Essential Real Estate Valuation Techniques

Hey there my beautiful friends! Welcome back to another exciting episode all about real estate right here on our channel Just Call Maggie. My name is Maggie Rehoso and I am a licensed real estate instructor and the owner of Maggie's Real Estate Academy. Today we're diving into the three approaches to value. We're unlocking the secrets behind the sales comparison approach, the cost depreciation approach, and the income approach. So grab your thinking caps and let's jump right in. All right, first up on our real estate journey is the sales comparison approach, or also called the comparable sales method. Picture this, you're trying to figure out the value of your dream home. What do you do? Well, You look at similar houses in the neighborhood, consider their prices, and then work out a fair market value for your own slice of heaven. Normally, a real estate agent, when getting ready to list a home for sale, will run what's called a comparative market analysis. You basically have to find similar homes within a certain radius of the house that you're trying to price. From there, you pick anywhere from... three to five homes and see how they're similar or different to your subject property. Then you price the subject property accordingly. The sales comparison approach is a direct application of the principle of substitution where if similar homes are for sale, the one with the lowest price will be the one that will attract the greatest demand. This approach is used to appraise residential properties. and vacant land in established neighborhoods, and is the one most widely used by real estate agents. Now, if on your exam you get asked which appraisal approach is most commonly used amongst real estate agents for residential properties, you know the answer. The sales comparison approach or comparable sales method. You got this. Let's move on now and work out some sample questions similar to ones that you may see on your real estate exam. A comparable property sold for $125,000. It has a garage and three bedrooms. The subject property has a garage but has four bedrooms. If a bedroom is priced at $5,000, how much should the subject property be listed for? For these type of adjustment questions, We use the CIA and CBS acronyms. For CIA, it means that if the comparable is inferior, then you add. Now CBS means that if the comparable is better, then you subtract. Let's take a look at how these are worked out. I'll put a C here for my comparable property, and then an S here for the subject property. We see the comparable sold for $125,000. So we'll just add that here next to the comparable. Now we see that both the comparable and the subject each have a garage and the comparable has three bedrooms while the subject property has four bedrooms. In this example we see that the comparable is what we would call inferior since we see it only has three bedrooms and the subject property has four bedrooms. So we would Add $5,000 to the comparable sales price of $125,000, making the price of the subject property now at $130,000. Let's check out another question. Sales associate Jane is trying to price her new listing. She finds a comparable home in the area that's sold for $105,000. The comparable property has a basement. three bedrooms but only one bathroom the subject property does not have a basement but it has three bedrooms and two bathrooms if a basement is valued at ten thousand dollars and an extra bathroom is valued at eight thousand dollars what is the price adjustment jane will have to make to list the subject property at a competitive price Here we will set up the question just like the last one. We'll write a C over here and an S over here. Let's place the comparable sales price of $105,000 right here next to the C. Now, let's include what we were given in the question. We see the comparable has a basement that is valued at $10,000, and we see that it has the same amount of bedrooms as the subject property. But the comparable only has one bathroom, and a bathroom is valued at $8,000. And we can write under the S that it does not have a basement, and it has two bathrooms. Since the comparable in this example has a basement, that means the comparable is better than the subject in this aspect. So we will use CBS and subtract $10,000 from the sales price of $105,000. So $105,000 minus $10,000 equals $95,000. Now let's look at the bathroom situation. We see the comparable only has one bathroom and this subject property has two bathrooms. In this situation, the comparable is inferior since it has less bathrooms than the subject property. So we'll use CIA, which means we'll just add $8,000 for the bathroom. So $95,000 plus $8,000. equals $103,000. Now we see the subject property Jane is going to sell can be listed for $103,000. Those are fun and just as long as you follow that little trick of CIA and CBS, you should be good to go. Let's move on to our next method. Next in line, we have the cost depreciation approach or cost method. This approach is used to estimate the current cost of reproducing or replacing a building. It helps you factor in the wear and tear, the aging, and the depreciation of your property, plus the value of the land to determine its current value. Let's talk about the difference between replacement costs versus reproduction costs. Replacement costs are an estimated cost to build a comparable structure at today's prices. using today's materials, designs, and features. Reproduction cost is the price to build a structure using today's prices, but building an exact replica of the structure, all while using the same materials, design, and layout. Reproduction cost is what's most commonly seen in appraisals of historic properties. So when is the cost approach used? Well, appraisers will use this to estimate the price of newer built properties for insurance purposes, properties proposed for renovations, and for special purpose buildings, which are not often sold or transferred, like schools, churches, libraries, hospitals, and even government buildings. Basically, this approach is commonly used on properties that don't