate professional get upset when they discover that their home is worth less than they had hoped for (or need). Unfortunately, the real estate agent often faces the brunt of their frustrations. The true professional carefully explains that he or she does not set prices but more specifically, the market indicates the value of their home. A carefully prepared market analysis will often be the first key ingredient to overcoming a hesitant homeowner's pricing concern.
PREPARING A LOGICAL COMPARATIVE MARKET ANALYSIS USING THE DIRECT SALES APPROACH
As noted earlier, the first step in the sales comparison approach is to locate at least three similar sales that have recently closed. It is imperative that the sale be closed (not a pending sale contingent upon mortgage financing) and the sale must be at arms-length.
ARMS-LENGTH: An
arm's-length transaction is a sale that was offered on the open and competitive
marketplace for a typical period
of time which had no unusual circumstances affecting the transaction and
to which the parties were not
under duress to buy or sell. A further understanding of an arm's-length
sale
includes that all parties to
the transaction (buyers & sellers) are aware of the property's positive
and
negative attributes (such as
a snow covered roof that may be in dire need of repair but hidden to the
typical
buyer).
Put your answers in the box that opens when you click on "RESPONSE" and remember to enter your last name & last 4 digits of your social security number so we can electronically track your timing & participation for this program!
{30 minutes}
After selecting the sales you wish to use in your analysis, confirm with the listing office or assessor's office that the sale was indeed sold at "arm's-length" and is definitely closed.
Many real estate agencies utilize
some kind of form when preparing a comparative market analysis. Most
forms or computer programs list closed sales at the top third of the form,
current listings in the middle section and expired
listings at the bottom third.
Whatever order or system you use, the following section will describe how
to adjust closed sales so as to make them similar to the subject property.
WHY LIST CURRENT
LISTINGS? Many real estate
professionals
like to show what is currently going on in the
marketplace and
who they may be competing with if they
should be fortunate
enough to actually list the property .
If current listings
are similar to your subject in design, quality,
condition, size,
location and other related amenities - why
would a reasonable
person want to list their home at a higher
price when other
more reasonably priced homes have not yet
sold? Current
(or active) listings help give you direction.
WHY LIST EXPIRED
LISTINGS? When a real estate
broker lists a
property and the property fails to sell during it's
listing period,
the property expires. In most areas, the property
is then available
to be relisted by any area broker (or the previous
listing company).
Properties tend to expire for one of two reasons:
they are either
over-priced or under-marketed by the listing
broker. Expired
listings that are similar to the subject property tend
to set the upper
most value ceiling providing they were actively
marketed.
WHEN DO YOU MAKE ADJUSTMENTS AND HOW?
In general, adjustments are made for items of variation that have value in the marketplace. Another way of saying this is: only make adjustments for things that a typical buyer would care about in a typical real estate transaction.
Most professional real estate appraisers are of the opinion that if you cannot prove a value, then an adjustment should not be made. For example, assume that the subject property has a built-in fan unit above the stove. Would a typical buyer really pay more for that house (or less) if that item wasn't present? Probably not. Other items that are typically difficult to prove values for include:
1. Minor
lot size variations (frontage & depth);
2. Differences
in types of central heating systems;
3. Differences
in some types of exterior wall sheathing (vinyl vs. vinyl & brick facade);
4. Four
bedroom homes compared to three bedroom
homes;
and
5. Homes
with crawl space attics and homes with no
attic
areas.
COMPILATION OF YOUR DATA
Once you have selected the closed
sales, competing listings and expired listings - you are now ready to
assemble your data on a CMA
form. In general, it is most logical to make adjustments for items
of
variation only to the closed
sales (not to the current or expired listings). Based on the type
of form you use
and the amount of room available
- you may have to show your adjustments on a separate page.
NOTE: A savvy
homeowner who reviews your CMA that shows
adjustments for
items of variation will be very impressed
compared to agents
and brokers who simply "fill in the
blanks" on a CMA
form showing a myriad of houses with
all kinds of different
amenities. Think about it: If a property
owner looks at
your first comparable sale and notices that it
does not have
a fireplace and finished basement (like the
subject) - they
may think - "Why is this agent comparing that
house to mine?
My home is better".
People like to see numbers and explanations - not just hear an agent say, "I already considered the fact that they don't have a fireplace and finished basement like your home in the range of value below."
From your extensive research
of the marketplace, the sales above represent your
best available comparables.
Now you have the task of selecting the best three for
your CMA. Your first
step should be to select those sales which have the fewest
variations from the subject
property. Next, select the most current sales (they
indicate current market
conditions).
A careful analysis of the sales reveals the following:
SALE 1: The only variation is that it is 290 square feet bigger.
SALE 2:
The only variations is that it is 180 square feet smaller and has
no fireplace (patios
and porches are usually assigned similar values by many real estate appraisers).
SALE 3: The only variation
is that it is 10 square feet smaller.
SALE 4: Comparable four is 380 square feet bigger, has a porch as well as a patio and has a fully finished basement.
SALE 5: Comparable
five is considered an old sale because it is 16 months closed, 500 square
feet bigger, has
two fireplaces, an in ground
pool, three car garage, fully finished basement and central air.
What a shame sale
five is across the street but so different from the subject!
{30 minutes}
SELECTION OF YOUR SALES
In general, when selecting sales
to use in your analysis, picking the sales that will have the fewest
adjustments made to them will
yield you the most probable estimated selling price for the subject property.
