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Appraisals (Part 3 of 3) Approaches to Value | Real Estate Exam Prep Videos - YouTube
Channel: The Real Estate Classroom
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[Music]
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hey everyone my name is paul vachesky
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and welcome to the real estate classroom
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youtube channel like always before we
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get started in today's video give this
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video a thumbs up hit that red subscribe
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button click on the notification bell
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and comments and questions love them put
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them down below in the comment section
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all right this is video number three of
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a three-part
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series into the introduction of
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appraisals and so i'm gonna finish it up
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third video coming right up
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okay so in this video i'm going to
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finish up this third video which is a
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three-part series on just the
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introduction into the appraisal process
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uh if you have not watched the other two
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videos part one and part two i highly
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suggest that you watch that first or
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watch those first then come back to this
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one in this video we're gonna discuss
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the different approaches or the
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different types of appraisals that are
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out there there are
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three here's what we call the sales
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comparison approach or sometimes called
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the market
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data approach to value we have the cost
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approach
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to value and then the income approach to
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value i have all three listed on your
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screen
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and remember these are types of
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appraisals the appraiser needs to
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identify
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which type of appraisal they're going to
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need to do based on the type of property
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that they're they're trying to determine
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the value on
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all right so let's briefly discuss the
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three different types now keep this in
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mind i'm only going to give a general
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overview to provide that foundation of
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what each one of these are
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my next three videos i'm going to do a
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video
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individually on each one of these
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different types of appraisals
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and we're going to go through the math
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i'll show you how to do the adjustments
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and stuff like that
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this is just a fifty thousand foot view
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but it's very important conceptually
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the first type of approach that i have
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listed is the sales comparison approach
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so
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let's take a look at what that looks
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like
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typically we use the sales comparison
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approach or the market data approach for
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residential type properties
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land those type of things it compares
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the subject property
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the property we're trying to determine
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the value on is the subject property
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we're trying to determine
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the value of the subject property and we
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do that by
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by using comparables we call them
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comparables those are
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properties that are similar to our
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subject property
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there may be differences but they're
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generally similar
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that have recently sold in the general
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vicinity of the subject property
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and typically there's a time frame
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usually no more than six months old
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right that's what the appraisers are
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using we're determining the value
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by comparison homes um that are
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currently for sale very important homes
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that are currently for sale that are on
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the market that have not sold yet
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that have not gone under contract yet
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they are not
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included in this formula only sold and
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closed on properties are used now
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that's for the appraisal the appraiser
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that are doing these sales comparison
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approach appraisals
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understand real estate professionals
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that are doing competitive
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market analysis or the cma
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they do take into consideration
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homes that are currently on the market
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homes that are under contract
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those type of things and i'll give you
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an example if i'm trying to figure out
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the market value and remember there's
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two
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previous videos that i did this is the
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third one
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and one of the previous two videos in
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fact i think in both of them i discussed
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the cma and and the market value and
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what that means so
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go back and watch those and this will
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make more sense but if i'm
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if i'm if i'm an agent trying to
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determine the market value
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and i have a home that's in close
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proximity to my subject property the
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property i'm trying to find the value on
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and i notice that it's actively for sale
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at 250 000
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and my house is pretty similar to that
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house
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but that house has been on the market
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for six months
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but that area the average market time in
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that area is only two months
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then that's telling me that that 250 000
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price of that home that's for sale is
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too much it's overpriced so i need to
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take that in consideration when i'm
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trying to determine the value
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you know what value am i going to put
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this house up for sale
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appraisers don't look at it that way
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that's they only want
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homes that have sold and and the sale
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price of those homes
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because we each do two different things
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that's
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that's actually explained in the other
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two videos that's why you should watch
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them
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before you come to this one all right um
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a minimum
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of three comparables typically is
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required
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and then the uh when we're looking for
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those comparables or when the the
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appraiser is looking for those
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comparables they are going to
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start like in the neighborhood then
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they're going to move out a little bit
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further than a little bit further until
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they can get the
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comparables that they need and it says
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on here adjustments are made to the
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comparable properties
