Introduction To Real Estate Appraisal PDF

CHAPTER 21 INTRODUCTION TO REAL ESTATE APPRAISAL PURPOSE OF APPRAISAL Vendor planning to sell Purchaser planning to buy Developer requi...

CHAPTER 21 INTRODUCTION TO REAL ESTATE APPRAISAL PURPOSE OF APPRAISAL Vendor planning to sell Purchaser planning to buy Developer requiring es mates for redevelopment Mortgagee assessing loan security Determining insurable value for insurance Real property taxa on Legal Circumstances (estate, gi and transfer taxes, divorce) Expropria on Licensing Requirements for Appraisers In BC anyone may legally undertake appraisal work and charge a fee. Subject of an Appraisal It is the value of legal interests in real estate (legal rights of ownership) that is es mated. They may include: 1. Fee-simple ownership 2. Leasehold estate 3. Condominium ownership 4. Air space 5. Easements 6. Any combina on of the above Di erences in ownership may cause di erences in value. For example: Two adjacent stores that are physically the same in all respects may be rented for $1,500 per month and $1,350 per month. If the leases run for the same length of me, the value of the rst owner’s interest is worth more since he receives an extra $150 per month. Value is the product of two variable elements: 1. Right of ownership ff ti ti ti ti ft ti ff fi ti  2. The physical property in which those rights are vested Value of the Owner-Subjec ve value: Value of owner is assessed from investment point of view. Floor Price: The owner’s minimum price Ceiling Price: The prospec ve buyer’s maximum price For a poten al sale to occur; there must be at least one buyer who is prepared to make an o er (ceiling price) equal to or greater than the vendor’s oor price. When a price is agreed upon, it is referred to as the sale price or value in exchange. Varia ons in Sale Prices Circumstances surrounding individual sales may cause varia ons in sale prices Time The length of me allowed for the sale to take place will a ect the sale price Adver sing Adequately adver sed property will probably realize a higher sale price Sales between Related Par es In cases where there is some rela onship between the par es (e.g. father and daughter), the sale price will likely di er from what is expected in an open market. When there is no rela onship between the par es, they are said to have been bargaining at arms’ length. Financing Terms of nancing may a ect a sale price. For example: A vendor take-back mortgage with a lower interest rate will probably increase the sale price of a property. Special Purchasers If a property has a unique advantage to a prospec ve buyer (e.g. an adjacent property); the buyer will probably be prepared to pay more for it. The presence of a special purchase will increase the number of possible bids. De ni on of Market value fi ti ti ti ti fi ti ff ti ti ff ti ti ti ti fl ti ff ti ti ti ff  At any given me, the market value of an interest in land is the price it might reasonably be expected to realize when sold by a willing seller to a willing buyer a er adequate me and exposure to the market. Legal considera ons for appraisers Allowable error will vary with the purpose and complexity of the appraisal. Where the object of the appraisal is to nd market value, the property is of a common type (e.g. a single family residence) and there is su cient evidence of recent sales, up to 10 % may be reasonable. Legal Responsibili es of an Appraiser Situa ons may arise where a carelessly prepared appraisal report results in one ac on based on contract law by a person who ordered the appraisal (e.g. a mortgage lender)and a second ac on based on the law of tort by another person who relied on the appraisal (e.g. a purchaser). Degree of Development Proper es can be classi ed by their degree of development: 1. Those which possess highest and best use, or 2. Those which possess poten al for redevelopment (latent value). Highest and Best Use: Implies that the exis ng development is likely to yield the maximum net return to the land during the foreseeable future. Ask, “if this building burned down, would the same type of building be constructed in its place?” If so, it represents its highest and best use. Redevelopment Poten al: Latent value occurs when the maximum net returns are likely to result if exis ng redevelopment is changed in the foreseeable future. Most proper es represen ng highest and best use are located within areas of similar use. For example: a residen al property in a residen al subdivision. Zoning and restric ve covenants may complicate the process of conver ng a property to its highest and best use. Selec on of the Appropriate Appraisal Method Compara ve (Market) Method It involves collec ng and analyzing data for similar proper es that have been recently sold. It operates on the principle of subs tu on. This method is likely to provide most reliable es mate of market value. It is most useful for proper es that are within their property class. For example: single-family dwellings. The assump on is that if several iden cal proper es recently sold for $60,000; the subject property should sell for $60,000. ti ti ti ti ti ti ti ti ti ti ti ti ti ti fi ti ti ti ti ti ffi ti ti fi ti ti ft ti ti ti ti ti ti  “Recent” means that me period during which the market forces of demand and supply have remained stable. Investment or Income Method It is o en used for income-producing proper es. It requires recent market evidence of similar proper es to compare rental levels, opera ng expenses, sale prices and yield (capitaliza on rate). Net Opera ng Income (NOI) Yield (capitaliza on rate) = _____________________ X 100 Market value/sale price Cost Method: It is based on the assump on that cost is equal to value which is not necessarily correct. This method is inexact since cost and market value are not necessarily equal at any given me. This method can be used for proper es on which there is a li le comparable data. For example: A Church i.e. the property is unique. Residual Method Should only be used if the property possesses latent value i.e. the property is not at its highest and best use. The property has redevelopment poten al. Urban Land Economics Demand for Real Property Demand measures the quan ty of property that the market would like to purchase at any given price. Demand decreases as the price increases. Demand for real estate changes: 1. In the short-run, due to change in: a) Rate of interest b) Tastes and preferences of buyers 2. In the long-run; due to a change in: a) Popula on b) Income of people c) Government projects Supply of Real Property ft ti ti ti ti ti ti ti ti tt ti ti ti ti ti  Land cannot be created. The supply of real property is xed in loca on. Real property markets are local by nature because real property is immobile. Real property will be a ected by external in uences from neighboring property. Real property is more prone to the e ect of externali es because of its immobility. Background Analysis The appraiser should ascertain the e ect that each factor will have on the subject property. For example: socio-economic factors, the comparables chosen, the trends in the market viz-a-viz the subject. ff ti fl ff fi ti ff