Real Estate Financial and Investment Analysis 1 APPRAISAL THEORY AND PRACTICE WHAT IS THE OBJECTIVE...
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Transcript of Real Estate Financial and Investment Analysis 1 APPRAISAL THEORY AND PRACTICE WHAT IS THE OBJECTIVE...
![Page 1: Real Estate Financial and Investment Analysis 1 APPRAISAL THEORY AND PRACTICE WHAT IS THE OBJECTIVE OF AN APPRAISAL? - - ESTIMATE FAIR MARKET VALUE.](https://reader030.fdocuments.us/reader030/viewer/2022032800/56649d4b5503460f94a28c9f/html5/thumbnails/1.jpg)
Real Estate Financial and Investment Analysis 1
APPRAISAL THEORY AND PRACTICE
WHAT IS THE OBJECTIVE OF AN APPRAISAL?
- - ESTIMATE FAIR MARKET VALUE
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Real Estate Financial and Investment Analysis 2
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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Real Estate Financial and Investment Analysis 3
WHO USES APPRAISALS?
• IS THERE A DIFFERENCE BETWEEN INVESTMENT AND FAIR MARKET VALUE?
• WHAT CREATES VALUE IN THE MARKET PLACE?
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Real Estate Financial and Investment Analysis 4
AN OVERVIEW OF THE THREE METHODS OF APPRAISAL
• SALES - COMPARISONS
• INCOME - CAPITALIZATION
• COST - REPLICATION
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Real Estate Financial and Investment Analysis 5
SALES - COMPARISONS
• WHAT IS IT?
• WHERE IS IT MOST APPLICABLE?
• WHAT ARE THE ADVANTAGES AND DISADVANTAGES?
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Real Estate Financial and Investment Analysis 6
SIMPLE SALES - COMPS EXAMPLE
PROPERTY # DESCRIPTION OBSERVEDSALES PRICE
1 3 Bedrooms, Garage, Interior lot,Ranch style
$46,000
2 3 Bedrooms, No Garage, Cornerlot, Ranch style
$43,000
3 2 Bedrooms, No Garage, Interiorlot, Ranch style
$35,000
4 2 Bedrooms, No Garage, Cornerlot, Ranch style
$36,000
5 2 Bedrooms, Garage, Corner lot,Ranch style
$40,000
Question: What is the Fair Market Value for a 3 bedroom,ranch style house with a garage on a corner lot inthis neighborhood?
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Real Estate Financial and Investment Analysis 7
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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Real Estate Financial and Investment Analysis 8
VALUATION BY STATISTICAL INFERENCE:
An Extension of the Sales-Comparable Approach
The Hedonic Method
Parcel Services CharacteristicsFMV
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Real Estate Financial and Investment Analysis 9
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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Real Estate Financial and Investment Analysis 10
ESTIMATE OF THE MARKET VALUE FUNCTION(Obtained by Two-Stage Least Squares)
V = 524 - 0.31 Q - 2.07 AGE - 78.7 log t(0.09) (0.26) (9.12)
+ 92.3 BT + 115 log LS + 27.7 G + 40.1 D1968(3.60) (5.44) (4.63) (6.31)
+ 90.8 D1969 - 30.1 Dum + 45.3 Dgmv - 15.3 Dtem(7.14) (7.00) (8.07) (5.81)
R2 = 0.75
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Real Estate Financial and Investment Analysis 11
where:
Q(TX/BR )
= Property tax bill (in dollars) divided by the number of bedrooms
log t = Log of distance, measured from the center of the municipality tocenter city Philadelphia (i.e., an accessibility index, in miles)
log LS = Log of the lot size (in acres)G = Number of car-garage spaces
BT = Number of bathroomsAGE = Age of the house (in years)
D1968 = Dummy variable for time: if sale occurred in 1968, D1968 = 1;otherwise D1968 = 0
D1969 = Dummy variable for properties sold in 1969Dum = Dummy variable for property location: if property is located in
Upper Merion, Dum = 1; otherwise Dum = 0Dtem = Dummy variable for properties located in Tredyffrin, Easttown,
or MalvernDgmv = Dummy variable for properties in Gladwyne, Merion, or
VillanovaV = market value (in 100 dollars)
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Real Estate Financial and Investment Analysis 12
INTERPRETATION OF VALUE ESTIMATE
• TAXATION CAPITALIZATION
• ACCESSIBILITY
• PROPERTY CHARACTERISTICS
• OTHER VARIABLES
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Real Estate Financial and Investment Analysis 13
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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Real Estate Financial and Investment Analysis 14
ESTIMATING GROSS INCOME
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Real Estate Financial and Investment Analysis 15
ESTIMATING ANNUAL OPERATING EXPENSES
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Real Estate Financial and Investment Analysis 16
THE CAP RATE:WHAT IS IT AND HOW IS IT USED?
CAP RATE
NOI
FMV
Market Data?
Market Data?
INCOME APPROACH SCHEMATIC
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Real Estate Financial and Investment Analysis 17
HOW ARE CAP RATES AND INTEREST RATES RELATED?
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Real Estate Financial and Investment Analysis 18
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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Real Estate Financial and Investment Analysis 19
FOUR BASIC DATA ELEMENTS OF COST APPROACH
1.
2.
3.
4.
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Real Estate Financial and Investment Analysis 20
COST APPROACH EXAMPLE
BUILDING COST (NEW) $100,000LAND IMPROVEMENTS 10,000
$110,000LESS DEPRECIATION -30,000
$80,000LAND VALUE (ESTIMATE) 15,000
"INDICATED" FMV USING COST APPROACH $95,000
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Real Estate Financial and Investment Analysis 21
WHERE IS THE COST APPROACH MOST EFFECTIVE AND WHY?
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Real Estate Financial and Investment Analysis 22
REPLACEMENT COST VS. REPRODUCTION COST
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Real Estate Financial and Investment Analysis 23
METHODS FOR ESTIMATING COSTS
• QUANTITY SURVEY
• UNITS-IN-PLACE
• UNITS-COMPARISON
• BASE-BUILDING METHOD / INDEX ADJUSTMENT
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Real Estate Financial and Investment Analysis 24
DEPRECIATION CONSIDERATION
• PHYSICAL
• TECHNOLOGICAL
• ECONOMIC
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Real Estate Financial and Investment Analysis 25
SOME OTHER TECHNIQUES
• GROSS OR NET INCOME MULTIPLIER METHODS
• RESIDUAL CAPITALIZATION
• MORTGAGE EQUITY CAPITALIZATION