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for differences and then you add to the
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lesser property and subtract
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from the better property that seems very
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consum
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confusing and it will definitely be
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explained in those three videos that i'm
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going to do on each
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type of excuse me each type of appraisal
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but let me kind of
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give you the broad i guess overview what
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i'm talking about if this is the house
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that you want
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to do the appraisal on this is the house
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that we're trying to figure out
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the value for notice we have to do
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we figure that out by comparing
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properties that have already sold so we
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have
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this house that's two houses down that's
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similar the only difference is
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our subject property is let's say
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uh three bedrooms and the comparable
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that sold last month
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two houses down is four bedrooms and it
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has a little bit more square foot
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now how or what can we do adjustment
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wise to
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this one now this comparable sold for
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250 000
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last month so what can we do to this one
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which is bigger to make it look
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like our property here regarding
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an adjusted sale price we know this one
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sold for 250
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000. let's say the the appraiser has
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determined
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that bedrooms each bedroom in that
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neighborhood is valued at ten thousand
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dollars this has four
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this has three this sold for 250 000
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but it has four bedrooms so right away
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we know that we need to
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minus subtract ten thousand dollars from
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the sale price
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this sold last month for 250 so we're
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gonna minus ten thousand dollars for
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that fourth bedroom
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to make it look like our three bedroom
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and so this the the adjusted sale price
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goes from 250 000 down to 240
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000. so the actual sale price was 250
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now after we subtract 10 000 for that
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fourth bedroom
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it is now uh the adjusted sale price
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would be
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240 000. so that kind of gives us an
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idea that our subject property is
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valued at 240. three bedrooms are valued
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at 240
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and uh four bedrooms are valued at 250.
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again we're going to get really in
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detail with this
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on the video that uh where we talk about
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the sales comparison approach but i
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wanted to kind of introduce introduce
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you
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into the two concepts on your screen at
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the bottom adjustments are made to the
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comparable
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properties for differences between the
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two properties
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and then we add to the lesser and
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subtract from the better
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our comparable was better it had an
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extra bedroom it had four bedrooms
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so we subtracted from the
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better property to make it look like our
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subject
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so that's what we're gonna talk about
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all right
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what are we already talked about
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bedrooms but what are some of the things
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that we're going to
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adjust to the comparables what are
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different categories
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some of the categories are time age
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property location
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the size of the lot the number of
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bedrooms and bathrooms the number of
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garages
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those type of things maybe our subject
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property
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has three car garage but our comparable
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only has
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two car we're going to make the
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adjustments maybe our comparable has a
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fireplace and the compare i'm sorry
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subject property has a fireplace
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and our comparable does not we're going
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to make the adjustments to our
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comparables to reflect that
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in terms of dollars and that adjusted
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sale price
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so these are all the things that we're
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going to look at
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the next type is the cost approach that
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is the second type of appraisal i want
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to talk about in this video the cost
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approach
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considers today's cost to reasonably
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build or rebuild a dwelling of similar
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design
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similar utility those type of things
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this is that's something to remember
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this is the only type of appraisal out
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of the
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all three of them that considers
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depreciation
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and we're going to talk about
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depreciation in the next slide
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but here's the formula real simple
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the appraiser is going to determine the
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replacement cost
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they're going to minus the depreciation
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and then they're going to add back in
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the value of the land and that's going
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to give us
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the the appraised value using the cost
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approach
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so let's just dig in a little bit deeper
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here
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replacement costs i already said this
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but replacement cost is the cost
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required to rebuild a reasonable
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duplicate of this church or of this
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municipal building remember the cost
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approach to evaluation
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those type of appraisals are used for
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those unique type properties
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such as uh government buildings and
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schools and
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and churches uh those type of things and
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how does the appraiser come up with that
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replacement cost there are we're not
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going to talk about
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them in the video because you don't need
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to know but understand the
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appraiser has access to a lot of
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services that they that they're members
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to
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that will give them the information for
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replacement costs and those type of
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things so the appraiser is going to
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determine
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what the replacement cost is to rebuild
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that property in today's dollars
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then they're going to minus out
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depreciation
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now understand the definition of
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depreciation in real estate is a loss of