Another
way of saying this is: the
more adjustments you have to make to a comparable sale - the less
comparable it is (otherwise
you wouldn't have to make all those adjustments). In the appraisal
world,
underwriters who review appraisals
prepared by professional real estate appraisers look for sales which have
been adjusted excessively.
This tips them off to a simple fact: the sale must not be too comparable
if the appraiser
has to make substantial adjustments.
HOW DO I KNOW WHAT'S CONSIDERED EXCESSIVE?
There are no iron-clad rules
for real estate agents preparing CMA's like there are for real estate appraisers
(who prepare appraisals that
may be sold on the secondary mortgage market). Many people follow
Fannie Mae regulations when it comes to deciding what is excessive with
regard to adjustments.
Fannie Mae requires additional clarification and explanation any time gross adjustments exceed 25% and net adjustments exceed 15% of the original sale price. The gross adjust ment percentage is calculated by simply adding up all the adjustments made (ignore negative numbers - treat them as positive numbers, then divide by the original sale price). If this exceeds 25%, your comparable may not be comparable!
Net adjustments are calculated by adding all the adjustments together, (this time keep ing the negatives negative and the positives positive) then dividing the resulting sum by the original sale price. If this exceeds 15%, your comparable may not be comparable!
Your goal should be to keep your adjustment percentages as close to 0% as possible!
As we adjust our sales,
this may be better explained by using actual numbers.
Name three types of things an appraiser might have to likely adjust for which could cause him/her to exceed (or nearly exceed) the Fannie Mae/Freddie Mac percentage guidelines.
Place your answers in the box that opens when you click on RESPONSE below - remember to enter your last name & last 4 digits of your social security number so we can electronically track your timing & participation for this program!
PAIRED SALES
ANALYSIS: A paired sales analysis
is a mathematical
procedure used to derive a line item
value for a specific
property attribute which equates to the
contributory value
of that item. Essentially, in a paired
sales analysis,
two nearly identical properties are paired-
up and carefully
analyzed. There should only be one main
item of variation
between them. By subtracting the sale
price of each
away from the other, a value is derived for
the item of variation.
When preparing to do a paired sales analysis, the easiest way to start is to select a large number of sales from a marketplace you feel is most representative of the one you'll be listing and selling in. The sales should all be recently closed and be similar in design and appeal. Typical categories on your sales grid adjustment chart (this is the same as paired sales analysis except on broader scale) include: Ranches & Split Levels; Capes, and Colonials & Other Two Story homes.
The next step is to set up a
spreadsheet large enough to list each property and it's attributes for
comparative
purposes (an example of this
will follow). The most reliable analysis will be derived from those
sales grid adjustment charts that have the most number of properties included.
In other words - if you only list 5 or 10 ranch style properties
and try to come up with a number
which represents the value for a full bathroom, garage and basement - statistically
speaking - your "sample" may simply not be large enough (in quantitative
terms).
** JUST A REMINDER **
The purpose of setting up a
sales grid adjustment chart and doing paired sales analysis is to have
"on hand" a number of values for items that vary from one property to the
next. This will enable you to prepare a more logical market analysis
that will better represent a possible selling price. This will enable
you to adjust your comparable sales (like an appraiser) to make them like
the subject property.
IMPORTANT NOTES:
Ideally, you will want to locate as many "paired sales" of homes that have
a full basement which is finished to those that are equal except not having
a finished basement. Going back to basic logic/statistics - a theory
is generally not proven by simply finding "one pair" of "paired-sales"
and thus concluding
that all finished basements
are now worth $2,500.
In many sales
grid adjustment charts, appraisers generally have three to four "pairs"
which showed a value
range of
$500 - $1,000 (wherein a mid-range value would be chosen and used
for typical properties).
You may be
asking yourself, "Why is the value so low for a
finished
basement? It probably costs at least twice that
amount to
finish off a full basement". If you asked yourself
that question
- you're in good company!
In appraising, we're not generally concerned with actual costs of improvements as much as we're concerned with "how much a typical buyer would be willing to pay to have that existing improvement present (or not)". This brings up a new term know as contributory value.
CONTRIBUTORY VALUE
Contributory value is part of
a larger concept known as contribution. The concept of contribution states
that
improvements are only worth
the amount they actually add to a property's market value, regardless of
the cost
of the improvement. The most
typical and generally accepted example is that of an in g round pool. While
most
real estate professionals are
familiar with the actual costs of an in ground pool ($10,000 - 40,000+),
most agree
that the amount of value they
contribute to a home (if they are even desirable in that particular neighborhood)
is
barely $3,000 to $8,000.
Real estate professionals should always consider contributory value over
actual costs
(buyers do - and they establish
values in the marketplace)!
T SIZE=+1>
VALUES TYPICALLY USED BY
REAL ESTATE APPRAISERS
As earlier mentioned, very few
texts specifically mention dollar amounts for items that vary from one
property to the next.
Most describe how to get these numbers (i.e., paired sales analysis and
the sales grid
adjustment chart) but few practitioners
actually spend the time to do it. Based on substantial research from
all throughout the country,
as well as discussions with Realtors, assessors, appraisers and other real
estate
instructors, some common values
for items will be provided. Please remember, the numbers quoted should
only be used if you have proven
them in your marketplace. They may vary depending on your neighborhood,
economic conditions, specific
buyer attitudes at the time, etc. They are provided here for illustrative
purposes only.
