California Real Estate

Principles, 10.1 Edition

Chapter 10
Real Estate Appraisal

© 2016 OnCourse Learning

Chapter 10
1. Define appraisal and list the elements and
forces that influence value.
2. Distinguish between utility value and
market value
3. Define depreciation; outline the causes of
depreciation; describe how to calculate
depreciation
4. Discuss the 3 approaches to value; outline
the steps in each approach
5. Define gross rent multiplier and cap rate
What is the purpose of the appraisal?
Salvage value

Insurance agent
Tax assessor Realty company
Bank

Assessed value
Insured value Market value Loan Value
APPRAISAL
An estimate or opinion of value as of a specific
date.
The accuracy of an appraisal is determined by the
– Skill
– Experience
– Judgment of the appraiser
Licensing
• A person who meets minimum statutory requirements may be
licensed or certified as an appraiser

• by the California Bureau of Real Estate Appraisers (BREA)

• by satisfying education (courses & hours), experience (hours)

and testing criteria.
Appraisal License Requirements
Licenses: Education Experience

Trainee Appraiser

Licensed Appraiser 150 hours 2,000 hours

Certified Residential 200 hours 2,500 hours

Appraiser

Certified General 300 hours 3,000 hours

Appraiser (1,500 must be
non-residential
• Must have 15 hours of USPAP property)
to obtain license & 7 hours to renew.
Value
• Value in Use
Utility Value = Worth to an Owner
• Market Value = Value in Exchange
“Highest price in terms of money for which a
Property would sell in an open market,
The seller not being obligated to sell,
The buyer not being obligated to buy,
Allowing for a reasonable length of time

to effect the sale”

Value affected by

4 Elements: D U S T Value
Demand – desire to own
Subjective Value
Utility - usefulness Emotional Value
Historic Cost

Scarcity – lack of abundance

Transferability – can transfer ownership

PEPS
Forces that change Value
Political Forces
Government: Zoning, Fiscal Policy, Taxes
People: Environmental Protection, Education
Economic Forces
Consumer: Income, Employment, Credit, Interest Rates
Physical Forces
Natural: Land, Climate, Resources
Man-Made: Buildings, Roads, Utilities
Social Forces
Area: Neighborhood, Living Standards
People: Family Size, Lifestyle, Attitudes
PRINCIPLES OF VALUATION
• Highest and Best Use
• Change
• Balance
• Supply and Demand
• Contribution
• Substitution
• Progression – Regression
• Competition
• Conformity
• Anticipation
DEPRECIATION
• Physical Deterioration
– Worn out, run down, deferred maintenance, weathering
• Curable or Incurable
• Functional Obsolescence
– Out of date, poor floor plan,
lack of modern appliances,
out of style architecture
• Curable or Incurable
• Economic Obsolescence
– Neighborhood or Social Causes:
• Traffic, noise, flood zone, crime
• Incurable
 DEPRECIATION:
Functional Obsolescence

Kitchen Family Bedroom Bedroom

Bath

Utility Dining
Bedroom Bedroom

Living
This 4-bedroom, 1 bath home with no access to
the back yard from the family room and utility room far from the
bedrooms where kitchen becomes a hallway is an example of
functional obsolescence (a floor plan that does not fit today’s needs).
The Appraisal Process
D e fine the P ro b lem

P re lim in a ry S u rv e y a n d A p p ra isa l P lan

C o lle ct D a ta

G e ne ra l D a ta S p e c ific D a ta
R e g ion T itle
C it y S ite
N e ig h bo rho od Im p ro v e m e n ts
 Data Classification and Analysis for
Highest and Best Use

Cost Approach Market Data Approach Income Approach

Indicated Value Indicated Value Indicated Value

Reconciliation/Correlation of Value

Final Estimate of Value

W ritten Report
Letter
Short Form
Narrative
Types of Appraisal Reports
Form Report:
Summary Report

Narrative Report:
Self-Contained Report
Cost Approach to Value
• Used primarily for:
– New construction
– Special purpose
property
– Public buildings
To replace/reproduce the
improvements on the property.
The upper limit to value.
BEST used for unique properties
with a limited market appeal
COST
APPROACH
Steps:
1. Estimate the land value, as if it were vacant.
2. Estimate the current replacement cost of the
improvements
Sq Foot x $ per sq foot = Current replacement cost

3. Estimate and subtract depreciation of the improvements.

Replacement Depreciation of Present Value of
cost Improvements Improvements
4. Add back the value of the land.

