©2011 Cengage Learning
California Real Estate
Principles
Chapter 9
Real Estate Appraisal
©2011 Cengage Learning
Chapter 9
1.
2.
3.
4.
5.
Define appraisal and list the elements and
forces that influence value.
Distinguish between utility value and market
value
Define depreciation; outline the causes of
depreciation; describe how to calculate
depreciation
Discuss the 3 approaches to value; outline the
steps in each approach
Define gross rent multiplier and cap rate
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What is the purpose of the appraisal?
Salvage value
Insurance agent
Tax assessor
Realty company
Assessed value
Market value
Insured
value
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Bank
Loan Value
APPRAISAL
An estimate or opinion of value as of a specific
date.
The accuracy of an appraisal is determined by
the
 Skill
 Experience
 Judgment
Of the appraiser
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Licensing
 A person who meets minimum statutory
requirements may be licensed or certified as
an appraiser by the California Office of Real
Estate Appraisers (OREA) by satisfying
education (courses & hours), experience
(hours) and testing criteria.
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Appraisal License Requirements
Licenses:
Education
Experience
Licensed Appraiser
150 hours
2,000 hours
Certified Residential
Appraiser
200 hours
2,500 hours
Certified General
Appraiser
300 hours
Trainee Appraiser
3,000 hours
(1,500 must be
non-residential
 Must have 15 hours of USPAP
property)
to obtain license & 7 hours to renew.
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Value
 Value in Use
(Utility Value = Worth to an Owner
 Market Value = Value in Exchange
“Highest price in terms of money for which a
Property would sell in an open market,
The seller not being obligated to sell,
The buyer not being obligated to buy,
Allowing for a reasonable length of time
to effect the sale”
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Value affected by
4 Elements: D U S T
Value
Demand – desire to own
Utility - usefulness
Subjective Value
Emotional Value
Historic Cost
Scarcity – lack of abundance
Transferability – can transfer ownership
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PEPS
Forces that change Value
Political Forces
Government: Zoning, Fiscal Policy, Taxes
People: Environmental Protection, Education
Economic Forces
Consumer: Income, Employment, Credit, Interest
Rates
Physical Forces
Natural: Land, Climate, Resources
Man-Made: Buildings, Roads, Utilities
Social Forces
Area: Neighborhood, Living Standards
People: Family Size, Lifestyle, Attitudes
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PRINCIPLES OF VALUATION
 Highest and Best Use
 Change
 Balance
 Supply and Demand
 Contribution
 Substitution
 Progression – Regression
 Competition
 Conformity
 Anticipation
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DEPRECIATION
 Physical Deterioration
 Worn out, run down, deferred maintenance,
weathering
 Curable or Incurable
 Functional Obsolescence
 Out of date, poor floor plan,
lack of modern appliances,
out of style architecture
 Curable or Incurable
 Economic Obsolescence
 Neighborhood or Social Causes:
 Traffic, noise, flood zone, crime
 Incurable
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DEPRECIATION:
Functional Obsolescence
Family
Kitchen
Utility
Bedroom
Bedroom
Bath
Dining
Bedroom
Bedroom
Living
This 4-bedroom, 1 bath home with no access to
the back yard from the family room and utility room far from the
bedrooms where kitchen becomes a hallway is an example of
functional obsolescence (a floor plan that does not fit today’s needs).
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The Appraisal Process
Define the Problem
Preliminary Survey and Appraisal Plan
Collect Data
General Data
Region
City
Neighborhood
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Specific Data
Title
Site
Improvements
Data Classification and Analysis for
Highest and Best Use
Cost Approach
Market Data Approach
Income Approach
Indicated Value
Indicated Value
Indicated Value
Reconciliation/Correlation of Value
Final Estimate of Value
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Written Report
Letter
Short Form
Narrative
Types of Appraisal Reports
Letter Report:
Restricted Report
Short Form Report:
Summary Report
Narrative Report:
Self-Contained Report
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Cost Approach to Value
 Used primarily for:
 New construction
 Special purpose property
 Public buildings
To replace/reproduce the improvements on the
property.
The upper limit to value.
BEST used for unique properties with a
limited market appeal
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COST APPROACH
Steps:
1. Estimate the land value, as if it were vacant.
2. Estimate the current replacement cost of the improvements
Sq Foot x $ per sq foot = Current replacement cost
3. Estimate and subtract depreciation of the improvements.
Replacement
cost
Depreciation of
Improvements
Present Value of
Improvements
4. Add back the value of the land.
Land Value
+
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Present Value of
Improvements
Total Value
INCOME APPROACH
Capitalization or Investment Approach
Value based on income produced by the property
Formula
Gross Scheduled Income
Less Vacancy and Bad Debt
Effective Gross Income
Less Operation Expenses
Net Operating Income
GSI
- VAC
EGI
- OE
NOI
BEST for income producing properties
Apartments, Commercial, Offices
NOI
= Value
Cap Rate
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Capitalization Rate
I=RXV
I
= V
The higher the risk,
R
The higher the capitalization rate.
 The higher the cap rate, the lower the value.
$30,000 I
10% R = $300,000
$30,000 I
5% R = $600,000
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GROSS RENT MULTIPLIER
Definition:
A gross rent multiplier is a calculation of how
many times the property’s rent goes into the
price.
 It can be based on the monthly or annual rent.