ITEM DOLLAR RANGE (ADJUSTMENT)
1 Bath vs 1.5 Baths
$500 - $1,000
2 Baths vs 1 Bath
$1,000 - $2,000
Full Bsmt vs Partial
Bsmt
$1,500 - $2,500
Full Bsmt vs Crawl Space
$3,000 - $4,500
Partial Bsmt vs Crawl
Space $2,500 - $3,000
Fin. Bsmt vs Partial
Finished $1,000 - $2,000
Fin. Bsmt vs Unfinished
$2,000 - $3,000
Partially Fin. vs Unfinished
$1,500 - $2,000
Space Heater vs Forced
Air $500 - $1,500
2 Car Garage vs 1 Car
$1000 - $2000
2 Car Garage vs No Garage
$2,000 - $2,500
1 Car Garage vs No Garage
$1,000 - $1,500
1 Car Garage vs Carport
$500 - $750
Central Air vs No Air
$1,000 - $1,800
Solar Panels vs None
$2,000 - $3,000
Heat Pump vs None
$1,500 - $3,000
Cov. Porch vs Open Porch
$500 - $1,000
Open Porch vs No Porch
$500 - $1,000
Cov. Porch vs No Porch
$1,000 - $1,500
Fireplace vs WB Stove
$500 - $750
Fireplace vs None
$1,000 - $2000
WB Stove vs None
$500 - $1000
Fence vs None
$1,000 - $1,500
Exceptional Landscaping
vs
Average
$1000 - $2,000
Built-In Appliances
vs None $500 - $1,500
[*Amounts should be doubled
when the house value exceeds $125,000-$150,000].
OTHER ITEMS:
Square foot differences: 1/4 to 1/3 cost new (see a cost manual)
Lot size difference:
Must be derived from comparable land sales
Location adjustments:
Typically subjective based on marketplace
Room Count:
Typically included within the square foot
adjustment (so as to not double-count)
Date of Sale:
Should not be required if sales are current
View differences:
Typically subjective based on marketplace
Quality differences:
Typically subjective based on marketplace
Appeal:
Typically subjective based on marketplace
Ideally, your goal should be
to choose comparable sales that require no adjustments when comparing them
to the
subject property. The
more adjusting required, the less comparable the sale. The following example
will illustrate adjustments and percentage difference considerations.
ADJUSTMENTS:
Bathroom differences:
+500
-500
-1,000
Sq. Footage diff.:
0
+2,400
-3,600
Basement Finishing:
0
0
-2,000
Garage differences:
+1,000
+2,000
+2000
Porches, etc.:
0
+2,000
-1,000
Fireplaces, etc.:
0
+500
+1,000
NET ADJ.:
+$1,500 (2.3%)
+$6,400 (10%)
-$4,600 (7%)
GROSS ADJ.:
$1,500 (2.3%)
$7,400 (12%)
$ 10,600 (15%)
ADJ. VALUES:
$66,500
$68,400
$65,400
Based on the preceding example, the indicated value for the subject property would be $66,500 because sale one has the lowest percentage of net and gross adjustments compared to the other two sales. Sale two would be the next most comparable property because of it's relatively small percentage of adjustments. Sale three is the least comparable of the three because of it's high gross adjustments and net adjustments.
IMPORTANT NOTE:
Avoid averaging your adjusted sales to come up with
an estimated selling
price for your home. When adjusted sales are averaged, your
carefully adjusted sales
are then further skewed (a statistical term). In essence,
you're changing your
value estimate once again making the entire process less
reliable. Of course,
if all three adjusted sales are within hundreds of dollars of
each other - averaging
won't affect your final analysis - you're simply wasting your
time! Pick the
sale with the lowest percentage of net and gross adjustments and
round to the nearest
$500.
{1 hour}
THE COST APPROACH
The Cost Approach in appraisal
is a widely used supporting method of valuation for a wide variety of property
types.
Many buyers in a particular
marketplace tend to compare the value of an existing improvement or building
by
considering the current prices
of other similar buildings and what it would cost to rebuild a new structure
that would
meet their physical and functional
requirements.
In many cases, the cost approach
works extremely well in providing me a direction on an upper most value
range
for those "difficult to price"
properties that we all have (or will) run into. Some property types
include:
A). Rural properties
where sales are extremely limited;
NOTE: It should
be emphasized that the sales approach will typically produce
LIMITATIONS TO THE COST APPROACH
One of the major drawbacks to
the cost method is the estimation of depreciation which has taken place
from the
time the subject property was
originally built. That is why I emphasize that the cost approach
works quite well for properties that are new or nearly new. Properties
that are nearly new have little depreciation which has taken place
and thus is less subject to
"subjective" depreciation estimates that may be incorrectly applied.
Suggestions on how to estimate depreciation will be explained a little
later in the material.
ESTIMATING VALUES USING THE
COST APPROACH
The first step in the cost approach
is to estimate a value for the subject property as if it were new.
One of the
most popular methods used is
the square foot approach. In the square foot approach, the appraiser
first ascertains
the quality of the construction
of the subject property. Typical options for quality include: excellent,
very good, good, average, fair and poor. The most common quality
used is average.
Quality can be determined in
a number of different ways. The easiest method is to look at a cost
manual and find a picture of a home that resembles the quality which is
evident at the subject property.
COST MANUAL: A
cost manual is a book which is periodically updated and
Costs vary for a variety of
reasons including: labor availability, lumber costs, availability
of skilled craftsman, transportation costs, general economic conditions,
supply & demand, and much more.
Another way of determining quality
is to go by your experience in real estate. For example, a home having
excellent quality will have
some very specific differences in what it offers compared to a home that
is
considered fair or average
quality. Below are some guidelines that might assist you in determining
quality.
