Real Estate Principles
Tenth Edition
Real Estate:
An Introduction to the Profession
Tenth Edition
Chapter 18
Real Estate Appraisal
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Appraisal
An estimate of value.
 Three approaches to estimating value:

Market – comparable sales data
 Cost – construction cost plus land value
 Income – monetary returns of property
capitalized

Valuing a House
Market Comparison Approach
-$7,560
+$2,960
-$2,700
Competitive Market Analysis
Calculating Gross Rent Multiplier
Gross Rent
Multiplier
$245,000
Gross
Annual
Rents
$34,900
No.2
$160,000
$22,988
= 6.96
No.3
$204,000
$29,352
= 6.95
No.4
$196,000
$27,762
= 7.06
As a Group:
$805,000
$115,002
= 7.00
Building
Sales Price
No.1
= 7.02
Costs Approach to Value
Step 1: Estimate land as vacant
$ 30,000
Step 2: Estimate new construction
cost of similar building
$120,000
Step 3: Less estimated depreciation -12,000
Step 4: Indicated value of building
$108,000
Step 5: Appraised property value
by the cost approach
$138,000
Square-foot Method of Cost Estimating
Income Approach
Variation by Direct Capitalization
Income / Rate = Value
$18,000 / 0.09 = $200,000
Projected Annual Operating Statement
(Pro Forma Statement)
Operating expense ratio: $31,070 / $79,800 = 38.9%
Direct Capitalization Using an Overall Rate
Income
= Value
Overall Rate
$45,400
0.09376
= $484,215
Overall Rates - 10-year Holding
Period, 25-year Loan for 75% of the
Purchase Price, 10% Investor Return
Reconciliation
Market Approach
Cost Approach
Income Approach
Final Indicated Value
$180,000 x 75% = $135,000
$200,000 x 20% = $ 40,000
$160,000 x 5% = $ 8,000
$183,000
Types of Appraisals and
Reporting Options under USPAP
Types of Appraisals
• Complete appraisal
• Limited appraisal
Reporting Options
• Self-contained appraisal report
• Summary report
• Restrictive report
Formats of Appraisal Reports
1. Letter report
2. Form report
3. Narrative report
4. Review appraisals
5. Real estate analysis
Appraiser License
Certified General Appraiser
 Certified Residential Appraiser
 State licensed appraiser
 Provisional licensed real estate appraiser
 Appraiser trainee

Principles of Value
 Principle of Anticipation
 Principle of Substitution
 Highest and best use of a property
 Principle of competition
 Principle of supply and demand
 Principle of change
 Principle of contribution
 Principle of conformity
Value
Market value
 Assessed value
 Insurance value
 Loan value
 Estate tax value
 Plottage value
 Rental value
 Replacement value

Markets
Buyer’s market – excess supply of
housing for sale.
 Seller’s market – demand exceeds
supply.

Professional Appraisal Societies

The American Institute of Real Estate
Appraisers (AIREA)

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
MAI
SRA
Society of Real Estate Appraisers
NATIONAL Association of Independent Fee
Appraisers
 Farm Managers and Rural Appraisers
 National Society of Real Estate Appraisers
 American Society of Appraisers
Key Terms

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
Appraisal
Capitalize
Comparables
Cost approach
Depreciation
FIRREA
Gross rent multiplier

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Highest and best use
Income approach
Market approach
Market value
Operating expenses
Scheduled gross,
Projected gross
USPAP