Real Estate Division
BUSI 330: Foundations of Real Estate Appraisal
Session 5
Presented by Chuck Dunn
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Introduction
Welcome to the third of five sessions for the Foundations of Real Estate Appraisal
• Session 1 Introduction. Lesson 1, 2 – August 24, 2017 Archived
• Session 2 Lesson 3, 4, 5 and 6. Discuss Project 1 – September 14, 2017 Archived
• Session 3 Lesson 7, 8 and 9 – October 12, 2017 Archived
• Session 4 Lesson 10 and11. Discuss Project 2 November 2, 2017 Archived
• Session 5 Preparation for the Final Exam November 16, 2017
NOTE: Project 1 is due October 11, 2017
Project 2 is due November 15, 2017
Exam is written December 7, 2017
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About Your Course Tutor
• Chuck Dunn is one of the three BUSI 330 tutors
• Graduated from the Faculty of Commerce, UBC
• Worked as a fee appraiser
• Taught real estate appraisal courses at Langara College for over 20 years
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About Your Course Tutor
Presently an active realtor in Vancouver
Chuck Dunn, AAIC, Retired
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Sauder Website for BUSI 330
The website for this course has the following:
• Additional Readings – Review and Discussion Questions – Chuck Dunn’s Review Notes
• Student Discussion Group – Review topics found in the Discussion Group as they
may assist you in understanding a concept that is not clear to you
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Exams
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Exam Format
Exam is 3 hours, 180 minutes. 100 marks
2 Parts
• Part 1: 3-4 short answer questions 25 marks (+/- 25 minutes)
• Part 1: Two case studies: – Direct Comparison/Cost Approach -Residential 25 marks – Income Approach -Small apartment/Commercial building
10 marks
• Part 2: 40 multiple choice questions 40 marks (+/- 40 minutes)
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Exam Tips
• Write clearly so the grader can read and follow your answers
• Rough work on left side
• Finished work on the right side
• Show your work to receive part marks if answer is incorrect
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Exam Tips
Equipment Required for the Exam
• Pens, pencils, ruler, coloured highlighter, calculator, eraser, wrist watch
• Do not SQUASH your answers
• Spread them out; easy to read/mark
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Exam Tips
Some Tips from the Student Handbook
• Page 20 - In written questions match the amount you write to the marks for the question
• For multiple choice questions rule out the obvious incorrect answers, then choose the BEST answer from the remaining choices
• Avoid second guessing yourself. Go with your “gut reaction”
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Exam Tips
Extra exam booklets are available. They are Number booklets 1 of 2 and 2 of 2 Do not write your name on the booklet, only your
student number
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Study Tips Available
In total there are 436 ways to review the course material for the exam
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Study Tip Sources
Foreword-Multiple Choice-Learning-Review
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Study Tips
Foreword to the course has 12 General Objectives of what a student should learn from the course
• There are 200 Multiple Choice Questions that you answered from the 10 lessons
• There are 101 Learning Objectives you can review and answer
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Study Tips • There are 123 Review and Discussion questions with
answers on your student page.
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Study Tips
• Do not study and cram until the last minute.
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Study Tips
• Get a good nights sleep so you are rested and relaxed.
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Study Tips
• Arrive early and know the location of the building and room number
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Webinars
• Review the archived Webinars for this term
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Study Tips
• For additional assistance please contact your tutor or visit the Student Discussion Group on the website
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Study Tips – Cost Approach
Know How to Calculate:
1. Land values
2. The reproduction cost new of a house
3. Depreciation
4. Summarize the Cost Approach.
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Study Tips - Direct Comparison Approach
Know How to:
• Make Adjustments for changing Market Conditions (Time or Market Condition Adjustment)
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Study Tips - Direct Comparison Approach
• Making Adjustments for other variations between the Comparables and the Subject
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Study Tips - Direct Comparison Approach
• Understand the Order of the Adjustments
• Write a good Reconciliation based on the adjusted value of the comparables
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Study Tips - Income Approach
Know How to:
• Prepare a typical operating profit and loss income statement
• Calculate and apply the ross Income ultiplier (GIM)
• Calculate and apply the Capitalization Rate
• Write a Comprehensive Reconciliation
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Comments on the Questions
Comments on the Three Approaches to Value
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Cost Approach
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Cost Approach – Land Adjustments
Market Conditions or Time Adjustment for Land
• Sale 1 sold January 1 for $100,000
• Sale 1 re-sold July 31 for $114,000
$14,000/$100,000 = 14% increase over a 7 month period or 2% per month
Or if no re-sales then use sales of similar lots/improved properties to calculate Time Adjustments
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Cost Approach – Land Adjustments
Market Conditions or Time Adjustment
• Apply the increase to comparables sale prices to bring them up to the date of the appraisal
• If comparable #1 sold 5 months before the appraisal date for $100,000, then today it should sell for 10% more (2% (see previous slide) x 5 months)
• Repeat for all comparables
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Cost Approach - Replacement Cost New
• To find the construction cost new of a house look at sales of new homes. Deduct a reasonable land value from the sale price. Divide the resultant figure, less any outbuildings or garage, by the square feet/metres of the house to find the cost to build on a square feet/metre basis
• Other sources for costing a new house are local contractors and/or costing services, such as Marshall and Swift
• Apply that cost per square to the subject house to estimate the cost to build it today
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Cost Approach - Depreciation Age/Life Method
• To find the depreciated cost of an older house use its estimated “Effective Age” divided by its Economic Life. This is called the “Age-Life Method”
• Estimated Effective Age = 15 years, Actual Age is 20 years and Economic Life = 60 years.
