A Fundamentals of Real Estate APPRAISAL 10th Edition William L. Ventolo, Jr. Martha R. Williams, JD Dennis S. Tosh, PhD William B. Rayburn, PhD, MAI, CFA Consulting Editors Dearb rri Real Estate Education
CONTENTS PREFACE xi ABOUT THE AUTHORS xiii ACKNOWLEDGMENTS xv CHAPTER 1 The Appraisal Profession 1 Key Terms 1 Learning Objectives 2 Overview 2 The Appraiser's Work 3 Assignments Available 3 Employment Opportunities 4 Appraiser Compensation 5 Exercise 1.1 6 Licensing and Certification 6 FIRREA 7 Appraiser Licensing 7 The Appraisal Foundation 8 Qualifications of an Appraiser i Exercise 1.2 11 Other Federal Regulation 12 Fair Housing 12 Environmental Concerns 12 Subprime Lending Crisis 12 Professional Standards of Practice 14 Exercise 1.3 19 Professional Groups 19 The Modern Appraisal Office 22 The Backup System 22 The Internet 23 Geographic Information Systems (GIS) 23 The Camera 23 Use of Technology 24 Exercise 1.4 24 Summary 24 Review Questions 25 CHAPTER 2 Appraisal Math and Statistics Key Terms 27 Learning Objectives 28 Overview 28 Calculators 29 Percents 29 Converting Percents to Decimals 30 Converting Decimals to Percents 30 Converting Fractions to Decimals 30 Exercise 2.1 31 Percentage Problems 31 Problem-Solving Strategy 33 Exercise 2.2 35 Interest 35 27 Simple Interest 35 Compound Interest 36 Exercise 2.3 38 Exercise 2.4 38 Area and Volume 39 Area of Squares and Rectangles 39 Exercise 2.5 42 Area of Triangles 43 Exercise 2.6 45 Area of Irregular Closed Figures 45 Exercise 2.7 46 Living Area Calculations Exercise 2.8 48 Volume 48 47 iii
IV Exercise 2.9 51 Statistics 52 Population and Sample 52 Organization of Numerical Data 53 Measures of Central Tendency 54 Measures of Dispersion 55 Graphic Presentation of Data 57 Normal Distribution 59 Exercise 2.10 61 Skewness 61 Regression Analysis An Old Technique with a New Use 61 Summary 63 Review Questions 63 CHAPTER 3 Real Estate and Its Appraisal 69 Key Terms» 69 Learning Objectives 70 Overview 70 Basic Concepts 70 What Is a Real Estate Appraisal? 70 Real Estate and Real Property 71 Personal Property 74 Exercise 3.1 75 Legal Descriptions of Land 76 Lot and Block System 76 Metes and Bounds System 76 Rectangular Survey System 78 Exercise 3.2 79 Legal Rights and Interests 81 Freehold Estates 81 Nonfreehold Estates 82 Other Interests 83 Forms of Property Ownership 85 Individual Ownership 85 Co-Ownership 85 Business and Trust Ownership of Real Estate 89 Special Forms of Ownership 90 Exercise 3.3 91 Summary 92 Review Questions 93 CHAPTER 4 Real Estate Transactions 97 Key Terms 97 Learning Objectives 98 Overview 98 The Offer to Purchase 98 Elements of a Valid Contract 99 Exercise 4.1 101 Contract Terms 101 Contract Language 103 Discharging a Contract 103 Record Retention 104 Exercise 4.2 105 Transfer of Title 105 Requirements for a Valid Deed 105 Types of Deeds 106 Recordation 107 Exercise 4.3 108 Lease Agreements 108 Fair Housing 108 Residential Leases 109 Commercial Leases 110 Ground Leases 111 Exercise 4.4 112 Summary 112 Review Questions 113 CHAPTER 5 The Real Estate Marketplace 117 Key Terms 117 Learning Objectives 118 Overview 118 The Market for Real Estate 119 Characteristics of Real Estate Markets 119 Market Analysis 120 The Cost of Credit 121 How Real Estate Is Financed 122 Elements That Create Value Influences on Real Estate Value 127 Exercise 5.1 129 Basic Value Principles 129 Anticipation 130 Balance 131 Change 131 Competition 131 124