RATING_______
FAIR/POOR_____
AVERAGE______
GOOD/EXCELLENT
Very few windows
X
The cost method works particularly
well when the subject improvements are new or nearly new. In
many circumstances, the cost approach may be the best method of valuation
when recent sales of similar properties are
few and far between or if the
subject property is unique in it's characteristics (thus making it difficult
to find "comparable sales"). When utilizing this approach, the cost
to develop a property is compared with the value of an existing property
or one that is substantially
similar.
B). Upper-end customized
homes that fall into the higher price ranges; and
C). Unique properties
such as manufactured housing, log homes, cottages;
and seasonal residences.
the most reliable estimate
of value for the subject property. The cost and income
approaches should be
used to provide support and direction when reconciling for
your final value estimate.
readily available to
real estate professionals which lists on a nationwide basis, the
costs to construct (either
replacement or reproduction) a variety of homes which fall
into the categories
of quality noted above. The manual is further broken down into
housing styles/categories
which can easily be compared to what you're analyzing
(i.e., the subject property).
The manual also provides multipliers known as regional
multipliers which are
used to adjust those nationwide numbers into a realistic number
which is appropriate
to your particular market area. Regional multipliers are important
to use because housing/building
costs vary from one part of the country to the next.
Typical for the area
X
X
Two or more types of
exterior
wall sheathing
X
X
Two-four roof lines
X
Space-Heaters
X
Full basements/finished
X
X
Minimal ornamentation
X
Substantial ornamentation
X
Very "box-like" shape
X
Carport instead of garage
X
Fireplace
X
X
Few porches/patios, etc.
X
X
Complex floor plan
X
More than two baths
X
Less than 1.5 baths
X
Predominantly double-hung
windows
X
X
Casement/double-hung
windows
X
X
Decorative-type windows
X
THE NEXT WORK SECTION REQUIRES YOU TO ANALYZE THE VARIOUS PHOTOS
OF HOMES WHICH FOLLOWS AND ESTIMATE WHAT QUALITY RATING THEY SHOULD
BE GIVEN BASED ON THE GUIDELINES ABOVE. Your answers will go in the
next work section that follows!
HOUSE 1
HOUSE 2
HOUSE 3
HOUSE 4
HOUSE 5
HOUSE 6
HOUSE 7
HOUSE 8
HOUSE 9
HOUSE 10
HOUSE 11
HOUSE 12
HOUSE 13
HOUSE 14
HOUSE 15
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Once you have selected the appropriate category of quality, you are now ready to look up the appropriate cost per square foot based on the size of your subject property.
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{1 hour}
When measuring the square footage of a house, only count those areas above grade which are finished and heated. Finished basements should never be included in the square footage calculations regardless of how nice it's finished. Begin by measuring the outside perimeter of the structure and continue in a clockwise fashion until you are at your point of eginning. Once inside, exclude those areas that are not finished and heated (like garages, Florida rooms and enclosed porches).
In order to accurately use a cost manual, you must know the size of your subject property. The reason why relates to the "economies of scale". In other words, the larger the home, in general, the less expensive per square foot it is to build. Once you select a price/square foot that is appropriate for the subject, you must multiply it by your regional multiplier. Take the resulting factor and multiply it by the square footage.
The next step is to calculate the value for the foundation and/or the basement. This is generally the same square footage as what you have calculated for the first floor of the residence. (Assuming that the subject property has a full basement). If the basement is finished, the cost manual will provide you with the additional cost per square foot to add to the base cost. (Then your adjusted cost per square foot will reflect a finished basement value instead of an unfinished basement value).
Just as you did with the finished area above grade, you must multiply the adjusted basement cost per square foot by your regional multiplier then multiply that by the basement square footage.
The next step is to determine the square footage of the garage area (if there is a garage) and select the appropriate cost per square foot from the cost manual. As before you must multiply this cost factor by the regional multiplier then multiply by the garage's square footage.
The next step is to add in any additional items such as porches, patios, decks, fireplaces, wood-burning stoves, and built-in appliances based on their cost new. This data is also included in the manual.
The next step is to add all your "costs new" together. The resulting number will be your estimated cost new.
Finished area above grade
35' x 25' x 2 =
1,750 square feet
15' x 12' x 1 =
180 square feet
-------------------
1,930 square
feet
====
Basement area
35' x 25' x 1=
875 square feet
15' x 12' x 1=
180 square feet
-------------------
1,055 square
feet
====
Garage area
24' x 20' =
480 square feet
===
1930 sq ft x ($50.20 x
1.02) = $98,823.72
1055 sq ft x ($12.01
x 1.02) = $12,923.96
480 sq ft x ($14.25 x
1.02) = $ 6,976.80
Additional Amenities:
WB Stove & Built-In
Appliances
= $ 2,100.00
ESTIMATED COST NEW....................
= $120,824.48
PLEASE NOTE: It is not
necessary to go out and purchase
a
cost manual in order to use the square
foot
method of the cost approach. You can
interview
local builders or real estate appraisers
in
your local market place and ask what kind of
numbers
they use for differing quality types.
A ranch style home measuring 45 feet in length and 26 feet in width has a full basement (unfinished) and a detached garage measuring 16' x 20'. If the cost new for the living areas is $60 per square foot, basement area is $14 /sq.ft and the garage is $16 per sq. ft. - determine the cost new for building this home.
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At
the beginning of this section, two terms were mentioned but not carefully
identified. They are reproduction and replacement cost.
