the valuation process & appraisal reports wayne foss, mba, mai, cre foss consulting group email:...
TRANSCRIPT
The Valuation The Valuation ProcessProcess
& &Appraisal ReportsAppraisal Reports
Wayne Foss, MBA, MAI, CREFoss Consulting GroupEmail: [email protected]
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Valuation ProcessValuation Process
Definition:– A systematic procedure employed to provide the answer to a client’s
questions about the value of real property Process has many uses
– provides a framework for estimating market value (or other types of value)
– provides a model for performing• market research• analysis of data• applying appraisal techniques
– provides a checklist for appraisers and users of appraisal services– complies with the Uniform Standards of Professional Appraisal
Practice
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Identification of real estate
Identification of property rights to be
valued
Use of appraisal
Definition of Value
Date of value
estimate
Description of scope of appraisal
Other limiting
conditions
Reconciliation of Value Indications and Final Value Estimate
Report of Defined Value
The Subject MarketSubject and ComparablesRegion, City, Neighborhood
Highest and Best Use AnalysisLand as though vacant Property as improved
Sales Comparison Income CapitalizationCostApplication of the Three Approaches
Land Value Estimate
Definition of the Problem
The Valuation Process
General Specific Competitive Supply and DemandPreliminary Analysis and Data Selection and Collection
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Procedure: Procedure: Step OneStep One
Definition of the Problem– Identification of:
• the Client and other Intended Users• the Intended Use of the Appraiser’s Opinions and conclusions• the Purpose of the Assignment
type and definition of value definition of the question to be answered for the client limiting conditions and/or special assumptions
• the Effective Date of the Appraiser’s Opinion and Conclusion Sets the basis of market conditions on the as-of date As-is or Subject to (remodeling, repair, physical changes) Current Retrospective Prospective Statement of dates
Two dates for each report: date of the opinion and date of the report
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Procedure: Procedure: Step One con’tStep One con’t
Definition of the Problem, con’t– Identification of:
• the basic characteristics of the property The Real Estate - physical entity; “dirt + box” Location Real Property Interest to be Valued
Bundle of Sticks; which rights are to be included in the valuation Fee Simple, Leased Fee or Leasehold Whole Interest Partial or Fractional Interest
Any personal property, trade fixtures or intangible items Easements, Restrictions, Encumbrances, Leases etc.
• Scope of Work Necessary to Complete the Assignment• Any Extraordinary Assumptions • Any Hypothetical Conditions• Other Limiting Conditions
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Procedure: Procedure: Step TwoStep Two
Preliminary Analysis and Data Selection and Collection– Plan the Work Schedule– Selection and Collection of Data
• General Data Economic, Governmental and Environmental forces
• Specific Data Subject property: Land and Improvements Comparable Data:
Land & Improved Sales Rental and Capitalization Rate Data
– Competitive Supply and Demand Data• Identification of the subject’s market
Geographic, Property Type and category Potential Users, Potential Buyers
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Procedure: Procedure: Step ThreeStep Three
Highest and Best Use Analysis A Four Step Process
– Legal Use– Physically Possible– Financially Feasible– Maximally Productive
Conclusions Developed for– Land as Though Vacant– Property As Improved
Conclusion stated in terms of:– Use (Which legal use produces the highest value)– Timing for the Use– Typical Market Participants for the Use
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Procedure: Procedure: Step FourStep Four
Land Value Estimate– Needed for
• The Cost Approach• Income Capitalization Residual Techniques• Property Tax Assessments• Condemnation
Six Procedures to estimate Land Value– Sales Comparison– Allocation– Extraction– Subdivision Development– Land Residual Technique– Ground Rent Capitalization
