Property Appraising Methods

Published: 2021-07-06 06:37:22
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IntroductionSales Comparison Approach of Appraisal:Sales Comparison Approach to appraisal/valuation is a method that has its basis in the comparing the property appraised (the subject property), with properties that possess similarities with the subject. These similarities could be location, nature of construction, accommodation details among others. Different types of comparisons include straight comparison which in itself is the simplest or deep complex analysis such as on analysing the rate per unit area. Sales that have taken place recently in the neighbourhood are deemed sufficient comparisons and are analysed against the subject property. Some of the factors that are analysed include the sale price, the physical aspects of the properties, the functional and the locational features of each property. After the analysis, relevant adjustments are made so as to arrive at the market value of the property. In the appraisal of 2380 Appletree Court , the different sales comparisons that have been used include 2043 Appletree Court, 4207 E Park Trail Orlando and 4470 E Park Trail Orlando.The sales comparables that have been used in the appraisal of 2380 Appletree Court are not more than three months old and are within a reasonable radius from the subject property(2380 Appletree Court). This defends Sales Comparison as one of the approach used in the appraisal.Contractor’s Approach/Cost ApproachThis approach involves the assessment of the value of the land (based on direct comparison of sales of vacant land/development sites), and the addition of the ‘added value’ of the improvements (buildings etc) on the land. The added value of the improvements is assessed based on analysis of having regard to market evidence, often on a rate per area basis .It is also known as the summation approach of appraisal/valuation.While these two methods were used in the appraisal of 2380 Appletree Court, one method was not used. It is the Income Approach of Appraisal. The income approach is expressed in a formula.Market Value = Annual Income/Rate of Return or the Capitalisation rate (MV=A/R)The Income approach is predicted on the principal of anticipation which holds that the present value is indicated by the expectations of future benefits.This method is used for valuation of income producing properties.Given a known or estimated stream of net rental income, the end value is thus driven by the rate of return that is expected. The choice of return is made by comparison with such other investments as bear the nearest relationship in such matters as the physical characteristics, use and degree of risk and life of the investment.The price being offered to the Seller by the Buyer at the time of appraisal is $165,000.The appraiser settled upon a market value of $167,900. This is not favorable to the buyer since s/he is willing to offer a lesser price value for the same( $165,000). However, it is within the range of value that the appraiser has come up with and hence the appraised value supports the offered value.The part whereby all the maintenance issues are addressed is important in the appraisal report since it can be a basis for negotiation of the offer. If there are many defects and repair works to be carried out, it means that the buyer will have to part away wit extra cash to facilitate the repairs. This would make the buyer to be willing to buy the property at a lesser value than what is offered by the seller. On the other hand, if there are minor repair works or maintenance issues, it gives the seller an upper hand during the negotiations of the terms of the offer. This is because the buyer would not incur extra costs of repair as he is already buying property in a good condition.Functional obsolescence refers to the diminished usefulness or desirability of an object especially due to the design being old or due to its failure to adapt to current and prevailing conditions. In real estate, functional obsolescence usually has a negative effect on the appraisal value returned. In a case where there is A one bedroom house in a part of town and in that town, in the recent past, there has been advancement in sense of bedrooms in a house the single-bedroom house would be rendered functionally obsolete because it lacks the capacity most buyers want. Beside it being in a good condition, it does not suit the current market as it lacks new modifications.There are different conditions that would lead to adjustments in value of the comparable properties that have been used in the appraisal. They include but not limited to the following:Economic factors such as increased flow of money in the economy making the demand of properties to go up due to the many potential buyersDespite the comparables in use being relatively smaller than the subject property, they return a positive adjustment due to the location of the subject property which is relatively primer than the comparables used.In this neighbourhood, the presence of a pool decreases the value of the property. This is because properties with a pool are going for a lesser price than those that do not have a pool.(comparable No.3)Comparable sale No 1 is the most similar to the subject property since it also does not have a swimming pool just like the subject property and also sits on a similar land size.Review of the brochure for properties for sale in Lincoln Street. In the brochure, the subject property for sale has been compared with other similar properties in the neighbourhood. The purpose of this comparison is to able to give the buyer the chance to make a reasonable judgement while buying the property. The different properties that are in the neighbourhood include 1159 Corona Street and 638 East 12th Ave Street. The subject property itself has been described in detail including its location, size, accommodation and also the potential rent that it can generate. This information is very useful to the buyer since for instance the buyer would like to familiarize themselves with the property they are buying. The information provided also helps in making decisions such as the particular method of valuation/appraisal that should be used. Since it is an income generating property, it is no surprise that Income Method of