REPRODUCTION COST is an estimated cost to construct at current prices, an exact duplicate of the subject property, using the same materials, building/construction standards and quality of craftsmanship inherent of the subject. Any deficiencies present would be included in the value estimate.
REPLACEMENT COST
is an estimated cost to construct at current prices, a building that has
similar utility as the
subject utilizing modern materials,
building/construction standards and quality of craftsmanship inherent of
the
subject. Cost manuals generally
provide reproduction costs.
{1 hour}
ESTIMATING DEPRECIATION
The next step in the cost approach is to estimate the depreciation applicable at the subject property. There are three types of depreciation:physical, functional and external.
PHYSICAL DEPRECIATION
is generally applied to all properties
that have been lived
in (or occupied) even if the subject is less than
one year old. Physical
depreciation occurs as a result of the natural
wear and tear a property
goes through based on the elements of
nature and use by man.
The weather (snow, rain, wind, cold) causes
natural wear & tear.
Examples of man-made wear & tear include:
worn out carpeting from
children or pets in the home, etc. Physical
depreciation is generally
considered an accrued type of depreciation.
ACCRUED DEPRECIATION
is the total depreciation that has taken
place at the subject
property from the date the property was built.
FUNCTIONAL DEPRECIATION,
typically referred to as functional
obsolescence, is the
type of depreciation that occurs as a result of outdated
or undesirable design,
layout or features of the subject property. Typical
examples include: a home
lacking closets in the bedrooms (when they are
typical in the area),
the need to walk-through one bedroom to gain access
to another (inadequate
design/floor plan) or a home lacking a shower (when
they are typical in the
neighborhood or expected by the buyers of the day).
EXTERNAL DEPRECIATION,
typically referred to as external obsole-
scence, is the type of
depreciation that occurs outside the subject property
and is often outside
the subject's control. Examples include a neighbor who
uses their front yard
as a used car lot, a warehouse in close proximity to the
subject parcel or a nuclear
waste facility within 200 feet of your subject.
Most of the time your depreciation estimates will be for the physical wear & tear that has taken place at the subject property. Estimates of functional depreciation are often based on the estimated cost to cure and are represented in whole dollar amounts. For example, if your subject has an inadequate floor plan that necessitates the need to walk-through one bedroom to get to another bedroom, your functional depreciation estimate will probably be the cost to construct a wall for private access.
Your estimates for external
obsolescence will often take the form of a percentage adjustment based
on
interviews of local real estate
professionals who are knowledgeable about how much less typical buyers
pay who purchase properties that are adjacent or near "commercial properties"
or on "busy thoroughfares".
ESTIMATING PHYSICAL DEPRECIATION
There are a variety of methods available to you to calculate physical depreciation. Many professional real estate appraisers use charts that are provided by the producers of cost manuals (based on the subject's apparent condition) and actual age.
Another popular method is the economic/age-life method. The economic/age life method often referred to as the straight-line approach) is based on the assumption that depreciation on the subject has occurred at an even rate throughout it's economic life. In order to use the economic/age-life method, you must estimate how long the subject structure will remain standing with minimal maintenance before the improvements begin to detract value overall.
The chart below will provide
the typical economic-life estimates for use with the economic/age-life
method of
depreciation estimation.
TYPE OF CONSTRUCTION YEARS
Basic Wood-Frame Construction
55 yrs
Average Wood-Frame Construction
60-65 yrs
Good Wood-Frame Construction
65-70 yrs
V.Good Wood-Frame Construction
70-75 yrs
Basic Masonry (Brick)
Construction
65 yrs
Average Masonry Construction
70-75 yrs
V.Good Masonry Construction
75-80 yrs
Based on the data contained
within the chart above and your observation of the subject property, the
number you
choose will be your denominator
in your depreciation calculation. (See example that follows).
The next step is to estimate the subject's EFFECTIVE AGE. Effective age is an estimate of how old the subject property appears to look based on it's quality of construction, remodeling/updating received and overall current condition. The actual age of the property has no bearing on it's effective age. As a matter-of-fact, the better maintained the property, the lower the subject's effective age with respect to it's actual age.
You may be asking yourself, "How am I supposed to estimate the age of a property simply by looking at it?" or "I'm no construction expert, how can I accurately estimate a properties age?". If you fall into one of these two categories (or something similar), don't feel bad - you're in good company!
We have just stumbled across the main drawback of the cost approach - the problems associated with the estimation of depreciation. Indeed, it is very subjective. Some people may look at a 30 year old home and estimate an effective age of 15 years while another person may estimate an effective age of 20 years. There is a simple way of thinking that can put effective age into perspective.
When inspecting the subject property in order to ascertain it's effective age, try asking yourself the following question: "If I were to estimate, how long it's been since this property has been updated, I would have to say approximately __x__ years." In other words, effective age can be said to equal the number of years since the subject has been last remodeled and/or updated.
Therefore, it is possible to say that an 80 year old home (actual age) could have an effective age of 15- 20 years providing that it was substantially remodeled approximately fifteen to twenty years ago. Based on this theory, the accrued depreciation of the subject (assuming it is an average quality, wood/frame constructed home) would equal...
20 Effective Age
________ = 31.07%
ACCRUED DEPRECIATION
65 Economic Life
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The next step in our continuing example from the previous couple of sections indicates the following..............
