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Appraisals

Appraisals. Def: It is an opinion of value rendered by an impartial person skilled in the analysis and evaluation of real estate. Audience. People or parties interested in transferring ownership Taxing Authorities Compensation for property loss and damages for insurance companies

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Appraisals

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  1. Appraisals Def: It is an opinion of value rendered by an impartial person skilled in the analysis and evaluation of real estate

  2. Audience • People or parties interested in transferring ownership • Taxing Authorities • Compensation for property loss and damages for insurance companies • Attorneys need appraisals for divorces, estate planning, etc…

  3. Who can be an appraiser ? • Prior to 1989 anyone could be an appraiser • In 1989 anyone dealing with federal mortgages had to be licensed and certified in all 50 states • 2 Types of Appraisers • Licensed Appraiser • Certified Appraiser

  4. Nature of Fair Market Value • Def : Most probable selling price • With following conditions • Property is exposed to an open market for a reasonable period of time. • Buyers and Sellers are well informed and act prudently (in own self interest) • Payment is in cash without financing

  5. Appraisal Report • Fair Market Value based on current use. • What is the fair market value based on its highest and best use.

  6. Steps in Preparing an Appraisal • Define the Problem • Plan the Appraisal • Inspect Subject Property • Collect Market Data • Study Impact of Economic and Social Factors • Estimate Value using 3 Methods • Sales Comparison Approach • Cost Approach • Income Approach • Write Formal Report • Submit Report to Client

  7. Market Approach(Sales Comparison) • An average is never used • Rule #1 • If the comparable has a more desirable feature we subtract off the market value of that feature • Rule #2 • If the comparable lacks a desirable feature compared to the subject property then we add the value of this improvement

  8. Cost Method • Buyers will pay no more to erect a new building with the same features • Three Steps to this Approach • Estimate current costs to replace improvements • Subtract off the values of improvements that are used up.(e.g. depreciation) • Add in value of land

  9. Income Approach • Basic philosophy is that buyers will pay no more than the cost of purchasing the same cash flows with equal risk • Figure out Net Operating Income and then discount it back • EX. • Estimated Value = Operating Income • Capitalization Rate

  10. Examples An office building is currently producing $38,000 in operating income per year. If an investor requires a return of 14% on their investment, how much should they pay for the property if operating income remains the same in the future? Solution: V = $38,000/.14 = $271,429 Using the facts above, suppose operating income is expected to grow at 3% per year. What would the estimated value be? Solution: V = $38,000/.14 - .03 = $345,454

  11. Leases • Divide the bundle of rights between owners and users. • If a lease is over 1 year in length it has to be in writing. • Lease must be delivered to the tenant to be valid. • Landlords can restrict the use of the property through the lease. • Landlords are entitled to enter premises at any reasonable hour with notice • Landlords have right to show residence to prospective renters and buyers.

  12. Rights of Tenants • Property needs to be safe and habitable • Tenant has right to privacy • Lease can be canceled if property is damaged by any peril such as fire, tornado, etc. • Tenant can not be forced into taking alternative housing. • Tenant has right to withhold rent up to $300 or ½ of monthly rent in order to force landlord to make repairs on code violations. • Leases are non-transferable to other tenants

  13. Subleasing / Subletting • Sublease – someone else takes over the premises but original tenant remains liable for rent and damages • Substitute – New tenant is substituted entirely for the old tenant. The new tenant becomes entirely responsible for rent and damages

  14. Lease Termination • 95% leases terminate at end of lease • Tenant abandonment • Formal Eviction • Constructive Eviction

  15. Types of Leases • Commercial Leases • Normally based on Sq. Ft. • Net Lease • Percentage Lease • Triple Net Lease • Graduated Lease • Index Lease • Re-appraisal Lease • Ground Lease

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