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Land Value Estimate:Land Value Estimate:Sales Comparison Sales Comparison
ApproachApproachSubject Data #1 Data #2 Data #3 Data #4
4122 S. Western 2656 S. Western 2105W. Jefferson 2215 S.Vermont 3401 S.Western
ZONING: C2-1VL C2-1 C201 CM-1 C2-2INTENDED USE: Motel Church Retail Store HoldSALE DATE: 12/18/2002 10/3/2002 11/15/2001 2/6/2001SALES PRICE: $525,000 $245,000 $425,000 $600,000LAND AREA (SF.): 33,830 24,700 11,702 14,490 10,963
PRICE/SF: N/A $21.26 $20.94 $29.33 $54.73
** ADJUSTMENTS% **CASH EQUIVALENCY 0% 0% 0% -20%MARKET CONDITIONS 0% 0% 0% 0%SALES CONDITIONS 0% 0% 0% 0%
ADJUSTED $/ SF $21.26 $20.94 $29.33 $43.78 IMPROVEMENTS 0% 0% 0% 0%LOCATION 0% 10% -20% -10%FRONTAGE/EXPOSURE 5% -5% 0% -30%PHYSCIAL FEATURES 5% 0% 0% 0%LOT SIZE: 0% 0% 0% 0%
TOTAL% ADJ.: 10% 5% -20% -40%
ADJUSTED $/SF: $23.38 $21.98 $23.46 $26.27
LAND VALUATION:ESTIMATED
SUBJECT (SF) X PRICE/ SF = VALUE ROUNDED
33,830 $23.00 $778,090 $780,000
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Land Value Estimate:Land Value Estimate:Allocation ApproachAllocation Approach
Subject Area Area 1
Lot Value: No sales $75,000
Total Value: $200,000 $300,000
Pctg. Land: 25%
$200,000 x 25% = $50,000
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Land Value Estimate:Land Value Estimate:Extraction ApproachExtraction Approach
Sales Price $250,000
Less Improvement Value
Cost New: $200,000
Less Depreciation: $ 50,000
Depreciated Improvements: $150,000
Land Value $100,000
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Land Value Estimate:Land Value Estimate:Subdivision DevelopmentSubdivision Development
Average Sales Price: $351,017Time Period (Monthly)
10/1/02 10/31/02 11/30/02 12/31/02 1/31/03 2/28/03Cash Flow from Sales:Pre-Sale Open Escrows: 6 Total Monthly Sales Closings: 10 4 4 4 2Unsold Units: 14 10 6 2 0Monthly Gross Sales Revenue: 3,510,169$ 1,404,068$ 1,404,068$ 1,404,068$ 702,034$
Monthly Expenses: Real Estate Taxes: (4,811)$ (3,436)$ (2,062)$ (687)$ -$ Insurance: (700)$ (500)$ (300)$ (100)$ -$ Maintenance/HOA: (2,100)$ (1,500)$ (900)$ (300)$ -$ Sales & Marketing Costs: (280,814)$ (112,325)$ (112,325)$ (112,325)$ (56,163)$ Entrepreneurial Profit: (351,017)$ (140,407)$ (140,407)$ (140,407)$ (70,203)$
Total Estimated Costs: (639,441)$ (258,169)$ (255,994)$ (253,819)$ (126,366)$
Net Monthly Cash Flow: 2,870,727$ 1,145,899$ 1,148,073$ 1,150,248$ 575,668$
Present Worth Monthly Factor at End of Period - 10%: 0.9917 0.9835 0.9754 0.9674 0.9594
Present Value of Monthly Cash Flows: 2,800,107$ 1,108,543$ 1,119,831$ 1,112,750$ 552,296$
Summation of Cash Flows, Phase II: $6,693,526Conclusion (Rounded):$6,695,000
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Land Value Estimate:Land Value Estimate:Land Residual TechniqueLand Residual Technique
Net Operating Income $100,000
Less Income to Improvements
Improvement Value: $500,000
Rate to Building (RB) X 12% $ 60,000
Income to Land $ 40,000
Land Value $40,000 10% = $400,000
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Land Value Estimate:Land Value Estimate:Ground Rent CapitalizationGround Rent Capitalization
Income to the Land $ 100,000
Rate to the Land (RL) 10%
Land Value $1,000,000
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Procedure: Procedure: Step FiveStep Five
Research which leads to the
Application of the Three Approaches
– Cost Approach
– Sales Comparison Approach
– Income Capitalization Approach
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Cost ApproachCost Approach
Land and Buildings
Value is the sum total of cost to buy or create component parts
Summation concept
Physical Concept
Current Costs used
‘adjusted’ to recognize depreciation and obsolescence– Physical depreciation (immediate and/or deferred)
– Functional Obsolescence (curable or incurable)
– External (always incurable)
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Sales Comparison Sales Comparison ApproachApproach
Premise: Current Value is best indicated by recent sales prices of highly similar (comparable) property
Value in Exchange
Closed Sales are primary
Listings and Offers are secondary
Buyer and Seller - meeting of the minds
Considers the subject as a hypothetical sale
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Income ApproachIncome Approach
Value is the present worth of anticipated benefits
What it cost to create makes no difference.