If the agent estimates
that the eight year old subject has an
effective age of 5 years,
the accrued depreciation would be:
5 Effective Age
______ = 6.7% x $120,824.48
= $8,095.24 Total Depreciation from date built
75 Economic Life
Step two concludes with the accrued depreciation being subtracted from the estimated cost new. The net result (known as the depreciated value of the improvements) results in a value of ...............
$120,824.78
- $8,095.24 = $112,729.54
{30 minutes}
STEP THREE OF THE COST APPROACH
The final step in the cost approach
is to add in land value and any site improvements. The estimate of value
for the land is typically done
based on locating comparable sales which are similar in size and
location to that of the subject
parcel (assuming the subject property is vacant and being used at a use
which represents it's highest
and best use).
HIGHEST & BEST
USE is that use of a property that will yield it's most profitable,
legally
and physically permitted use, whether vacant or improved, at today's value.
After adding in land value,
site improvements may be added in. Typical items included under site
improvements include: in ground pools, private septic systems & private
wells, etc.
DERIVING LAND VALUE
Land value is estimated most
typically by extracting sales of similar size lots having similar utility,
neighborhood characteristics
and market appeal as that of the subject property (as if it were unimproved).
The
market approach is commonly
used and considered to be most reliable. See if you can determine
the land value
for the subject based on the
extracted sales which follow. (All sales are from similar neighborhoods
as the subject).
VL @ Sheva Lane
VL @ Big Tree Rd.
VL @ Jean Drive
VL @ Milestrip Rd.
SP: $25,000
SP: $30,000
SP: $20,000
SP: $27,500
Date: 4/96
Date: 2/96
Date: 1/94
Date: 12/95
Size: 100 x 180
Size: 150 x 200
Size: 100 x 180
Size: 120 x 175
Public Water/Sewer: NO
YES
NO
NO
VL @ McKinley
VL @ Grover Road
SP: $26,500
SP: $26,000
Date: 3/95
Date: 11/95
Size: 105x190
Size: 110 x 180
Public W/S: NO
NO
The subject property does not
have public water and sewer. The
current owner has a private
septic & well. The estimated value of the
septic and well is $6,500 (already
depreciated).
If you selected the sales on
Sheva Lane, Milestrip Road and Grover Road - you did a good job.
These sales reflect
the most current sales available
having the least number of differences between the subject and the comparables.
They will require the least
number of adjustments of the six provided. As a matter-of-fact, no
adjustments would
even be necessary due to their
minimal differences.
A reasonable range of value
would be: $25,000 - $27,500 with a specific value of $26,000
being mid-range.
CONCLUSION
Now that all three components
of the cost approach have been calculated, we must add everything together
to
arrive at a final value estimate
based on the cost approach:
Total estimated Cost
New: $120,824.48
Minus Accrued Depreciation:
8,095.24 (based on 6.7%)
Sub Total..................... $112,729.24
Add In Land Value:
$ 26,000.00
Add-in Septic &Well; $ 6,500.00
ESTIMATED VALUE BY COST: $ 145,229.24
Please note: If more information
was provided about the subject such as whether there was elaborate
landscaping, a concrete or
blacktop driveway or other miscellaneous types of site improvements, their
depreciated values would be
included in the area where you added in the septic and well amounts.
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Please summarize in your own words, the THREE main steps of the cost approach by CLICKING onto RESPONSE in the text area of the box that opens: & remember to enter your last name & last 4 digits of your social security number so we can electronically track your timing & participation for this program!
{1 hour}
THE INCOME CAPITALIZATION APPROACH TO VALUE
The income capitalization approach
to valuation, sometimes referred to as the income approach is used to
value any income producing
properties assuming reliable rental/data is available in the marketplace.
The
income approach works very
well as a supporting method of valuation as does the cost approach. Typical
examples of income producing
properties include:
A) Apartment Buildings
B) Retail/Commercial
Space
C) Warehouse and related
Buildings
D) Office Buildings
E) Strip Plazas and
other related entities
The income approach to valuation considers the earning potential of the property to be it's most important consideration. When evaluating an income property, most appraisers utilize current market standards as being the benchmark for comparison.
For example, if an appraiser
is evaluating a 200 unit apartment complex, and the
owner indicates that
he or she is spending 12% of their gross rental income for
advertising/marketing
expenses - the appraiser will compare that 12% to what is
typical in the marketplace
for similarly managed complexes. If this 12% figure is
out of line, the appraiser
will either adjust it to marketplace standards or do further
investigations as to
why the number is higher than what other typical property
owners pay (for similar
size units in similar areas).
INVESTOR MENTALITY
The investor's mentality is quite different from that of a residential buyer or seller. There is typically less emotion involved in a commercial transaction than a residential transaction. The main reason for this is that an investor who purchases income-producing property is essentially trading present dollars for the right to receive future benefits from the property ownership. The present dollars refer to the amount of money or other consideration required as a down payment and the future benefits refer to the potential tax advantages of property ownership as well as cash from it's disposition.
RISK AND VALUE PRINCIPLES
Most investors agree that a safe dollar is worth more to them than a risky dollar. Many investors avoid risk when they can do so without sacrificing their return on their investment. As a result, the marketplace rewards risk takers by paying higher yields to higher associated risky investments. Consider this: most banks pay 2-4% for basic passbook savings accounts while the typical stock mutual funds pay 8-12+%. The vast majority of passbook savings accounts are FDIC (Federal Deposit Insurance Corporation) insured while mutual fund investments are not guaranteed. People would not invest in mutual funds if they were not rewarded for their risk accordingly!
The same logic holds true for real estate investments. The higher the associated risk with a property, the higher it's capitalization rate. The lower the associated risk - the lower it's capitalization rate.
