Real Estate Valuation Appraisals

Overview

Also known as the Market Data Approach in some states.
Compares the subject property to similar properties ("comps") to estimate value.
Adjustments are made for differences between the subject property and comparable properties (e.g., size, features).
Most weight in residential property valuations.
Example: Used for estimating the value of a 30-year-old single-family house.

Estimates value based on the cost to replace the property minus depreciation plus land value.
Depreciation Types:
- Physical Deterioration: Loss due to physical wear; curable if within cost acceptability.
- Functional Obsolescence: Loss due to less desirable property features; can be curable or incurable.
- Economic/External Obsolescence: Loss due to external factors (e.g., high crime); always incurable.
Calculation: Replacement cost - depreciation + land value (land does not depreciate).
Example provided with a replacement cost of $400,000, depreciation of $50,000, and land value of $100,000, resulting in a property value of $450,000.

Used for valuing income-producing properties like apartment buildings.
Utilizes Cap Rate (Capitalization Rate): The expected rate of return.
Cap Rate Calculation:
- Formula: Cap Rate = Net Operating Income (NOI) / Market Value of the Property.
- Example: NOI of $80,000 and market value of $1,000,000 gives a cap rate of 8%.
Higher cap rates suggest higher potential returns.

Remember: Mortgage payments are not included in net operating income for cap rate calculations.
External economic factors are always considered incurable for depreciation.
Use resources and practice problems to solidify understanding before exams.

Good luck on your exam!