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Pitfalls in the APPRAISAL PROCESS

Pitfalls in the APPRAISAL PROCESS. June 2014. Presentation to: Real Estate Expert Summit. Introduction.

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Pitfalls in the APPRAISAL PROCESS

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  1. Pitfalls in the APPRAISAL PROCESS June 2014 Presentation to: Real Estate Expert Summit

  2. Introduction The following slides are the frame work of a presentation I made to Ossie Jurock’ Real Estate Expert Summit. After outlining the appraisal process, I have highlighted areas where a person, receiving an appraisal, should carefully review and evaluate their investment, making sure that the appraisal or research received has addressed all the relevant issues. When reviewing data ask yourself “WHY”.

  3. Project Evaluation Every investor, prior to making a decision to invest should under take due diligence. This can be achieved in any of the following ways. Your own experience New research Hiring a consultant Order an appraisal Rely on promoters’ documentation

  4. An Appraisal What is an appraisal? Are there different types of appraisals? Why obtain an appraisal? How is the appraiser remunerated? A representation of CURRENT circumstances.

  5. Definition of an Appraiser An appraiser is one who compiles and analyzes voluminous data of problematical accuracy from sources of dubious veracity and derives therefrom a numerical quantification of unquestionable necessity, analogous to a nebulous and euphemistic concept representational of value commensurate with ambient configurations of the open market and promulgates thereby a precise written declamation which delineates his observation, deliberations and conclusions

  6. An Appraisal There are many different reasons for an appraisal An appraised value is an interpretation of data Poor data can result in an incorrect value as can an ill informed interpretation Determine why & for whom the appraisal was done Reliance on a conservative appraisal, could result in a missed opportunity There can be a range of values for any property

  7. Your Property Yourself

  8. Your Buyer

  9. Your Bank

  10. Tax department

  11. Assessed Value Be careful when using the assessed value for making investment decisions. • BC Assessment undertake mass appraisal • They may not be aware of physical changes to a property • Their value is based upon economic rent not actual rent • The fee simple interest is appraised. • It can be high ( I appeal assessments every year) or low.

  12. Methods of Valuation Income approach Gross rent multiplier Comparative approach Cost approach

  13. Income Approach Components • Gross income • Vacancy • Expenses • Yield rate derived from market analysis Value = Net Income / Yield rate Yield rate = Net income/ Price Value = Gross Income x Gross rent multiplier

  14. Expenses

  15. More Expenses • Repairs & Maintenance • Heat & Light • Cablevision • Elevator • Advertising • Misc;admin • Security/tele, • Capital Reserve

  16. Comparative Approach • Compares a specific unit of value • Comparative unit derived from sales analysis • Square footage • Suite • Room In any comparative analysis, whether it be rental, cap rate, expenses or unit of comparison, make sure you are comparing APPLES with APPLES.

  17. Cost Approach • Land • Building • Depreciation • Physical • Economical • Functional Value = Land Value plus Building Cost New x % Depreciation Cost may be higher than value

  18. Review of Collected Data Neighbourhood Property Economy Highest and Best Use Rental and expense analysis Capitalization rates Comparative analysis Averages – UGH!!!

  19. Reasonableness of Conclusions Is the value arrived at in the appraisal logical given the available data? Has the appraiser taken all reasonable steps to arrive at the conclusion? Does the appraisal or research completed fully satisfy the needs of the investment analysis? What other considerations should be taken into account?

  20. Further Considerations Negatives of the property or the area Reliability of the assembled data Physical condition of the building Future requirements for the property Current and proposed competition Alternative uses Value added Rezoning potential

  21. More Considerations Future potential Risk / Reward relationship Security of income Security of capital Liquidity

  22. Questions? Peter Austin, AACI. BSc. CArb.AUSTIN REAL ESTATE CONSULTANTS4099 Springtree DriveVancouver, BC V6L 3E2Ph: 604-733-3282 Email: paustin@telus.net URL: www.austinrealestateconsultants.ca

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