CAPITALIZATION
RATE: a rate or multiplier that is
extracted from
the marketplace (sometimes referred to
as a discount
factor or rate of return). It is calculated by
dividing the net
operating income of an investment by it's
value. Capitalization
rates must always be a number less
than 1.0.
The higher a capitalization rate, the higher the
associated risk.
The converse is also true.
It is also true that similar
properties which are similarly managed in similar areas often have similar
capitalization rates.
RENT
Most investment property is
purchased for purposes of collecting rent. Rent is the major source
of income derived
from investment real estate.
Two types of rent are typically considered when analyzing an
investment property: historical
and market rent.
HISTORICAL RENT
is the rent that has been paid in
previous years during
the properties most recent holding
period. Historical
rent is often looked at in order to
realistically forecast
future rental potential at an investment
property.
When a property has a
history of collecting "below market
rents", (the typical
investor assumes history will repeat itself),
there is a good chance
the property will continue to produce
future rents that are
somewhat below that which is typical in
the marketplace (unless
substantial changes are made in the
property's management
and/or physical composition).
MARKET RENT is
an estimate of the potential rent that a
specific investment
property could earn (or may be earning
right now). Many
agents review local classified ads to
determine what other
similar properties are renting for at a
particular time.
A more ideal method of determining market
rent is to analyze current
sales of similar properties that were
rented at the time of
their sale. Rents should be verified with
the listing associate.
Other sources of market
rental data include: area property
managers, developers,
real estate agents & brokers, real estate
appraisers and management
companies.
There is a direct relationship between a properties rent and it's value. This relationship is better identified by looking at the gross rent multiplier.
GROSS RENT MULTIPLIERS
(G.R.M.'s) are calculated by
dividing the gross monthly
income by the property's value. On
small residential properties
(1-4 units), monthly income is typically
used. On larger
residential and commercial properties, yearly
income is considered.
When yearly incomes are used, the multiplier
is then called a gross
income multiplier (G.I.M.).
Here are some combinations of the various multipliers:
Property Value / or Sale
Price G.R.M.
_______________________
= or
G.I.M.
Monthly or Yearly Gross
Income
Property Value / or Sale Price Monthly or Yearly
_______________________ = Gross Income
G.R.M. or G.I.M.
(Monthly or Yearly Gross Income)
X (G.R.M. or G.I.M.) = Property Value
When evaluating a commercial
property, net operating income is typically used. Net operating income
(N.O.I.) is
derived by subtracting the
normal annual operating expenses from the effective gross income.
Effective gross
income is derived by subtracting
vacancies and collection costs (such as attorney fees) from gross income.
One expense never considered,
however, is the monthly or annual mortgage payment. This is typically
referred to as the debt service.
An example will help to put everything into perspective:
Suppose you are asked
to evaluate a 20 unit apartment complex
that collects $72,000
a year in gross income. Vacancies average
3% and yearly attorney
fees (for collections) have averaged $1,200.
Annual expenses exclusive
of the mortgage payment equates to
$28,150 per year.
Potential Gross Income
=
$72,000
MINUS Vacancies (.03x72,000)
=
2,160
MINUS Collections Costs
=
1,200
____________
$68,640 Effective Gross Income
MINUS Annual Expenses
$28,150
____________
$40,490 Net Operating
Income
Try selecting three (or more) sales from the following data to derive a realistic capitalization rate for the subject property. All sales are from the subject's neighborhood.
Sale 1 Sale 2 Sale 3 Sale 4 Sale 5 Sale 6
30 units
20 units
18 units
40 units
20 units
25 units
CD:3/96
CD:2/96
CD:2/94
CD:2/95
CD:10/95 CD:8/95
SP: $245,000
SP:$170,000
SP:$135,000 SP:$360,000
SP:$180,000 SP:$210,000
EGI:$105,000
EGI:$64,000
EGI:$54,000 EGI:$128,000
EGI:$62,000 EGI:$75000
EXP:$47,250
EXP:$27,158
EXP:$18,900 EXP:$62,100
EXP:$24,500 EXP:$30,890
If you selected sales two, five and six - you did good!
Some of the important reasons why the other sales were discarded include:
1. Old sales (past 12+
months closed);
2. Dissimilar properties;
and
3. Dissimilar incomes
and/or expenses.
Now that you've selected the three sales that appear to be most comparable to the subject, you'll want to verify the information to insure it's accuracy . The next step is to develop a capitalization rate from your "marketplace".
As earlier mentioned, a capitalization rate must always be a number that is less than 1.0 .Keeping this in mind, the formula for income capitalization is:
ANNUAL NET OPERATING
INCOME (I)
----------------------------------------------------------
= VALUE (V)
CAPITALIZATION
RATE (R)
ANNUAL NET OPERATING
INCOME I
-------------------------------------------------------
= CAP RATE r
VALUE
v
(CAP RATE)
x (VALUE) = NET OPERATING INCOME
PLEASE NOTE:
When deriving a capitalization rate,
it is imperative that
great care is taken during the selection
process.
For every one point variation in a capitalization
rate, you can affect
the overall value of the subject property
by 8-13+- percent!
It boils down to the analysis of the
comparable sales data.
Sales should be from a similar area,
have similar size, quality,
appeal and functional utility as does
the subject. If the
comparable's characteristics vary too much,
the sale should be discarded
from consideration.