Conformity, Progression, and Regression 132 Contribution 132 Externalities 133 Four Factors of Production 133 Growth, Equilibrium, Decline, and Revitalization 133 Highest and Best Use 134 Law of Increasing Returns and Law of Decreasing Returns 134 Opportunity Cost 135 Substitution 135 Supply and Demand 136 Surplus Productivity 136 Conclusion 136 Exercise 5.2 136 Summary 138 Review Questions 139 CHAPTER 6 The Appraisal Process 143 Key Terms 143 Learning Objectives 143 Overview 144 Steps in the Appraisal Process 144 Beginning the Appraisal Process 148 Purpose and Use of the Appraisal 148 Interests to Be Appraised 148 Date of the Opinion of Value 149 Limiting Conditions 149 FHA Appraisals 153 Valuation Approaches 154 Sales Comparison Approach 154 Cost Approach 155 Income Capitalization Approach 156 Exercise 6.1 158 Relationship of Approaches 158 Exercise 6.2 159 Summary 160 Review Questions 161 CHAPTER 7 Building Construction and the Environment 163 Key Terms 163 Learning Objectives 163 Overview 164 PART I: BUILDING PLANNING AND DESIGN 165 Regulation of Residential Construction 165 Plans and Specifications 165 Building Measurement 166 House Styles 167 Traditional Styles 168 Contemporary Styles 168 House Types 168 The One-Story House 171 The One-and-a-Half-Story House 171 The Two-Story House 171 The Split-Level House 171 The Split-Entry House 172 Factory-Built Houses 173 Orientation: Locating the House on the Site 174 Topography 174 Facing to the South 174 View 174 Exercise 7.1 175 PART II: CONSTRUCTION DETAILS 175 Foundations 176 Concrete Slab 177 Pier and Beam 177 Termite Protection 177 Radon Gas 177 Exterior Structural Walls and Framing 179 Platform Frame Construction 179 Balloon Frame Construction 179 Post and Beam Frame Construction 181 Exterior Walls 181 Insulation 182 Roof Framing 183 Roof Coverings 183 Exterior Trim 184 Exterior Windows and Doors 184
VI Types of Windows 184 Energy-Efficient Windows Noise Pollution 187 Types of Doors 187 Location of Exterior Doors Interior Walls and Finishing Plumbing 190 Plumbing Fixtures 191 Water Heaters 191 186 189 189 Heating and Air-Conditioning 191 Solar Heating 193 Electrical System 194 Power Requirements 194 Electric and Magnetic Fields 195 Green Building 195 Exercise 7.2 196 Summary 197 Review Questions 199 CHAPTER 8 Data Collection 201 Key Terms 201 Learning Objectives 201 Overview 202 Step 1: Identify the Problem 202 Property Rights Conveyed 203 Exercise 8.1 204 Step 2: Determine the Scope of Work 204 Step 3: Gather, Record, and Verify the Necessary Data 205 The Data Bank 205 The Data Source List 208 Exercise 8.2 211 Data Forms 212 Neighborhood Data 212 Exercise 8.3 215 Site Data 218 Exercise 8.4 220 Building Data 220 Exercise 8.5 223 Data for Sales Comparison Approach 224 Recent Sales 225 Similar Features 226 Financing Terms 228 Exercise 8.6 230 Arm's-Length Transactions 230 Sources of Data 231 Exercise 8.7 232 Summary 233 Review Questions 234 CHAPTER 9 Site Valuation 237 Key Terms 237 Learning Objectives 238 Overview 238 Separate Site Valuations 238 Cost Approach 239 Assessments and Taxation 239 Condemnation Appraisals 239 Income Capitalization 239 Highest and Best Use 239 Exercise 9.1 245 Site Data 245 Identification 245 Analysis 245 Environmental Concerns 246 Methods of Site Valuation 247 Sales Comparison Method 248 Exercise 9.2 249 Allocation Method 250 Exercise 9.3 250 Abstraction (Extraction) Method 250 Subdivision Development Method 251 Exercise 9.4 253 Ground Rent Capitalization Method 254 Summary 254 Review Questions 255 CHAPTER 10 The Cost Approach Part I: Reproduction/Replacement Cost 257 Key Terms 257 Reproduction Cost versus Learning Objectives 257 Replacement Cost 259 Overview 258 Exercise 10.1 260 Cost Approach Formula 258 Determining Reproduction/ Replacement Cost 261
VII Index Method 262 Exercise 10.2 263 Square-Foot Method 263 Exercise 10.3 267 Unit-in-Place Method 268 Exercise 10.4 273 Quantity Survey Method 274 Exercise 10.5 277 Summary 277 Review Questions 278 CHAPTER 11 The Cost Approach Part II: Depreciation 281 Key Terms 281 Learning Objectives 282 Overview 282 Accrued Depreciation 282 Physical Deterioration 282 Functional Obsolescence 283 External Obsolescence 284 Evaluating Depreciation Sources 285 Age-Life Method 287 Exercise 11.1 290 Observed Condition Method 290 Exercise 11.2 293 Capitalized Value Method 294 Exercise 11.3 294 Market