busi 330: foundations of real estate appraisal session 5 · real estate division busi 330:...

Real Estate Division

BUSI 330: Foundations of Real Estate Appraisal

Session 5

Presented by Chuck Dunn

UBC Sauder School of Business Real Estate Division 3

Introduction

Welcome to the third of five sessions for the Foundations of Real Estate Appraisal

• Session 1 Introduction. Lesson 1, 2 – August 24, 2017 Archived

• Session 2 Lesson 3, 4, 5 and 6. Discuss Project 1 – September 14, 2017 Archived

• Session 3 Lesson 7, 8 and 9 – October 12, 2017 Archived

• Session 4 Lesson 10 and11. Discuss Project 2 November 2, 2017 Archived

• Session 5 Preparation for the Final Exam November 16, 2017

NOTE: Project 1 is due October 11, 2017

Project 2 is due November 15, 2017

Exam is written December 7, 2017

Presenter

Presentation Notes

Mention dates of upcoming sessions


About Your Course Tutor

• Chuck Dunn is one of the three BUSI 330 tutors

• Graduated from the Faculty of Commerce, UBC

• Worked as a fee appraiser

• Taught real estate appraisal courses at Langara College for over 20 years


About Your Course Tutor

Presently an active realtor in Vancouver

Chuck Dunn, AAIC, Retired


Sauder Website for BUSI 330

The website for this course has the following:

• Additional Readings – Review and Discussion Questions – Chuck Dunn’s Review Notes

• Student Discussion Group – Review topics found in the Discussion Group as they

may assist you in understanding a concept that is not clear to you


Exams


Exam Format

Exam is 3 hours, 180 minutes. 100 marks

2 Parts

• Part 1: 3-4 short answer questions 25 marks (+/- 25 minutes)

• Part 1: Two case studies: – Direct Comparison/Cost Approach -Residential 25 marks – Income Approach -Small apartment/Commercial building

10 marks

• Part 2: 40 multiple choice questions 40 marks (+/- 40 minutes)


Exam Tips

• Write clearly so the grader can read and follow your answers

• Rough work on left side

• Finished work on the right side

• Show your work to receive part marks if answer is incorrect


Exam Tips

Equipment Required for the Exam

• Pens, pencils, ruler, coloured highlighter, calculator, eraser, wrist watch

• Do not SQUASH your answers

• Spread them out; easy to read/mark


Exam Tips

Some Tips from the Student Handbook

• Page 20 - In written questions match the amount you write to the marks for the question

• For multiple choice questions rule out the obvious incorrect answers, then choose the BEST answer from the remaining choices

• Avoid second guessing yourself. Go with your “gut reaction”


Exam Tips

Extra exam booklets are available. They are Number booklets 1 of 2 and 2 of 2 Do not write your name on the booklet, only your

student number


Study Tips Available

In total there are 436 ways to review the course material for the exam


Study Tip Sources

Foreword-Multiple Choice-Learning-Review


Study Tips

Foreword to the course has 12 General Objectives of what a student should learn from the course

• There are 200 Multiple Choice Questions that you answered from the 10 lessons

• There are 101 Learning Objectives you can review and answer


Study Tips • There are 123 Review and Discussion questions with

answers on your student page.


Study Tips

• Do not study and cram until the last minute.


Study Tips

• Get a good nights sleep so you are rested and relaxed.


Study Tips

• Arrive early and know the location of the building and room number


Webinars

• Review the archived Webinars for this term


Study Tips

• For additional assistance please contact your tutor or visit the Student Discussion Group on the website


Study Tips – Cost Approach

Know How to Calculate:

1. Land values

2. The reproduction cost new of a house

3. Depreciation

4. Summarize the Cost Approach.


Study Tips - Direct Comparison Approach

Know How to:

• Make Adjustments for changing Market Conditions (Time or Market Condition Adjustment)



• Making Adjustments for other variations between the Comparables and the Subject



• Understand the Order of the Adjustments

• Write a good Reconciliation based on the adjusted value of the comparables


Study Tips - Income Approach

Know How to:

• Prepare a typical operating profit and loss income statement

• Calculate and apply the ross Income ultiplier (GIM)

• Calculate and apply the Capitalization Rate

• Write a Comprehensive Reconciliation


Comments on the Questions

Comments on the Three Approaches to Value


Cost Approach


Cost Approach – Land Adjustments

Market Conditions or Time Adjustment for Land

• Sale 1 sold January 1 for $100,000

• Sale 1 re-sold July 31 for $114,000

$14,000/$100,000 = 14% increase over a 7 month period or 2% per month

Or if no re-sales then use sales of similar lots/improved properties to calculate Time Adjustments