generate income. So if a question on your real estate exam comes up like, what is the best appraisal approach used for a library? You know, it's the cost depreciation approach or the cost approach. Let's look at a practice question. Suppose an appraiser estimates the effective age of a ten year old building is six years. The appraiser estimates the cost to reproduce the structure as though it is new today. is $305,000. If the total economic life is 50 years, what is the amount of accrued depreciation? The formula for this example is effective age divided by total economic life, all of that then multiplied by the reproduction cost as if new. That will equal the estimated total accrued depreciation. What we can do instead is divide $305,000 by the total economic life of 50 years, then multiply by the effective age of six years. We get a total accrued depreciation of $36,600. Last but not least, let's uncover the secrets of the income approach or income method. Imagine you're considering investing in a rental property or a business opportunity. How do you figure out its value? Well, this approach will help you analyze the income generated by the property or a business. It's like peering into the future and calculating the magic numbers to ensure your investment yields those golden coins that you've been dreaming of. The income approach is used for income producing property. There are two techniques that are used for the income approach, direct capitalization and gross multiplier. To find the market value, using direct capitalization, you get the net operating income, then divide it by the capitalization rate. For these types of questions on your real estate exam, you can use the t-chart. Let's look at a few sample questions. What is the market value of a property with net operating income of $55,320 and a capitalization rate of 12%? Okay, so remember the formula for market value using the direct capitalization approach. I'll put the formula right here on the side. Now, for this example, we'll just use the T-chart. Since we're looking for the market value, that means that we're looking for the total amount. So we can easily place the net operating income given in the example in the parts section on top. Then. We place the capitalization rate of 12% in the rate column. Let's convert 12% into a decimal. So divide 12 by 100, which equals 0.12. Now we see we have to divide. So $55,320 divided by 0.12 equals $461,000. Easy enough? Okay, let's check out this next one. A property has a market value of $350,000. It has a gross income of $43,200 with operating expenses of $12,450. What is the property's capitalization rate? Alright, here's the formula again, but let's just use the T-chart, make things simpler. Okay, here we see that the property's market value is $350,000, so that will go in the total column. We also see that they've given us a total gross income amount and an amount for operating expenses. Since we are looking for a net operating income, like the formula says, all we have to do is subtract these two amounts. Remember, Net operating income is the amount of money an investment brings you after subtracting the expenses it costs you to run the place. So $43,200 minus $12,450 equals $30,750. So we can now place that in the parts section on top. We see that we just have to divide. So $30,750 over $350,000 equals 0.08785. But remember, we're looking for a percent. So just multiply now by 100. So 0.08785 times 100 equals 8.78%. we can now just round up to 8.8 percent almost nine percent capitalization rate on this property you wanna do one more let's do it an investor decided on a capitalization rate of 10.5 percent based on the comparables in the neighborhood if the property's market value is 225 000 what is the net operating income of this property All right, let's solve this question. Here's the formula again, and we're looking for the net operating income in this example. Okay, so let's take out the t-chart. Let's place the market value of $225,000 in the total column, then the cap rate of 10.5% in the rate column. Don't forget to convert your percentages into decimal form by just dividing by 100. So, 10.5 over 100 equals 0.105. We see now that we have to multiply. So $225,000 times 0.105 gives you a net operating income of $23,625. Okay, now that we've covered the direct capitalization approach to market value, let's talk about the second technique used for the income approach to market value. The gross multiplier technique, which includes the gross rent multiplier and the gross income multiplier. These formulas use gross monthly rent or annual gross rental income instead of net operating income to estimate the market value of one to four family rental properties. The gross rent multiplier is found by dividing the market value by the gross monthly rent. For more information about gross rent multiplier or GRM, check out my video right here. And the gross income multiplier, that's calculated by dividing the sales price by the annual gross rental income. We can definitely use the t-chart for this, but all we have to do is flip the total and the part sections and change the percentage percentage. column to grm or gim and there you have it if you enjoyed this real estate content don't forget to hit that like button and subscribe to my channel for more exciting real estate adventures oh and don't forget to ring that bell to stay updated on all of our amazing content that's coming your way but wait there's more for all you aspiring real estate agents out there that are struggling with the math side of things, my e-workbook, Math Skills for Real Estate Success, has come to the rescue for thousands of students just like you. I've included a link to the e-workbook in the description box below, so go ahead, check it out, and let's conquer those math questions once and for all together. That's all for today, folks. Thanks for joining me on this whirlwind tour of the three approaches to value. Stay tuned for more exciting real estate revelations, tips, and tricks right here on Just Call Maggie with me, Maggie Rehoso. Until next time, good luck and happy studying.