Extraction Method 295 Exercise 11.4 296 Itemizing Accrued Depreciation 296 Exercise 11.5 298 Exercise 11.6 298 Cost Approach Using the URAR Form 299 Exercise 11.7 300 Exercise 11.8 301 Summary 311 Review Questions 311 CHAPTER 12 CHAPTER 13 The Sales Comparison Approach 313 Key Terms 313 Learning Objectives 313 Overview 314 Step 3: Gather, Record, and Verify the Necessary Data (Continued) 314 Comparison Grid 314 Step 4: Data Analysis 320 Step 5: Form Opinion of Land Value 321 Step 6: Form Opinion of Value by Sales Comparison Approach 321 Types of Adjustments 321 Compute Adjustment Values 322 The Income Capitalization Approach Key Terms 345 Learning Objectives 346 Overview 346 The Income-Based Approaches to Appraisal 347 Income Capitalization and the Principle of Anticipation 347 Potential Gross Income 348 Rent 348 Exercise 13.1 351 Outside Economic Factors 351 Other Income 352 Exercise 12.1 326 Sequence of Adjustments 326 Exercise 12.2 327 Record Information 331 Exercise 12.3 332 Net Adjustments 332 Exercise 12.4 335 Opinion of Value 335 Exercise 12.5 335 Application of Sales Comparison Approach 338 Summary 338 Review Questions 339 345 Exercise 13.2 353 Effective Gross Income 353 Exercise 13.3 355 Net Operating Income 355 Classification of Operating Expenses 355 Expenses for Accounting Purposes versus Expenses for Appraisal Purposes 356 Reconstructing the Operating Statement 357 Exercise 13.4 357
VIII Operating Statement Ratios 360 Exercise 13.5 361 Gross Income and Gross Rent Multipliers 362 Exercise 13.6 364 Applying the GRM to Residential Properties 364 Income Approach Using the URAR Form 366 Summary 366 Review Questions 367 CHAPTER 14 Direct and Yield Capitalization Key Terms 371 Learning Objectives 372 Overview 372 Direct Capitalization Formula 373 Capitalization Rate 373 Exercise 14.1 375 Building a Capitalization Rate 376 Selecting the Rate for Capital Recapture 377 Selecting the Interest Rate by the Market Extraction Method 378 Exercise 14.2 379 Band of Investment Method Mortgage and Equity Elements 379 Relationship of Capitalization Rate and Risk 380 Exercise 14.3 380 Capitalization Techniques Using Residual Income 380 371 Building Residual Technique 381 Exercise 14.4 382 Land Residual Technique 382 Exercise 14.5 383 Valuing the Land and Building as a Whole 383 Exercise 14.6 384 Yield Capitalization 384 Value of One Dollar 385 Annuity Method of Capitalization 387 Building Residual Technique 389 Exercise 14.7 390 Valuing the,property as a Whole 390 Exercise 14.8 391 Recapture Rates 393 Exercise 14.9 394 Ellwood Tables 394 Summary 395 Review Questions 396 CHAPTER 15 Reconciliation and the Appraisal Report 401 Key Terms 401 Learning Objectives 401 Overview 402 Definition of Reconciliation 402 The Process of Reconciliation 402 Exercise 15.1 403 Review of the Three Approaches 403 Weighing the Choices 405 Exercise 15.2 406 Reconciliation Is Not... 406 Types of Appraisal Reports 407 Styles of Written Appraisal Reports 408 Form Report 408 Narrative Report 409 Introduction 409 Suppositions of the Appraisal 410 Presentation of Data 411 Data Analyses and Conclusions 413 Supporting Material 415 Exercise 15.3 415 Sample Appraisal Report 415 Form 2075 415 Exercise 15.4 419 Summary 428 Review Questions 428
ix CHAPTER 16 Appraising Partial Interests 431 Key Terms 431 Learning Objectives 431 Overview 432 Types of Partial Interests 432 Condominiums 432 Planned Unit Developments 434 Fannie Mae Form 1073: Individual Condominium Unit Appraisal Report 434 Time-Share Projects 441 Manufactured Homes 441 Other Forms of Ownership 442 Exercise 16.1 442 Appraising Lease Interests 443 Lease Terminology 443 Creation of Lease Interests 444 Exercise 16.2 446 Leased Fee and Leasehold Valuations 447 Exercise 16.3 451 Summary 451 Review Questions 452 APPENDIX A State Real Estate Appraiser Licensing/Certification Boards 455 APPENDIX B Web Sites 461 GLOSSARY 465 ANSWER KEY 483 INDEX 537