Cost Approach – Land Adjustments

Market Conditions or Time Adjustment

• Apply the increase to comparables sale prices to bring them up to the date of the appraisal

• If comparable #1 sold 5 months before the appraisal date for $100,000, then today it should sell for 10% more (2% (see previous slide) x 5 months)

• Repeat for all comparables


Cost Approach - Replacement Cost New

• To find the construction cost new of a house look at sales of new homes. Deduct a reasonable land value from the sale price. Divide the resultant figure, less any outbuildings or garage, by the square feet/metres of the house to find the cost to build on a square feet/metre basis

• Other sources for costing a new house are local contractors and/or costing services, such as Marshall and Swift

• Apply that cost per square to the subject house to estimate the cost to build it today


Cost Approach - Depreciation Age/Life Method

• To find the depreciated cost of an older house use its estimated “Effective Age” divided by its Economic Life. This is called the “Age-Life Method”

• Estimated Effective Age = 15 years, Actual Age is 20 years and Economic Life = 60 years.

• Depreciation is 15/60 or 25%

• Use EFFECTIVE & DO NOT USE THE ACTUAL AGE for this calculation


Cost Approach - Site Improvements

• Know the definition of Site Improvements as students often include some of the house improvements in this section

• Examples of Site Improvements are: driveways, landscaping, retaining walls, fences, etc

• Determine the depreciated value of any Site Improvements by applying it’s own age/life to the cost


Cost Approach - Site Improvements Retaining walls


Cost Approach - Site Improvements Flower beds and Grass


Cost Approach - Site Improvements Fences


Cost Approach - Summary

• Know how to summarize the Cost Approach which is composed of the following: 1. Land Value

2. Cost New of all Improvements (except Site Improvements)

3. Less any applicable depreciation

4. Plus depreciated value of any site improvements equals

5. Final Estimate of Value by the Cost Approach

6. Round off the Final Estimate of Value



Summary of Cost Approach

Value of Site, as if Vacant

$100,000

Replacement Cost New of House

Depreciation of House to date

Depreciated Value of House

Depreciated Value of Site Improvements

Estimated Value by Cost Approach

_________





$100,000






$250,000

_________





$100,000






$250,000

($30,000)

_________





$100,000






$250,000

($30,000)

$220,000

_________





$100,000






$250,000

($30,000)

$220,000

$ 7,500 _________





$100,000






$250,000

($30,000)

$220,000

$ 7,500 _________ $ 327,500


Direct Comparison Approach


Direct Comparison Approach - Adjustments

• Know how to derive and make simple market adjustments using the market data from the question

• Do “Time Adjustments” first and then all other

•

• adjustments based on this new Time Adjusted Figure

• Same procedure as for Land adjustments

• Review the Order of Adjustments - see text and workbook



• Other adjustments can be for location, condition, garage, basement finish

• Adjustments are made to make the comparables equal to the subject, as the subject is the benchmark property

• The object is to narrow the range of the comparable prices

• After adjusting all the comparables they should indicate a reasonable range of value for the subject



Adjustments

Comparable Property Adjustment

Inferior features in relation

to the subject

Add some dollar value to

make it equal to the subject

Superior features in relation

to the subject

Deduct some dollar value to make it equal to the subject


Direct Comparison Approach - Reconciliation

• Summarize in a sentence or two your adjustments for each comparable – why and how. Reasons are very important

• Finally write a reconciliation indicating which comparable(s) best indicates an estimated value for the subject

• Do not average but pick the best comparable(s) as an indication of the estimated value for the subject.

• Use other comparables as support for this estimated value


Final Reconciliation

• Once you have completed the two approaches then write a full Final Reconciliation indicating why the Cost or Direct Comparison Approach best indicates a value for the subject

• If the two approaches are too far apart in value then both approaches are suspect. They must support each other

• Review the Reconciliation section of the textbook for further guidelines in writing a reconciliation


Income Approach


Income Approach - Overview

Overview of the Income Approach

• Estimate the Effective Gross Income (EGI)

• Deduct the Normal Operating Expenses

• Resultant Figure is the Net Operating Income (NOI)

• Convert NOI to a Capital Value using a market capitalization rate

• And/or apply the GIM to the EGI to arrive at a Capital Value


Income Approach - Income and Expense Statement

• Appraisers must try to accurately estimate the NOI of a property and determine the appropriate capitalization rate when valuing an income producing property

• Small variations in either can translate into large amounts when capitalized

• For example every $1,000 of NOI translates into $10,000 of value using a 10% capitalization rate


Income Approach – Normalize the Profit and Loss Statement

• Review the owner’s Profit and Loss Statement and adjust their statement so it reflects the normal operating costs to operate the property to ensure a steady income flow for the year.

