Appraisals do not set value but estimate and render a credible opinion of value. This can only be done by a certified appraiser. Agents who are not licensed appraisers CANNOT complete an official appraiser but they can offer:
BPO (Broker's Price Opinion)
CMA (Comparative Market Analysis)
REMEMBER
MARKET PRICE: the properties asking offer or sales price
MARKET VALUE: the most probable price that a property should bring in a competitive and open market.
Characteristics of VALUE (D.U.S.T.)
Demand: the need or desire for possession or ownership backed by the financial means to satisfy that need
Utility: Use of the product
Scarcity: A finite supply of property
Transferability: Ownership rights should be able to transfer to another party
Appraisal Process
Identify the Problem / State the Purpose of the Appraisal
Determine the Scope of Work
Collect Data
Determine Highest and Best Use
Gather, Record, and Verify Data: General Date, specific data and data of each approach
Analyze Data
Form opinion by each 3 appraisal approaches
Reconcile values for final opinion of value
Report final opinion of value
Market Data Approach/Sales Comparison Approach
BEST USE: Residential properties and land
Based off the principle of substitution
The house being appraised is the SUBJECT PROPERTY
The house the subject is being compared to is COMPARABLE PROPERTY
Only make math changes to subtract or add on the comparable property
Comparisons should usually be an arm's length transaction (a transfer of property and the buyer and seller act independently of one another parties act in self interest and do not exert power over each other)
REMEMBER: CIA (Comparable Inferior Add) | CBS (Comparable Better Subtract)
Income Approach
BEST USE: Large income producing properties like Office building, shopping centers, apartment building.
Estimate the potential gross income
Deduct an appropriate allowance for variances (permits a prohibited land use to avoid undue hardship) and rent loss
Deduct annual operating expensed from the effective gross income (NOI)
Estimate the capitalization rate for the subject by analyzing cap rates of similar properties
Apply the capitalization rate to the property's annual NOI to get the property's value
Net Annual Income (REMEMBER it is ANNUAL and you may need to change a monthly unit to an annual unit while completing a problem on an exam)
Gross Income Multiplier: Sales price / Annual Gross Income
5+ Residential Units (Income Approach)
Gross Rent Multiplier: Sales price / Monthly Gross Rent
Used for smaller properties: 1 - 4 Residential Units
Cost Approach
BEST USE: Public service properties like: Churches, schools
Based off the principle of substitution
Only appraisal approach that requires two appraisals because you have the appraise the land/lot and then conduct a separate appraisal on the building
Residential properties the cost approach is based on the exterior sq. ft. measurements
Only approach that considers depreciation
Physical Life: How long a building will physically stand (Physical life is longer)
Economic Life: How long a building will contribute value to the land
Depreciation is a loss of value
Physical Deterioration: Curable item is one in need of repair, such as painting (deferred maintenance), that would result in an increase in value equal to or exceeding its cost
Functional Obsolesce: House is out of date and is not appealing for today's buyers
Ex: 5 bedroom one bath house
External Obsolesce: Problems in the neighborhood that effect the value of the home and this depreciation is considered incurable
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