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value from any reason
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there are three types of depreciation
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that we're gonna uh we're gonna discuss
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or that are relevant to real estate
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there's something you need to know and
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they're right there on your screen the
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first one is
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physical depreciation that's normal wear
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and tear if a homeowner does not keep up
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their property
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then depreciation sets in because the
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material condition of that property
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is going down the appraiser is going to
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note that and
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and put a dollar value to that physical
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depreciation
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another one is functional obsolescence
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and then economic
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obsolescence those are the other two now
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functional obsolescence can be curable
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or incurable and then economic
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obsolescence can be curable and
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incurable so what is functional
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obsolescence well
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that has to do with things like is the
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property updated or not
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uh does it have updated wiring or not
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does it have updated plumbing or not
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does it um
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does it is it a bad floor plan is it a
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seven bedroom house with
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one bathroom those type of things
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what makes it curable and incurable is
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the
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dollar amount so let me give you an
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example
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let's look at your screen there an
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example of curable
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functional obsolescence is
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the the home is just simply outdated or
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it's outdated and it needs to be updated
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maybe the appliances are out of date
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those type of things now
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what could make that incurable
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and it happens there's a part of town
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here in omaha where i live
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where everybody wants that area because
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it has a fabulous school
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it's a fabulous school district and
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they'll pay two three four hundred
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thousand dollars for a house that sits
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on a lot
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and then completely tear the house down
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and rebuild a new one
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because it would cost more
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to do the updates to the house
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than it would be just to tear it down
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and rebuild it that's an example of
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incurable functional obsolescence
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all right economic obsolescence can be
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curable or incurable so you may have a
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beautiful house that's well maintained
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uh it's got a great floor plan but it's
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just in a bad part of town a declining
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part of town that
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individual homeowner has no control over
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what the
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uh the the economy and the surrounding
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you know the community is doing so that
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would be an example of
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incurable economic obsolescence
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neighborhood conditions determine
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the value and whether or not it's
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curable or incurable
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and then the third component of cost
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approach to value
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is the land value and this is
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interesting because to determine the
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actual land value
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um the appraiser is going to use the
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cost or the
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sales comparison approach to determine
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what the land value is interestingly
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enough
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so one other thing you have to know is
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you just have to know this not only for
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the test but as a real estate
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professional
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as you get into the business you're
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going to learn more about depreciation
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and straight-line depreciation and all
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that that we see with investment
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properties but
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land itself never depreciates ever
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so just one of those things you need to
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know as a real estate professional
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all right the third type of appraisal i
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want to talk about is called the
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income approach to value this is where
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we use
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the income that the property produces
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to generate the value or determine the
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value
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and there are two methods one is called
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the gross rep multiplier and one is
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called the capitalization rater
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commonly known as the cap rate now the
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gross rent multiplier
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is used for those smaller rental
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properties
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most of the time they're residential
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they're the single family to four plex
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or maybe a duplex triplex you know that
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one to four family unit
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uh residential property the formula
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again these formulas i'm going to get in
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great detail
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in the individual video that i'm going
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to do for the income approach but
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just so you're kind of introduced to it
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it's the gross
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monthly rent that that property produces
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times the gross rent multiplier again
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i'm gonna i'll
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i'll explain in that video how we come
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up with the
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the gross rent multiplier and that
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equals the value of the property
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now in the capitalization rate the
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formula is the net
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operating income divided by the
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rate or the desired rate of return that
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that
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investor wants equals the value we call
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it the
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irv irv formula
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again we're going to really dive into
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that but this the capitalization rate is
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used for larger residential properties
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they're used for commercial retail
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and those type of properties and that's
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what an appraiser would use
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the income approach for those type of
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properties
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now the first video i'm going to do is
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on the sales comparison approach
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and a link to that video is right here
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to my right in the box if you have not
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subscribed to the channel yet please do
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so click the little circle to my left
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as always comments and questions down
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down below in the comment section
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love comments and questions that's all i
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got for this three
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video series thanks for hanging with us
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and i'll see you
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in the next video
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