Estimate anticipated benefits; may be qualitative or quantitative
Estimate “capitalization” rate from market information
Value = Income ÷ Rate. So we apply the Rate to expected Income benefits to find the present worth or value of the property now.
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Procedure: Procedure: Step SixStep Six
Reconciliation of Value Indications and Final Estimate of Value– Result in 3 different value indications– Which one is right?– Appraiser needs 1 value estimate
All Approaches to Value:– Consider market information– Rely on judgement and careful analysis– Simulate market participant behavior– Result in a slightly different answer because market
information is not perfect and our ability to analyze it is not perfect
These differences must be reconciled to a final single value estimate amount
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Procedure: Procedure: Step SevenStep Seven
Report of Defined Value– Uniform Standards of Professional Appraisal Practice
– Three Types of Report Formats• Self-Contained• Summary• Restricted
Supplemental Standards– Code of Professional Ethics & Standards of Professional Appraisal
Practice of the Appraisal Institute– Other Appraisal Organizations
• American Society of Appraisers• American Society of Farm Managers & Rural Appraisers• International Association of Assessing Officers• International Right of Way Association• National Association of Independent Fee Appraisers• National Association of master Appraisers
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ReportingReporting
USPAP Standards Rule 2-1
– Each written or oral real property appraisal report must• Clearly and accurately set forth the appraisal in a manner that will not be
misleading;• Contain sufficient information to enable the intended users of the
appraisal to understand the report properly; and• Clearly and accurately disclose all assumptions, extraordinary
assumptions, hypothetical conditions, and limiting conditions used in the assignment.
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Report ContentReport Content USPAP Standards Rule 2-2
– State the identity of the client and any intended users, by name or type– State the intended use of the appraisal– Describe information sufficient to identify the real estate involved in the
appraisal, including the physical and economic property characteristics relevant to the assignment
– State the real property interest appraised– State the type and definition of value and city the source of the definition– State the effective date of the appraisal and the date of the report– Describe the scope of work used to develop the appraisal– Describe the information analyzed, the appraisal methods and techniques
employed, and the reasoning that supports the analyses, opinions, and conclusions; exclusion of the sales comparison approach, cost approach, or income approach must be explained;
– State the use of the real estate existing as of the date of value and the use of the real estate reflected in the appraisal; and, when an opinion of highest and best use was developed by the appraiser, describe the support and retionale for that opinion;
– Clearly and conspicuously:• State all extraordinary assumptions and hypothetical conditions; and• State that their use might have affected the assignment results; and
– Include a signed certification in accordance with Standards Rule 2-3
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Appraisal MythsAppraisal Myths
You can look up property value in a table or book
An appraisal valuation amount is good for several years
Good appraisals rely on formulas
Techniques and principles used on one location can not be used in another location
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So That’s The Appraisal Process
Wayne Foss, MBA, MAI, CRE, Fullerton, CA USAPhone: (714) 871-3585 Fax: (714) 871-8123 Email: [email protected]