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Welcome to the International Right of Way

Association’s

Course 400Principles of

Real Estate Appraisal

400-PT – Revision 3 – 06.30.06.USA

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Introductions

Who we are…What we do…

Where we do it…

How long we’ve been doing it…

Our goals for the course...

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Objectives(1)

At the end of the two days,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

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Objectives(2) At the end of the two day,

you will be able to... • 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

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Housekeeping

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ScheduleDay One (1)

8:00 - 8:15 Introductions, Etc.

8:15 - 9:45 Characteristics of RealEstate and Real Property.Definitions. Documents.

9:45 - 10:15 Cost, Price and Value

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ScheduleDay One (2)

10:30 - 11:00 Factors that Createand Affect Value

11:00 - 12:00 Value Principles

1:00 - 5:00 Valuation Process

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ScheduleDay Two (3)

8:00 - 8:15 Recap

8:15 - 2:30 Three Approaches to Value

2:45 - 3:15 Partial Acquisitions

3:15 - 4:00 Summary and Review

4:00 - 5:00 Final Exam

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Real Estate andReal Property

Real estate is the physical land andappurtenances to the land.

Real property is all the rights, interestsand benefits inherent in the ownershipof the real estate. It is the bundle of

rights.

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Personal Property, Fixtures, and Trade

Fixtures (1)

Personal property is the items that are notaffixed to the real estate.

Fixtures are items that were once personal property but have since been permanently attached to the real estate.

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Personal Property, Fixtures, and Trade

Fixtures (2)

Tests: Manner affixed Adaptation Intent

Trade fixtures are not part of the real estate.

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Appraisal An appraisal is the act or processof developing an opinion of value.

An opinion of value.

An appraisal is a written statement …setting forth an opinion of value … supported by the presentation and

analysis of relevant market information.

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Controlling Documents

Uniform Standards of ProfessionalAppraisal Practice (USPAP)

“The Yellow Book”

The Uniform Act

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Cost, Price, and Value

Cost is the amount spent to construct an improvement.

Price is the amount paid for a good or service.

Value is the worth of a good or service.

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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; termsof sale; conditions of sale).

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D.U.S.T. (Factors that create value)

Demand: The desire or needfor real estate.

Utility: Usefulness. Scarcity: The supply of real estate

in relation to demand. Transferability: Title must be able to pass.

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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.

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Value Principles (Principle of Substitution)

When several similar goods or services are available, the one with the lowest

price will attract the greatest demand.

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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.

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Value Principles (Principle of Supply and Demand)

The price of a good or service varies directly with demand and

inversely with supply.

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Value Principles (Principle of Anticipation)

Present value is created by the expectation of future benefits.

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Other Principles

• Change• Consistent Use• Contribution

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Valuation Process

Appraisal Problem Definition

Scope of Work

Data Collection and Analysis

Land Value Opinion

Three Approaches to Value

Reconciliation and Final Value Opinion

Defined Value Opinion Report

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Valuation Process

Appraisal Problem Definition• Identification of the client, intended use, and users

• Value to be developed

• Date of the value opinion

• Identity and location of the subject property

• Property rights to be valued

• Limiting conditions

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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

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Valuation Process

Data Collection and Selection

• Market area data

• Comparable property data

• Subject property data

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Valuation Process

Data Analysis

• Market analysis

• Highest and best use analysis

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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?

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Valuation Process

Land Value Opinion

• Allocation

• Extraction

• Ground rent capitalization

• Land development

• Land residual

• Sales comparison

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Recap Day One

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Recap Yesterday and Look at Today

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Valuation Process

Three Approaches to Value

• Cost Approach

• Sales Comparison

• Income Capitalization Approach

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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

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Valuation Process

Cost Approach

Depreciation: Age-Life Method

Depreciation Percentage = Effective Age

Total Economic Life

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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 intoa final value opinion

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Valuation Process

Income Capitalization Approach

The conversion of income intovalue through a rate or a ratio.

• Gross Rent Multipliers

• Direct Capitalization

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Valuation Process

Income Capitalization Approach

Gross Rent Multipliers

Gross Rent Multiplier = Sale Price

Gross Rent

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Valuation ProcessIncome Capitalization Approach

• Estimate the subject’s annual potential gross income

• Determine a vacancy and collection loss

• Subtract the vacancy and collection loss from the potential gross income

• Estimate annual property expenses and subtract the expenses from the effective gross income to arriveat the net operating income

• Develop a capitalization rate

• Convert the net operating income into value

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Valuation Process

Income Capitalization Approach

Direct Capitalization

Value = Net Operating Income or Vo = NOI

Capitalization Rate Ro

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Valuation Process

Reconciliation andFinal Value Opinion

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Valuation Process

Defined Value Opinion Report

• Self-contained

• Summary

• Restricted-use

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Partial Acquisitions(1)

Larger parcel is the total propertybefore the taking.

• Contiguity• Title• Use

Value of the part taken is determinedby multiplying the quantity taken times the before unit value of the item

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Partial Acquisitions(2)

Damages to the remainder propertyrepresent the loss in value to the

remainder propertyas a result of a partial acquisition

Benefits to the remainder property represent

the increase in value to the remainderproperty as a result of a partial

acquisition

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Partial Acquisitions(3)

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])

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Objectives(1)

Right now, 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

46

Objectives(2)

Right now, you should be able to... • 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

47

Thank you!

400-PT – Revision 3 – 06.30.06.USA