Valuation(Capitalization) has been used.The sale price of the unit has been given as $495,000. This has been realized after capitalizing the income generated from the property. Described below is the Income Approach of Appraisal also expressed as a formulaMarket Value = Annual Income/Rate of Return or the Capitalisation rate (MV=A/R)The Income approach is predicted on the principal of anticipation which holds that the present value is indicated by the expectations of future benefits.This method is used for valuation of income producing properties.Given a known or estimated stream of net rental income, the end value is thus driven by the rate of return that is expected. The choice of return is made by comparison with such other investments as bear the nearest relationship in such matters as the physical characteristics, use and degree of risk and life of the investment.From the information given, I would buy the property at the quoted price since it is within the market range.Among the factors that would I would consider while buying the property include but not limited to:(i) Presence of environmental pollutants within the immediate neighbourhood(ii) Zoning regulations that affect the immediate neighbourhood and the probability that the status quo could change in the near future(iii) The tenure of the title to the property, is it freehold or leasehold tenure?Flat rent refers to a situation where the monthly instalments paid by tenant is constant for a leasing period. In Graduated rent, landlord may increase monthly instalment rating without the consent of the tenant as earlier agreed during the contractual agreement. In indexed leasing, instalments increases proportional to a reported index.Returns in a real estate are resulted from rent. In indexed rent, landlord increases rent in proportional to a change in consumer price index. This means that landlord will always have maximum returns even in inflationary periods as inflations are passed down to tenants indirectly.Usable Square Feet refers to the total space within the perimeters of a leased space that a tenant would occupy, that is, insider the perimeters of the leased space. For a property leased by multiple tenants, every tenant raises a certain ratio of amount to pay for the property’s common area. Rentable square footage is the total area within the perimeters of the leased property. Every space is accounted for except common areas such as stair cases and elevators.Leasing amount differs with space. A firm has to substantiate which mechanism to use for it to lease a space. The less the rentable square footage, the less a company would spend in monthly instalments.In Triple Net Lease, a single tenant leases a property and pays for operating expenses together with monthly rent. Tenant will account for all utilities. In Gross leasing, the tenant has responsibility of paying to the landlord the monthly instalments. Landlord pays for the operating expenses. The rent paid by the tenant is constant.In Triple Net Leasing, landlord has positive cash flows. He is receiving money from the tenants. The net cash flows is a way than in gross leasing. Operating expenses are incurred by the tenant.As a tenant I would prefer Gross Leasing over Triple Net Lease. The payable rent is a calculated regarding on estimates of costs incurred by the landlord, a tenant can presume the flow of costs and hence can plan on a probability of a flow of monthly leasing payment.According to Section 4.1 of the lease agreement, Minimum Rent means the Rent payable which is the rate per square foot of Floor Area of the Premises, and in the amount per month and per year, applicable during each Lease Year.Percentage Rent is the rent payable to the landlord as a percentage of the income that the tenant generates from the continued occupancy of the premises.Additional rent refers to the extra amount that the tenants will be paying to the landlord to cater for such expenses as taxes among others.The concept of assignments and sublettingIn this section, different terms have been described such as the Landlord’s right to recapture which describes the circumstamces under which the landlord may take possession of the property that he has let out, Consent not to unreasonably withhold which describes what ought to happen in the event one party is withholding consent from the other one.The section also has a sub-section that deals with permitted transfers and deemed assignments which in detail describe the prevailing circumstances and the method that can be used to resolve different disputes that could arise for instancethe tenant can issue a notice to the landlord and if the landlord doesn’t consent, assign the lease or even sublet the whole premises to any indivual(s) or entities: (i) that owns a majority of the equity interests in Tenant; (ii) a majority of the equity interests in which are owned by Tenant; or (iii) a majority of the equity interests in which are owned by the same individual(s) or entity that owns a majority of the equity interests in Tenant.For deemed assignments, there is the provision that if there is any substantive change in the partners or the members of the tenant if it is in the form of a partnership or LLC(limited liability company) and also in the event the tenant is a state corporation. With deemed assignments, there is the statement to the effect that if there is a transfer in the shares of the stocks of a tenant which leads to a substantive change in the identity of the ownership, then it effectively becomes an assignment in its own right in accordance to Section 13. An exemption is in the case where the transfer of the stock to the tenant who occupies a publicly held entity.ReferencesQizlet. https://quizlet.com/135090347/flashcards. 27. Mar. 2018.Krumhansi, B. “Gross vs Net: Understanding Different Types of Leases.” 29 Sept. 2017. https://www.crowdstreet.com/education/article/understanding-gross-vs-net-leases/. 27 Mar. 2018.O’Grady, B. “Difference Between Rentable Square Feet versus Usable Square Feet.” 29 Dec. 2013. https://www.propertymetrics.com/blog/2103/12/19/rentable-square-feet/. 27 Mar. 2018.Ohio-Reno-Route 7 North Lease – Route 7 Realty LLC and ADS Alliance Data Systems Inc.. https://contracts.onecle.com/alliance-data/route7.lease.2000.10.24.shtml. 27. Mar. 2018.

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