Present Value of
Land Value + Improvements Total Value
 INCOME APPROACH
Capitalization or Investment Approach
Value based on income produced by the
property
Formula
Gross Scheduled Income GSI
Less Vacancy and Bad Debt - VAC
Effective Gross Income EGI
Less Operation Expenses - OE
Net Operating Income NOI
BEST for income producing properties Apartments,
Retail, Office

NOI = Value
Cap Rate
Capitalization Rate
I=RXV I
= V
The higher the risk, R
The higher the capitalization rate.
The higher the cap rate, the lower the value.
$30,000 I
10% R = $300,000

$30,000 I
5% R = $600,000
GROSS RENT MULTIPLIER
Definition:

A gross rent multiplier is a calculation of how

many times the property’s rent goes into the
price.

It can be based on the monthly or annual rent.

GROSS RENT MULTIPLIER
Comp. Sales Price Gross Monthly Rent Multiplier
Comp. Monthly Rent (GMRM)
=

Comp. Sales Price Gross Annual Rent Multiplier

Comp. Annual Rent (GRM)
=
THEN
Gross Scheduled Income (GSI) x Gross Rent Multiplier
(GRM) = Estimated Value ($)

FAILS TO CONSIDER VACANCIES AND EXPENSES

©2011 Cengage Learning

Gross Rent Multiplier Example
Sales Price $350,000 = 175 gross mo. Rent Mo.
Rent $2,000 multiplier

Sales Price $350,000 = 14.58 gross annual

Annual Rent $24,000 multiplier
($2,000 X12mo.)
 MARKET VALUE APPROACH
The most probable price
that real estate would
bring in an arm’s
length transaction,
under normal market
conditions, on the
open market.

BEST used for existing one-to-four unit residential property, vacant

land and condominiums
 Comparison Approach
“If comparable homes sold for $XXX, then subject home should sell for $XXX”

1. Select 3 to 5 comparable or similar properties with similar

architectural style and character which have recently sold
under reasonable market conditions in the same
neighborhood
2. Make adjustments for the different between the comps and
subject property for amenities by adding or subtracting
from their sales prices.
-+-+-+-+
3. The result gives a value range for the subject property. From
the value range, select the probably market value of the
subject property.
MARKET DATA ANALYSIS
Item Subject Property Comparables
1 2 3

Address 412 Acme Drive 131 Skip Rd 221 Sutter St 168 Bow Rd
Sales Price $335,000 $353,000 $333,500 $318,500
Data Source Sales contract Present owner MLS Selling broker
Date of Sale 9/1/00 6/29/00 7/14/00 5/17/00
Location Hi-qual suburb Same Same Same
Site/View Inside lot Corner lot Corner lot Inside lot
Design/Appeal Rambler/exc Same Same Same
Constr. Quality Good Good Good Good
Age 7 yrs 6 yrs 8 yrs 8 yrs
Condition Good Good Good Good
# of Rooms 8 7 7 6
# Bedrooms 4 4 3 3
# Baths 2½ 2½ 2 2
Liv. Area (sq ft) 2,700 3,300 2,350 2,150
Garage/Carport 2-car att Same Same Same
Patio, pool, etc. 15 x 21 patio 15 x 26 patio 18 x 16 patio 15 x 17 patio
Additional Data 2 fireplaces 2 fireplaces 1 fireplace 1 fireplace
Range, oven Range, oven Range, oven Range, oven
D/W disposal D/W D/W D/W
Central air Central air Central air
Comments Subject has superior energy efficiency to comps 2 and 3 and is at least equal in this respect to comp 1.
Principal difference between comps 1 and 2 is square footage.
Arm’s Length Transaction
Neither party is under duress

The property is on the market for a

reasonable time.
Both parties have full knowledge of the
property’s assets and defects.
No unusual circumstances exist.
The price was not affected by special
financing.
Chapter 10 Question
Subject Comp #1 Comp #2
Value : ? Sale: $410,000 Sale: $350,000
Bedroom: 3 4 2
Bathroom: 2 3 1
Garage: 2 3 1

A bedroom in this area is valued at $15,000

A bathroom in this area is valued at $10,000
A garage in this area is valued at $5,000

What is the indicated value for Subject Property?

Chapter 10 Answer
• Comp # 1 Comp #2
$410,000 $350,000
- $15,000 + $10,000
-$10,000 + $15,000
- $ 5,000 +$ 5,000
$380,000 $380,000

The value for subject property is $380,000