Real Estate Valuation Methods

• C6 Zoning is for zoning a specific kind of commercial use.

Site Valuation

• A site is always valued as if unimproved and ready to be built upon.
• Consider price per sq ft, price per buildable sq ft, and price per acre as common units of comparison.
• Land cannot be created or destroyed.
• Land can have a negative value if there's an environmental hazard.

Sales Comparison Approach

• This valuation method compares a subject property’s characteristics with comparable properties recently sold in similar transactions.

Cost Approach

• Estimates property value by calculating current construction cost, subtracting accrued depreciation, and adding land value obtained from the market.
• Most effective when improvements are relatively new, ensuring accurate depreciation estimates.

Depreciation

• It is a loss of utility and value caused by physical or economic obsolescence, or a combination of these.

3 Approaches to Value

Sales Comparison Approach (Market Approach)

• Relies on the principle of substitution, where a comparable sale is equally desirable to the property in question.
• Use a minimum of 3 comparable sales, but use as many as necessary to justify your market value.
• Order of adjustments:
  • Rights conveyed
  • Differences in financing
  • Conditions of sale
  • Differences in location
  • Differences in size
  • Differences in age
  • Differences in condition
  • Differences in utility
  • Differences in amenities

Cost Approach

• Replacement cost minus depreciation equals depreciated value of improvement.
• Types of depreciation:
  • Physical:
    • Curable such as a broken window.
  • Incurable such as a boiler.
  • Functional (example the market demands 2 bathrooms):
    • Curable if the cost of adding the additional bathroom is equal to or less than the contributory value.
    • Incurable if economically not feasible.
  • External (example the main industry left town, which affects property demand):
    • Always incurable
• Depreciated value of site improvements + depreciated value of overall improvements + value of site under highest and best use = property value.

Income Approach

• Gross income minus contingency vacancy, minus holding costs (real estate taxes, insurance, maintenance, salaries, reserves) equals net operating income.

Sales Approach

• The sales approach is most commonly used by salespersons and brokers to value residential and amenity-type properties.

Pricing Properties

• A real estate person should recommend to a seller the price they should request for their property.
• To determine the right price, the salesperson should:
  • Gather data on recent comparable sales and offerings (last 3-6 months).
  • Analyze sales for similarities and differences in:
    • Location
    • Condition
    • Quality
    • Utility
  • Adjust the value based on the differences and create a CMA.
• Appraisal: An estimate of a property’s value by an appraiser who is an expert in the field.
• Assessed Value: Valuation placed on property by a public officer or board as a basis for taxation.
• Comparative Market Analysis: Property evaluation determining value by comparing similar properties sold within the last year.
• Cost: Total dollar expenditure for labor, materials, legal services, architectural design, Taxes during construction, interest, contractor's profit, and entrepreneurial profit (may or may not equal value).
• Direct Cost: The cost of labor and materials.
• Evaluation: Study of the nature, quality, or utility of certain property interests, where a value estimate is not required, e.g., highest and best use, feasibility, market supply and demand.
• Income Approach: Appraisal technique estimating property value by capitalizing its net operating income using an appropriate capitalization rate; Value = Income / Rate.
• Indirect Cost: Costs supporting a construction project, such as legal or architectural fees.
• Insured Value: Value of an asset covered by an insurance policy; estimated by deducting the cost of non-insurable items (e.g., land value) from market value.
• Investment Value: Specific value of an investment to a particular investor, based on individual requirements.
• Market Price: The actual selling price of a property.
• Market Value: Most probable price a property should bring if exposed for sale in the open market for a reasonable time, with both buyer and seller aware of current market conditions and under no duress.

Overview of real estate valuation methods including site valuation, sales comparison, and cost approach. Includes how to estimate property value by calculating current construction cost, subtracting accrued depreciation, and adding land value obtained from the market. Considers depreciation and zoning.