As we conclude our example, the capitalization rates are calculated as follows:
EGI - EXP = NOI NOI/VALUE = CAP RATE
Sale Two: 64,000-27,158= 36,842 36,842/170,000 = .2167 or 2 1.67%
Sale Five: 62,000-24,500= 37,500 37,500/180,000 = .2083 or 2 0.83%
Sale Six: 75,000-30,890=44,110
44,110/210,000 = .2100 or 2 1.00%
As a result of your careful
analysis, you have a narrow range of values (for your marketplace
capitalization rates):
20.83 % - 21.67 %
Your timing and participation in this program is based on a number of items including: your detailed responses, participation in threaded discussions and article summaries throughout the program, your research and summaries of links on the world-wide-web and test responses and questions throughout the program. Special SCRIPTING software (in conjunction with our SQL SERVER which provides "active script time frames") document then reports the location you are working from as well as the time of day or night you are responding to tasks required to complete this program successfully.
You could reasonably
conclude that a 21% cap rate would be appropriate in the analysis of the
subject property.
By applying this to the IRV formula, the following value is derived for
the
subject:
40,490 (NOI)
----------------
= $192,800 (VALUE)
.21 (RATE)
If you want to derive
a range of value for purposes of a CMA, simply
divide the NOI by the
highest CAP RATE derived and the lowest cap
rate derived (from your
marketplace) as follows:
40,490/.2167 = $186,848 40,490/.2083 = $194,383
$186,848 - $194,383.
In the application of gross
rent multipliers, the methods of comparison are no different than those
applied in the use
of capitalization rates.
When you use comparable properties from comparable neighborhoods, comparable
multipliers will be derived.
{30 minutes}
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SUMMARY QUIZ - Choose the
best answer.
** READ THE QUESTIONS THAT FOLLOW, WRITE YOUR ANSWERS ON A SEPARATE SHEET OF PAPER, THEN CLICK ON RESPONSE AND PROVIDE US THE BEST ANSWER.
PLEASE CLICK ON TO WORK-SECTION "L" WHICH FOLLOWS THE QUESTIONS TO CONCLUDE THIS PART OF THE COURSE! **
1. In general, when is it considered that you have just made an "appraisal"?
A) When you use appraisal
forms B) When the analysis says the word
"appraisal or appraiser"
C) When you state a specific
value D) If you live in a mandatory state
2. Real estate professionals who reside in a voluntary state (who're not licensed or certified as an appraiser) and are asked to do an appraisal for a bank (for mortgage purposes) can/should:
A) Generally do the appraisal
B) Do the appraisal if it won't be sold to the
secondary mortgage market
C) Inform the bank that
they D) Never do appraisals for mortgage
are not licensed/certified
purposes
3. Real estate professionals who are affiliated with the National Association of Realtors and wish to do appraisals must:
A) Be licensed as Brokers
B) Be State licensed/certified as Appraisers
C) Be designated by an
appraisal D) Never do real estate appraisals
organization
4. Which type of appraisal license/certification
allows a person to appraise non-residential
property?
A) Certified General License
B) Certified Residential License
C) Licensed Residential
Certificate D) Certified Commercial Real Estate License
5. Which methods of valuation
typically serve as "supporting methods" of value in the
appraisal profession:
A) Sales and Income
B) Cost and Income
C) Cost and Sales
D) Reproduction and Replacement
6. What principle states that the worth of any real estate is directly influenced by the cost of acquiring and equally desirable substitute property?
A) Principle of Conformity
B) Principle of Highest & Best Use
C) Principle of Substitution
D) Principle of Replacement Cost
7. In general, current (active) listings are used in an analysis to:
A) Give direction for
value B) Assist in determining line item adjustments
C) Establish minimum
values for an D) Inform the reader of the current
area or neighborhood
marketplace situation
8. When selecting sales to use in your analysis (when determining a range of value for the subject property), try to select sales that:
A) Are similar to the
subject B) Look like the subject property
C) Have similar size
as the subject D) Will have the least amount of adjustments
made to them
9. When making adjustments to
come up with a value for the subject, do you make
adjustments to:
A) the Sales
B) the listings
C) both A &
B D) neither A nor B
10. In general, the cost approach is most reliable when:
A) There are few sales
available B) The subject is nearly new
C) The cost factors are
current D) You're evaluating special-use properties
11. The major limitation to the application of the cost approach is:
A) Reliable costs are
difficult to locate B) Derivation of land values
C) Estimation of depreciation
D) Lack of reliable sales data
12. Based on the quality discussion in the preceding section, which choices are most accurate for fair/poor quality homes:
A) Few windows/2+ baths/Full
Bsmt B) Box-like in shape/Carports/Space-Heaters
C) Two roof lines/1 bath/Fin.
Bsmt D) Open porch/1 bath/and Substantial_Ornamentation
13. When determining square footage (or gross living area), the best method is to:
A) Measure the outside
perimeter of B) Contact the local assessor
the home
C) Add together the interior
rm sizes D) Review the survey
and multiply by 1.25
14. The difference between reproduction cost and replacement cost is:
A) reproduction considers
current prices B) replacement considers current prices
C) reproduction considers
building D) replacement considers building standards
standards of previous
times of previous times
15. The need to walk-through
one bedroom to get to another bedroom is an example of:
A) Physical Depreciation
B) Functional Obsolescence
C) External Obsolescence
D) Accrued Depreciation
16. When the exterior clapboard
on a home needs to be scraped and painted, this is an
example of:
A) Physical Depreciation
B) Functional Obsolescence
C) External Obsolescence
D) Accrued Depreciation
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{2 hours}
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