APPRAISAL THEORY AND PRACTICE

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APPRAISAL THEORY AND PRACTICE

• WHAT IS THE OBJECTIVE OF AN APPRAISAL?
• - - ESTIMATE FAIR MARKET VALUE

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WHAT IS FAIR MARKET VALUE?

• VALUE IN CASH OR EQUIVALENT
• COMPETITIVE MARKET CONDITIONS
• USUAL FINANCING TERMS
• ARMS LENGTH
• KNOWLEDGEABLE, INFORMED BUYER AND SELLER
• NO UNDUE STIMULUS OR DURESS

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WHO USES APPRAISALS?

• IS THERE A DIFFERENCE BETWEEN INVESTMENT AND FAIR
  MARKET VALUE?
• WHAT CREATES VALUE IN THE MARKET PLACE?

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AN OVERVIEW OF THE THREE METHODS OF APPRAISAL

• SALES - COMPARISONS
• INCOME - CAPITALIZATION
• COST - REPLICATION

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SALES - COMPARISONS

• WHAT IS IT?
• WHERE IS IT MOST APPLICABLE?
• WHAT ARE THE ADVANTAGES AND DISADVANTAGES?

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SIMPLE SALES - COMPS EXAMPLE
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SALES COMPARABILITY APPRAISAL - SIMPLE
ADJUSTMENT PROCESS

• 1) REAL ESTATE STRATIFICATION
• 2) TEMPORAL FACTOR
• 3) GEOGRAPHY
• 4) LAND USE / PROPERTY TYPE
• 5) VALUE CLASSES
• 6) TERMS OF SALES
• 7) PROPERTY CHARACTERISTICS

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VALUATION BY STATISTICAL INFERENCEAn Extension
of the Sales-Comparable ApproachThe Hedonic
Method
Parcel Services
Characteristics
FMV
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HEDONIC APPROACH -- STATISTICAL INFERENCE
APPRAISAL AND COMPUTER ASSISTED MASS APPRAISAL

• STEPS
• DEFINE SALES SAMPLE
• SELECT PARCEL CHARACTERISTICS
• CODE PARCEL CHARACTERISTICS
• ALALYZE MULTIVARIATE REGRESSION RESULTS
• REFINE MULTIVARIATE REGRESSION RESULTS
• - REVISE SAMPLE
• - REVISE VARIATES
• VERIFY FINDINGS AND RESULTS

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ESTIMATE OF THE MARKET VALUE FUNCTION(Obtained
by Two-Stage Least Squares)
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INTERPRETATION OF VALUE ESTIMATE

• TAXATION CAPITALIZATION
• ACCESSIBILITY
• PROPERTY CHARACTERISTICS
• OTHER VARIABLES

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INCOME - CAPITALIZATION APPROACH

• WHAT IS THE RATIONALE FOR USING AN INCOME
  CAPITALIZATION APPROACH?
• WHARE ARE LIKELY ADVANTAGES OF THIS METHOD?
• DISADVANTAGES?
• HOW DOES THIS METHOD COMPARE TO THE SALES-COMP
  APPROACH?
• WHAT INFORMATION DO YOU NEED TO CONDUCT THE
  INCOME-CAPITALIZATION METHOD OF APPRAISAL?
• 1.
• 2.
• 3.
• 4.

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ESTIMATING GROSS INCOME

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ESTIMATING ANNUAL OPERATING EXPENSES

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THE CAP RATEWHAT IS IT AND HOW IS IT USED?
INCOME APPROACH SCHEMATIC
NOI
Market Data?
Market Data?
CAP RATE
FMV
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HOW ARE CAP RATES AND INTEREST RATES RELATED?

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COST - APPROACH

• WHY DO WE USE THE COST APPROACH?
• WHAT ARE ITS LIMITATIONS AND ADVANTAGES?
• HOW DOES THE COST APPROACH COMPARE TO THE SALES
  AND INCOME APPROACHES?
• BASIC ASSUMPTIONS PERFECTLY COMPETITIVE MARKET!
• C - D V

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FOUR BASIC DATA ELEMENTS OF COST APPROACH

• 1.
• 2.
• 3.
• 4.

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COST APPROACH EXAMPLE
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WHERE IS THE COST APPROACH MOST EFFECTIVE AND WHY?

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REPLACEMENT COST VS. REPRODUCTION COST

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METHODS FOR ESTIMATING COSTS

• QUANTITY SURVEY
• UNITS-IN-PLACE
• UNITS-COMPARISON
• BASE-BUILDING METHOD / INDEX ADJUSTMENT

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DEPRECIATION CONSIDERATION

• PHYSICAL
• TECHNOLOGICAL
• ECONOMIC

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SOME OTHER TECHNIQUES

• GROSS OR NET INCOME MULTIPLIER METHODS
• RESIDUAL CAPITALIZATION
• MORTGAGE EQUITY CAPITALIZATION