So grab your thinking caps and let's jump right in. All right, first up on our real estate journey is the sales comparison approach, or also called the comparable sales method. Picture this, you're trying to figure out the value of your dream home. What do you do? Well, You look at similar houses in the neighborhood, consider their prices, and then work out a fair market value for your own slice of heaven.

Normally, a real estate agent, when getting ready to list a home for sale, will run what's called a comparative market analysis. You basically have to find similar homes within a certain radius of the house that you're trying to price. From there, you pick anywhere from...

three to five homes and see how they're similar or different to your subject property. Then you price the subject property accordingly. The sales comparison approach is a direct application of the principle of substitution where if similar homes are for sale, the one with the lowest price will be the one that will attract the greatest demand. This approach is used to appraise residential properties. and vacant land in established neighborhoods, and is the one most widely used by real estate agents.

Now, if on your exam you get asked which appraisal approach is most commonly used amongst real estate agents for residential properties, you know the answer. The sales comparison approach or comparable sales method. You got this.

Let's move on now and work out some sample questions similar to ones that you may see on your real estate exam. A comparable property sold for $125,000. It has a garage and three bedrooms. The subject property has a garage but has four bedrooms. If a bedroom is priced at $5,000, how much should the subject property be listed for?

For these type of adjustment questions, We use the CIA and CBS acronyms. For CIA, it means that if the comparable is inferior, then you add. Now CBS means that if the comparable is better, then you subtract. Let's take a look at how these are worked out.

I'll put a C here for my comparable property, and then an S here for the subject property. We see the comparable sold for $125,000. So we'll just add that here next to the comparable.

Now we see that both the comparable and the subject each have a garage and the comparable has three bedrooms while the subject property has four bedrooms. In this example we see that the comparable is what we would call inferior since we see it only has three bedrooms and the subject property has four bedrooms. So we would Add $5,000 to the comparable sales price of $125,000, making the price of the subject property now at $130,000. Let's check out another question. Sales associate Jane is trying to price her new listing.

She finds a comparable home in the area that's sold for $105,000. The comparable property has a basement. three bedrooms but only one bathroom the subject property does not have a basement but it has three bedrooms and two bathrooms if a basement is valued at ten thousand dollars and an extra bathroom is valued at eight thousand dollars what is the price adjustment jane will have to make to list the subject property at a competitive price Here we will set up the question just like the last one. We'll write a C over here and an S over here.

Let's place the comparable sales price of $105,000 right here next to the C. Now, let's include what we were given in the question. We see the comparable has a basement that is valued at $10,000, and we see that it has the same amount of bedrooms as the subject property. But the comparable only has one bathroom, and a bathroom is valued at $8,000.

And we can write under the S that it does not have a basement, and it has two bathrooms. Since the comparable in this example has a basement, that means the comparable is better than the subject in this aspect. So we will use CBS and subtract $10,000 from the sales price of $105,000.

So $105,000 minus $10,000 equals $95,000. Now let's look at the bathroom situation. We see the comparable only has one bathroom and this subject property has two bathrooms. In this situation, the comparable is inferior since it has less bathrooms than the subject property.

So we'll use CIA, which means we'll just add $8,000 for the bathroom. So $95,000 plus $8,000. equals $103,000.

Now we see the subject property Jane is going to sell can be listed for $103,000. Those are fun and just as long as you follow that little trick of CIA and CBS, you should be good to go. Let's move on to our next method. Next in line, we have the cost depreciation approach or cost method.

This approach is used to estimate the current cost of reproducing or replacing a building. It helps you factor in the wear and tear, the aging, and the depreciation of your property, plus the value of the land to determine its current value. Let's talk about the difference between replacement costs versus reproduction costs. Replacement costs are an estimated cost to build a comparable structure at today's prices. using today's materials, designs, and features.

Reproduction cost is the price to build a structure using today's prices, but building an exact replica of the structure, all while using the same materials, design, and layout. Reproduction cost is what's most commonly seen in appraisals of historic properties. So when is the cost approach used?

Well, appraisers will use this to estimate the price of newer built properties for insurance purposes, properties proposed for renovations, and for special purpose buildings, which are not often sold or transferred, like schools, churches, libraries, hospitals, and even government buildings. Basically, this approach is commonly used on properties that don't generate income. So if a question on your real estate exam comes up like, what is the best appraisal approach used for a library?

You know, it's the cost depreciation approach or the cost approach. Let's look at a practice question. Suppose an appraiser estimates the effective age of a ten year old building is six years.