• Depreciation is 15/60 or 25%
• Use EFFECTIVE & DO NOT USE THE ACTUAL AGE for this calculation
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Cost Approach - Site Improvements
• Know the definition of Site Improvements as students often include some of the house improvements in this section
• Examples of Site Improvements are: driveways, landscaping, retaining walls, fences, etc
• Determine the depreciated value of any Site Improvements by applying it’s own age/life to the cost
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Cost Approach - Site Improvements Retaining walls
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Cost Approach - Site Improvements Flower beds and Grass
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Cost Approach - Site Improvements Fences
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Cost Approach - Summary
• Know how to summarize the Cost Approach which is composed of the following: 1. Land Value
2. Cost New of all Improvements (except Site Improvements)
3. Less any applicable depreciation
4. Plus depreciated value of any site improvements equals
5. Final Estimate of Value by the Cost Approach
6. Round off the Final Estimate of Value
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Cost Approach - Summary
Summary of Cost Approach
Value of Site, as if Vacant
$100,000
Replacement Cost New of House
Depreciation of House to date
Depreciated Value of House
Depreciated Value of Site Improvements
Estimated Value by Cost Approach
_________
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Cost Approach - Summary
Summary of Cost Approach
Value of Site, as if Vacant
$100,000
Replacement Cost New of House
Depreciation of House to date
Depreciated Value of House
Depreciated Value of Site Improvements
Estimated Value by Cost Approach
$250,000
_________
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Cost Approach - Summary
Summary of Cost Approach
Value of Site, as if Vacant
$100,000
Replacement Cost New of House
Depreciation of House to date
Depreciated Value of House
Depreciated Value of Site Improvements
Estimated Value by Cost Approach
$250,000
($30,000)
_________
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Cost Approach - Summary
Summary of Cost Approach
Value of Site, as if Vacant
$100,000
Replacement Cost New of House
Depreciation of House to date
Depreciated Value of House
Depreciated Value of Site Improvements
Estimated Value by Cost Approach
$250,000
($30,000)
$220,000
_________
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Cost Approach - Summary
Summary of Cost Approach
Value of Site, as if Vacant
$100,000
Replacement Cost New of House
Depreciation of House to date
Depreciated Value of House
Depreciated Value of Site Improvements
Estimated Value by Cost Approach
$250,000
($30,000)
$220,000
$ 7,500 _________
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Cost Approach - Summary
Summary of Cost Approach
Value of Site, as if Vacant
$100,000
Replacement Cost New of House
Depreciation of House to date
Depreciated Value of House
Depreciated Value of Site Improvements
Estimated Value by Cost Approach
$250,000
($30,000)
$220,000
$ 7,500 _________ $ 327,500
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Direct Comparison Approach
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Direct Comparison Approach - Adjustments
• Know how to derive and make simple market adjustments using the market data from the question
• Do “Time Adjustments” first and then all other
•
• adjustments based on this new Time Adjusted Figure
• Same procedure as for Land adjustments
• Review the Order of Adjustments - see text and workbook
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Direct Comparison Approach - Adjustments
• Other adjustments can be for location, condition, garage, basement finish
• Adjustments are made to make the comparables equal to the subject, as the subject is the benchmark property
• The object is to narrow the range of the comparable prices
• After adjusting all the comparables they should indicate a reasonable range of value for the subject
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Direct Comparison Approach - Adjustments
Adjustments
Comparable Property Adjustment
Inferior features in relation
to the subject
Add some dollar value to
make it equal to the subject
Superior features in relation
to the subject
Deduct some dollar value to make it equal to the subject
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Direct Comparison Approach - Reconciliation
• Summarize in a sentence or two your adjustments for each comparable – why and how. Reasons are very important
• Finally write a reconciliation indicating which comparable(s) best indicates an estimated value for the subject
• Do not average but pick the best comparable(s) as an indication of the estimated value for the subject.