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GROSS RENT MULTIPLIER
Comp. Sales Price
Multiplier
Comp. Monthly Rent
Comp. Sales Price
Multiplier
Comp. Annual Rent
Gross Monthly Rent
=
=
(GMRM)
Gross Annual Rent
(GRM)
THEN
Gross Scheduled Income (GSI) x Gross Rent Multiplier
(GRM) = Estimated Value ($)
FAILS TO CONSIDER VACANCIES AND EXPENSES
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Gross Rent Multiplier Example
Sales Price $350,000
Rent $2,000
= 175 gross mo. Rent Mo.
multiplier
Sales Price $350,000
Annual Rent $24,000
($2,000 X12mo.)
= 14.58 gross annual
multiplier
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MARKET VALUE APPROACH
The most probable price
that real estate would
bring in an arm’s length
transaction, under normal
market conditions, on the
open market.
BEST used for existing one-to-four unit residential
property, vacant land and condominiums
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Comparison Approach
“If comparable homes sold for $XXX, then subject home should sell for $XXX”
Select 3 to 5 comparable or similar properties with
similar architectural style and character which have
recently sold under reasonable market conditions in
the same neighborhood
2. Make adjustments for the different between the
comps and subject property for amenities by adding
or subtracting from their sales prices.
-+-+-+-+
3. The result gives a value range for the subject property.
From the value range, select the probably market
value of the subject property.
1.
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MARKET DATA ANALYSIS
Item
Subject Property
Comparables
1
2
3
Address
Sales Price
Data Source
Date of Sale
Location
Site/View
Design/Appeal
Constr. Quality
Age
Condition
# of Rooms
# Bedrooms
# Baths
Liv. Area (sq ft)
Garage/Carport
Patio, pool, etc.
412 Acme Drive
$335,000
Sales contract
9/1/00
Hi-qual suburb
Inside lot
Rambler/exc
Good
7 yrs
Good
8
4
2½
2,700
2-car att
15 x 21 patio
131 Skip Rd
$353,000
Present owner
6/29/00
Same
Corner lot
Same
Good
6 yrs
Good
7
4
2½
3,300
Same
15 x 26 patio
221 Sutter St
$333,500
MLS
7/14/00
Same
Corner lot
Same
Good
8 yrs
Good
7
3
2
2,350
Same
18 x 16 patio
168 Bow Rd
$318,500
Selling broker
5/17/00
Same
Inside lot
Same
Good
8 yrs
Good
6
3
2
2,150
Same
15 x 17 patio
Additional Data
2 fireplaces
Range, oven
D/W disposal
Central air
2 fireplaces
Range, oven
D/W
Central air
1 fireplace
Range, oven
D/W
Central air
1 fireplace
Range, oven
D/W
Comments Subject has superior energy efficiency to comps 2 and 3 and is at least equal in this respect to comp 1.
Principal difference between comps 1 and 2 is square footage.
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Arm’s Length Transaction
Neither party is under duress
The property is on the market for a
reasonable time.
Both parties have full knowledge of the
property’s assets and defects.
No unusual circumstances exist.
The price was not affected by special
financing.
©2011 Cengage Learning
Chapter 9 Question
Subject
Comp #1
Sale: $400,000
Comp #2
Value :
?
Sale: $350,000
Bedroom:
3
4
2
Bathroom:
2
3
1
A bedroom in this area is valued at $10,000
A bathroom in this area is valued at $15,000
What is the indicated value for Subject Property?
A. $325,000
C. $375,000
B. $350,000
D $425,000
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Chapter 9 Answer
 Comp # 1
Comp #2
$400,000
$350,000
- $10,000
-$15,000
+ $10,000
+ $15,000
$375,000 ( C ) $375,000
The range of value for subject property is $375,000
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Review Quiz Chapter 9
1. The most important consideration in an appraisal is the:
a. methods used
b. experience and knowledge of the appraiser
c. data gathered
d. inspection of the title records
2. Which of the following is a physical force that influences
value?
a. rate of changes in population
b. income levels
c. size and shape of the parcel
d. zoning changes
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Review Quiz Chapter 9
3. The appraisal principle that states that the value of a
property is dynamic, not static is called:
a. principle of supply and demand
b. principle of highest and best use
c. principle of substitution
d. principle of change
4. A loss in value because of busy street is an example
of:
a. economic obsolescence
b. accrual for depreciation
c. functional obsolescence
d. physical deterioration
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Review Quiz Chapter 9
5. The market approach would be given the most
weight if appraising a:
a. New home
b. New apartment
c. Five year old home
d. Special purpose property
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Review Quiz Chapter 9
6. Find the value by use of the income
approach (round to the nearest $100)
(1) an older 3-unit apartment rents for
$1,000 per month per unit
(2) vacancy factor of 5%
(3) annual operating expenses $10,000
(4) capitalization rate of 8%
a. $302,500
b. $288,000
c. $276,500
d. $275,000
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Review Quiz Chapter 9
7.
With a gross annual multiplier of 150, a duplex that
rents one unit for $575 per month and the other for
$625, should have an estimated value of:
a. $173,000
b. $176,000
c. $180,000
d. $197,000
8. Licensed by the Office of Real Estate Appraisers to
do the most complex property appraisal is the:
a. real estate agents
b. certified residential appraiser
c. certified general appraiser
c. licensed appraiser
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Review Quiz Chapter 9
9. The type of appraisal report required by most lenders
is the:
a. loan report
b. narrative report
c. short form report
d. letter form report
10. Regarding the sales comparison approach, which is
false?
a. the comps are adjusted to the subject property
b. 3 is the minimum number of comps to use
c. the subject property is adjusted to the comps
d. this approach is best for valuating residential homes
©2011 Cengage Learning
Answers to Review Quiz Chapter 9
1. B
6. A
2. C
7. C
3. D
8. C
4. A
9. C
5. C
10. C
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