The appraiser estimates the cost to reproduce the structure as though it is new today. is $305,000. If the total economic life is 50 years, what is the amount of accrued depreciation? The formula for this example is effective age divided by total economic life, all of that then multiplied by the reproduction cost as if new. That will equal the estimated total accrued depreciation.

What we can do instead is divide $305,000 by the total economic life of 50 years, then multiply by the effective age of six years. We get a total accrued depreciation of $36,600. Last but not least, let's uncover the secrets of the income approach or income method. Imagine you're considering investing in a rental property or a business opportunity. How do you figure out its value?

Well, this approach will help you analyze the income generated by the property or a business. It's like peering into the future and calculating the magic numbers to ensure your investment yields those golden coins that you've been dreaming of. The income approach is used for income producing property.

There are two techniques that are used for the income approach, direct capitalization and gross multiplier. To find the market value, using direct capitalization, you get the net operating income, then divide it by the capitalization rate. For these types of questions on your real estate exam, you can use the t-chart.

Let's look at a few sample questions. What is the market value of a property with net operating income of $55,320 and a capitalization rate of 12%? Okay, so remember the formula for market value using the direct capitalization approach.

I'll put the formula right here on the side. Now, for this example, we'll just use the T-chart. Since we're looking for the market value, that means that we're looking for the total amount.

So we can easily place the net operating income given in the example in the parts section on top. Then. We place the capitalization rate of 12% in the rate column. Let's convert 12% into a decimal.

So divide 12 by 100, which equals 0.12. Now we see we have to divide. So $55,320 divided by 0.12 equals $461,000.

Easy enough? Okay, let's check out this next one. A property has a market value of $350,000. It has a gross income of $43,200 with operating expenses of $12,450. What is the property's capitalization rate?

Alright, here's the formula again, but let's just use the T-chart, make things simpler. Okay, here we see that the property's market value is $350,000, so that will go in the total column. We also see that they've given us a total gross income amount and an amount for operating expenses.

Since we are looking for a net operating income, like the formula says, all we have to do is subtract these two amounts. Remember, Net operating income is the amount of money an investment brings you after subtracting the expenses it costs you to run the place. So $43,200 minus $12,450 equals $30,750.

So we can now place that in the parts section on top. We see that we just have to divide. So $30,750 over $350,000 equals 0.08785. But remember, we're looking for a percent. So just multiply now by 100. So 0.08785 times 100 equals 8.78%.

we can now just round up to 8.8 percent almost nine percent capitalization rate on this property you wanna do one more let's do it an investor decided on a capitalization rate of 10.5 percent based on the comparables in the neighborhood if the property's market value is 225 000 what is the net operating income of this property All right, let's solve this question. Here's the formula again, and we're looking for the net operating income in this example. Okay, so let's take out the t-chart.

Let's place the market value of $225,000 in the total column, then the cap rate of 10.5% in the rate column. Don't forget to convert your percentages into decimal form by just dividing by 100. So, 10.5 over 100 equals 0.105. We see now that we have to multiply. So $225,000 times 0.105 gives you a net operating income of $23,625.

Okay, now that we've covered the direct capitalization approach to market value, let's talk about the second technique used for the income approach to market value. The gross multiplier technique, which includes the gross rent multiplier and the gross income multiplier. These formulas use gross monthly rent or annual gross rental income instead of net operating income to estimate the market value of one to four family rental properties. The gross rent multiplier is found by dividing the market value by the gross monthly rent. For more information about gross rent multiplier or GRM, check out my video right here.

And the gross income multiplier, that's calculated by dividing the sales price by the annual gross rental income. We can definitely use the t-chart for this, but all we have to do is flip the total and the part sections and change the percentage percentage. column to grm or gim and there you have it if you enjoyed this real estate content don't forget to hit that like button and subscribe to my channel for more exciting real estate adventures oh and don't forget to ring that bell to stay updated on all of our amazing content that's coming your way but wait there's more for all you aspiring real estate agents out there that are struggling with the math side of things, my e-workbook, Math Skills for Real Estate Success, has come to the rescue for thousands of students just like you. I've included a link to the e-workbook in the description box below, so go ahead, check it out, and let's conquer those math questions once and for all together. That's all for today, folks.

Thanks for joining me on this whirlwind tour of the three approaches to value. Stay tuned for more exciting real estate revelations, tips, and tricks right here on Just Call Maggie with me, Maggie Rehoso. Until next time, good luck and happy studying.

Transcript for:Essential Real Estate Valuation Techniques

Transcript for:
Essential Real Estate Valuation Techniques