• Use other comparables as support for this estimated value
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Final Reconciliation
• Once you have completed the two approaches then write a full Final Reconciliation indicating why the Cost or Direct Comparison Approach best indicates a value for the subject
• If the two approaches are too far apart in value then both approaches are suspect. They must support each other
• Review the Reconciliation section of the textbook for further guidelines in writing a reconciliation
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Income Approach
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Income Approach - Overview
Overview of the Income Approach
• Estimate the Effective Gross Income (EGI)
• Deduct the Normal Operating Expenses
• Resultant Figure is the Net Operating Income (NOI)
• Convert NOI to a Capital Value using a market capitalization rate
• And/or apply the GIM to the EGI to arrive at a Capital Value
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Income Approach - Income and Expense Statement
• Appraisers must try to accurately estimate the NOI of a property and determine the appropriate capitalization rate when valuing an income producing property
• Small variations in either can translate into large amounts when capitalized
• For example every $1,000 of NOI translates into $10,000 of value using a 10% capitalization rate
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Income Approach – Normalize the Profit and Loss Statement
• Review the owner’s Profit and Loss Statement and adjust their statement so it reflects the normal operating costs to operate the property to ensure a steady income flow for the year.
• Remove expenses that are not normal operating expenses, such as Mortgage Payments, Income Taxes and Depreciation, as they are not required to operate a building.
• But maybe necessary when owning a building
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Income Approach - Summary
Potential Gross Income $150,000 100%
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Income Approach - Summary
Potential Gross Income $150,000 100%
Less Vacancy and Collection say 3% ($4,500) 3%
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Income Approach - Summary
Potential Gross Income $150,000 100%
Less Vacancy and Collection say 3% ($4,500) 3%
Effective Gross Income $145,500 97%
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Income Approach - Summary
Potential Gross Income $150,000 100%
Less Vacancy and Collection say 3% ($4,500) 3%
Effective Gross Income $145,500 97%
Less Normal Operating Expenses ($45,500) 30%
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Income Approach - Summary
Potential Gross Income $150,000 100%
Less Vacancy and Collection say 3% ($4,500) 3%
Effective Gross Income $145,500 97%
Less Normal Operating Expenses ($45,500) 30%
Net Operating Income $100,000 67%
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Income Approach - Capitalization Rate
• Review the comparable sales to derive a capitalization rate for each of them and then reconcile these rates into a final capitalization rate to be used for the subject’s NOI
• Capitalization Rates are derived by dividing the NOI of the comparables by their selling price to arrive at a percentage figure
EXAMPLE • NOI of $100,000 divided by a sale price of $1,000,000
indicates a capitalization rate of 10%
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Income Approach - Gross Income Multiplier
• The Gross Income Multiplier is another method to value an income producing property
• The multiplier is derived by dividing the Selling Price of a property by its estimated Effective Gross Income
• For example a property selling for $1,000,000 with an Effective Gross Income of $145,500 the multiplier is ($1,000,000/$145,500) = 6.87. This is NOT a % or $ figure
• Just a multiplier figure
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Income Approach - Summary
Capitalization of NOI
$100,000/10% = $1,000,000
Gross Income Multiplier
$145,500 x 6.87 = $999,585, round to $1,000,000
Reconcile them into a Final Estimate of Value
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Income Approach - Valuation
• The two approaches should support each other with no large differences. If any then review calculations
• Next reconcile them into a Final Estimate of Value
• Your reconciliation should explain the reasons for relying on either or both the GIM or the Capitalization method
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Summary
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Final Exam Comments
Examination Information
1. Note if more than one exam book used
2. Submit all exam papers back to the course monitor
3. Only student number appears on exam, not your name
4. Right hand side is for the answer
5. Left hand side is for rough work
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Final Exam Comments
Examination Information – continued
1. Plan answers so they are easy to find and read, i.e., number them correctly
2. Show work for partial marks if answer is incorrect
3. Write clearly and neatly so answer is easy to read and understand
4. Use a pen or dark pencil for easy reading. Not this
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Final Exam Comments
• Read questions very carefully and make sure your answer is related to the question.
• If asked to make comparisons then one heading for the good points and then list the points.
• Another for the bad points and then list the main points
• If completing a chart make sure all information is listed in the left hand column.
• Reconciliations are worth marks so make sure they are well written and informative to the reader. Mention the key points that will make sure the reader agrees with your final value.
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Exam Location
• You can find the exam centre information in your online “Exam Centre” link, which you can access once you login to your website.
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Thank you for your participation in the BUSI 330 exam study review
EXAM DATE
December 7, 2017
Archived
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Introduction
Welcome to the third of five sessions for the Foundations of Real Estate Appraisal
• Session 1 Introduction. Lesson 1, 2 – August 24, 2017 Archived
• Session 2 Lesson 3, 4, 5 and 6. Discuss Project 1 – September 14, 2017 Archived
• Session 3 Lesson 7, 8 and 9 – October 12, 2017 Archived
• Session 4 Lesson 10 and11. Discuss Project 2 November 2, 2017 Archived
• Session 5 Preparation for the Final Exam November 16, 2017
NOTE: Project 1 is due October 11, 2017
Project 2 is due November 15, 2017
Exam is written December 7, 2017
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Questions from students
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Feedback and Questions
For further questions related to the course content presented in this session, contact your tutor (please include the course number in the subject line):
[email protected] For all other feedback about the webinar please contact the Real Estate Division (please include the course number in the subject line):