Finance 353:

Real Estate Valuation

A Short Course in the Valuation

of Residential and Commercial
Real Estate

Wayne Foss, MBA, MAI, CRE

Foss Consulting Group
Email: [email protected]
Introduction
 Student Introduction
 Name
 Academic Level
 Real Estate Experience
 What do you expect to get from
this course?
 Future Goals
 Instructor Introduction

2
Course Syllabus
 Objectives
 To develop an analytical approach to
identifying and solving real estate problems

 Course Coverage
 techniques of appraisal analysis
 development of appraisal theories
 recent regulatory changes

 Prerequisites
 Fin 351 or equivalent

3
Course Syllabus, con’t...
 Required Textbook
 The Appraisal of Real Estate
 12th Edition
 The Appraisal Institute
 Course Project
 Appraisal of a Single Family Residence
 Group Project (3 to 4 students to a group)
 Property of your choice
 length approximately 30 to 50 pages including
exhibits
 presentation of findings in class

4
Course Syllabus, con’t...
 Examinations
 Type
 50% Multiple Choice or True False
• Closed Book, Closed Notes
 50% Short Answer or Problems
• Open Book, Open Notes
 No Partial Credit
 Calculators are permitted, computers are not
 Make-up examinations are not permitted
 Unless there an extraordinary circumstance

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Course Syllabus, con’t...

 Final Grade Weighting Policy

 Mid-term 30%
 Final Exam 35%
 Course Project 30%
 Class Participation 5%
 Total: 100%

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 Course Syllabus, con’t...
The Final Course Grade will be based on the
following Scale:
Grade GPA Pctg. Range
A+ = 4.0 97-100%
A = 4.0 93-96%
A- = 3.7 90-92%
B+ = 3.3 87-89%
B = 3.0 83-86%
B- = 2.7 80-82%
C+ = 2.3 77-79%
C = 2.0 73-76%
C- = 1.7 70-72%
D+ = 1.3 67-69%
D = 1.0 63-66%
D- = 0.7 60-62%
F = 0.0 Less than 60%

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8
 Class Schedule
DATE TOPIC ASSIGNMENT

Aug. 25 Introduction -
Sept. 1 Nature of Value, Foundations, Markets Ch 1-3
8 The valuation process, Appraisal Reports Ch 4, 26
15 Fee Simple and Partial Interest Ch 5
Data Collection/Neighborhoods Ch 7-8
22 Land/Building Description Ch 9-10

29 Midterm -

Oct. 6 Special Assignment

11 Highest and Best Use Analysis, Land Valuation Ch 11-12
20 Highest and Best Use Analysis, Land Valuation Ch 11-12

27 Cost Approach & Depreciation Ch 13-16

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 Class Schedule
DATE TOPIC ASSIGNMENT

Nov 3 Sales Comparison Approach Ch 17-19

10 Sales Comparison Approach Ch 17-19
17 Income Approach Ch 20-22
24 Fall Recess
Dec. 1 Yield Capitalization and DCF Ch 23, 24
Reconciliation Ch 25
8 Case Presentations

15 Final Examination

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Nature of Appraisals, Value and
Real Estate Markets
 Nature of Appraisals
 Definitions
 Purpose and Intended Use
 Distinctions between real estate, real
property and personal property
 Nature of Value
 Price versus Cost
 Types of Value
 Economic Principles
 Real Estate Markets
 Characteristics
 Market Analysis
11
The valuation process and
Appraisal Reports
 The Valuation Process
 A systematic procedure employed to provide
the answer to a client’s questions about the
value of real property
 Appraisal Reports
 Complete or Limited
 Self-contained, Summary or Restricted

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 The Valuation Process

Definition of the Problem

Identification Identification Use of Definition of Date of Description Other
of real estate of property appraisal Value value of scope of limiting
rights to be estimate appraisal conditions
valued
Preliminary Analysis and Data Selection and Collection
General Specific Competitive Supply and Demand
Region, City, Neighborhood Subject and Comparables The Subject Market

Highest and Best Use Analysis

Land as though vacant Property as improved

Land Value Estimate

Application of the Three Approaches

Cost Sales Comparison Income Capitalization

Reconciliation of Value Indications and Final Value Estimate

Report of Defined Value

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Fee Simple and Partial Interests,
Data Collection and Neighborhoods
 Fee Simple and Partial Interests
 Types of Estates
 Lease Interests
 Easements
 Data Collection and Analysis
 General Data
 Specific Data
 Neighborhoods and Districts
 A Neighborhood is -
 A group of complementary land uses
 A District is -
 Characterized by homogeneous land
uses

14
Land and Building Descriptions

 Land Description
 Types of Legal Descriptions
 Site analysis
 Sources of Data

 Building Description
 Architecture
 Inspection
 Improvement Analysis

15
Highest and Best Use Analysis,
Land Valuation
 Highest and Best Use Analysis
 Land or Site as though vacant
 Property as Improved
 Systematic Approach to analysis
 Legally Permissibility, Physically Possible,
Financial Feasibility, Maximally Productive
 Land Valuation
 Approaches
 Sales Comparison
 Allocation and Abstraction
 Income Capitalization
 Units of Comparison

16
The Cost Approach

 Building Cost Estimates

 Reproduction Cost
 Replacement Cost

 Depreciation
 Physical Deterioration
 Functional Obsolescence
 External Obsolescence
 Curable or Incurable

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The Sales Comparison Approach

 The Sales Comparison Approach

 Five Step Model
 Research
 Data verification
 Units of comparison
 Compare with sale property with the subject
 Reconciliation
 The identification and measurement of
adjustments
 Types of adjustments
 Adjustment Process

18
The Income Approach

 Ownership Interests
 Market Value versus Investment Value
 Five Step Model
 Research
 Data verification
 Reconstructed Operating Statement
 Selection of the Appropriate Capitalization
method(s) and the Capitalization of Income
 Reconciliation
 Derivation of Rates

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Yield Capitalization, Discounted Cash
Flow and Reconciliation

 Yield Capitalization, Discounted Cash

Flow
 Time Concept
 Data Requirements
 Applications

 Reconciliation of Value Indications

 A Review
 Appropriateness of the Approaches
 The Final Value Opinion
 A Range or a Point Estimate?

20
Case Presentations and the
Appraisal Report

 Case Presentations
 3 to 4 students to a group
 15 to 20 minute presentation of
findings

 The Appraisal Report

 Complete Self-Contained Format
 30 to 50 pages

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So That’s
An Introduction to Real Estate Valuation

Wayne Foss, MBA, MAI, CRE, Fullerton, CA USA

Phone: (714) 871-3585 Fax: (714) 871-8123
Email: [email protected] 22