• Remove expenses that are not normal operating expenses, such as Mortgage Payments, Income Taxes and Depreciation, as they are not required to operate a building.

• But maybe necessary when owning a building


Income Approach - Summary

Potential Gross Income $150,000 100%




Less Vacancy and Collection say 3% ($4,500) 3%





Effective Gross Income $145,500 97%






Less Normal Operating Expenses ($45,500) 30%






Less Normal Operating Expenses ($45,500) 30%

Net Operating Income $100,000 67%


Income Approach - Capitalization Rate

• Review the comparable sales to derive a capitalization rate for each of them and then reconcile these rates into a final capitalization rate to be used for the subject’s NOI

• Capitalization Rates are derived by dividing the NOI of the comparables by their selling price to arrive at a percentage figure

EXAMPLE • NOI of $100,000 divided by a sale price of $1,000,000

indicates a capitalization rate of 10%


Income Approach - Gross Income Multiplier

• The Gross Income Multiplier is another method to value an income producing property

• The multiplier is derived by dividing the Selling Price of a property by its estimated Effective Gross Income

• For example a property selling for $1,000,000 with an Effective Gross Income of $145,500 the multiplier is ($1,000,000/$145,500) = 6.87. This is NOT a % or $ figure

• Just a multiplier figure



Capitalization of NOI

$100,000/10% = $1,000,000

Gross Income Multiplier

$145,500 x 6.87 = $999,585, round to $1,000,000

Reconcile them into a Final Estimate of Value


Income Approach - Valuation

• The two approaches should support each other with no large differences. If any then review calculations

• Next reconcile them into a Final Estimate of Value

• Your reconciliation should explain the reasons for relying on either or both the GIM or the Capitalization method


Summary


Final Exam Comments

Examination Information

1. Note if more than one exam book used

2. Submit all exam papers back to the course monitor

3. Only student number appears on exam, not your name

4. Right hand side is for the answer

5. Left hand side is for rough work


Final Exam Comments

Examination Information – continued

1. Plan answers so they are easy to find and read, i.e., number them correctly

2. Show work for partial marks if answer is incorrect

3. Write clearly and neatly so answer is easy to read and understand

4. Use a pen or dark pencil for easy reading. Not this


Final Exam Comments

• Read questions very carefully and make sure your answer is related to the question.

• If asked to make comparisons then one heading for the good points and then list the points.

• Another for the bad points and then list the main points

• If completing a chart make sure all information is listed in the left hand column.

• Reconciliations are worth marks so make sure they are well written and informative to the reader. Mention the key points that will make sure the reader agrees with your final value.


Exam Location

• You can find the exam centre information in your online “Exam Centre” link, which you can access once you login to your website.

Real Estate Division UBC Sauder School of Business 68

Thank you for your participation in the BUSI 330 exam study review

EXAM DATE

December 7, 2017

Archived

Presenter

Presentation Notes



Introduction

Welcome to the third of five sessions for the Foundations of Real Estate Appraisal

• Session 1 Introduction. Lesson 1, 2 – August 24, 2017 Archived

• Session 2 Lesson 3, 4, 5 and 6. Discuss Project 1 – September 14, 2017 Archived

• Session 3 Lesson 7, 8 and 9 – October 12, 2017 Archived

• Session 4 Lesson 10 and11. Discuss Project 2 November 2, 2017 Archived

• Session 5 Preparation for the Final Exam November 16, 2017

NOTE: Project 1 is due October 11, 2017

Project 2 is due November 15, 2017

Exam is written December 7, 2017

Presenter

Presentation Notes



Questions from students

Presenter

Presentation Notes



Feedback and Questions

For further questions related to the course content presented in this session, contact your tutor (please include the course number in the subject line):

[email protected] For all other feedback about the webinar please contact the Real Estate Division (please include the course number in the subject line):

[email protected]

mailto:[email protected]

mailto:[email protected]

busi 330: foundations of real estate appraisal session 5 · real estate division busi 330:...

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