1. Welcome to the
International Right of Way
Association’s
Course 400
Principles of
Real Estate Appraisal
400-PT – Revision 3 – 06.30.06.USA
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2. Introductions
Who we are…
What we do…
Where we do it…
How long we’ve been doing it…
Our goals for the course...
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3. Objectives(1)
At the end of the two days,
you will be able to...
• Express an understanding of basic real
estate terms and principles
• Demonstrate a basic knowledge of the
valuation process and its components
3

4. Objectives(2)
At the end of the two day,
you will be able to...
• Discuss the definitions of and steps in
each of the three (cost, sales
comparison and income capitalization)
approaches to value
• Solve problems that show an
understanding of the three approaches
to value
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5. Housekeeping
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6. Schedule
Day One (1)
8:00 - 8:15 Introductions, Etc.
8:15 - 9:45 Characteristics of Real
Estate and Real Property.
Definitions. Documents.
9:45 - 10:15 Cost, Price and Value
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7. Schedule
Day One (2)
10:30 - 11:00 Factors that Create
and Affect Value
11:00 - 12:00 Value Principles
1:00 - 5:00 Valuation Process
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8. Schedule
Day Two (3)
8:00 - 8:15 Recap
8:15 - 2:30 Three Approaches to
Value
2:45 - 3:15 Partial Acquisitions
3:15 - 4:00 Summary and Review
4:00 - 5:00 Final Exam
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9. Real Estate and
Real Property
Real estate is the physical land and
appurtenances to the land.
Real property is all the rights, interests
and benefits inherent in the ownership
of the real estate. It is the bundle of
rights.
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10. Personal Property,
Fixtures, and Trade
Fixtures (1)
Personal property is the items that are not
affixed to the real estate.
Fixtures are items that were once personal
property but have since been permanently
attached to the real estate.
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11. Personal Property,
Fixtures, and Trade
Fixtures (2)
Tests: Manner affixed
Adaptation
Intent
Trade fixtures are not part of the real
estate.
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12. Appraisal
An appraisal is the act or process
of developing an opinion of value.
An opinion of value.
An appraisal is a written statement …
setting forth an opinion of value …
supported by the presentation and
analysis of relevant market information.
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13. Controlling Documents
Uniform Standards of Professional
Appraisal Practice (USPAP)
“The Yellow Book”
The Uniform Act
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14. Cost, Price, and Value
Cost is the amount spent to construct
an improvement.
Price is the amount paid for a good
or service.
Value is the worth of a good or
service.
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15. Market Value
Market value is a type of value,
stated as an opinion, that presumes
the transfer of a property … as of
a certain date, under specific
conditions … relationship,
knowledge, and motivation; terms
of sale; conditions of sale).
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16. D.U.S.T.
(Factors that create value)
Demand: The desire or need
for real estate.
Utility: Usefulness.
Scarcity: The supply of real estate
in relation to demand.
Transferability: Title must be able to pass.
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17. E.E.G.S.
(Factors that affect value)
Economic: the relationship among
demand, supply, and utility.
Environmental: the natural and developed
environment.
Governmental: related to the government.
Social: related to demographics.
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18. Value Principles
(Principle of Substitution)
When several similar goods
or services are available,
the one with the lowest
price will attract
the greatest demand.
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19. Value Principles
(Highest and Best Use)
The reasonably probable and legal
use that is physically possible,
appropriately supported, and
financially feasible, and that results
in the highest value.
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20. Value Principles
(Principle of Supply and Demand)
The price of a good or service varies
directly with demand and
inversely with supply.
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21. Value Principles
(Principle of Anticipation)
Present value is created by the
expectation of future benefits.
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22. Other Principles
• Change
• Consistent Use
• Contribution
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23. Valuation Process
Appraisal Problem Definition
Scope of Work
Data Collection and Analysis
Land Value Opinion
Three Approaches to Value
Reconciliation and
Final Value Opinion
Defined Value Opinion Report
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24. Valuation Process
Appraisal Problem Definition
• Identification of the client, intended use, and users
• Value to be developed
• Date of the value opinion
• Identity and location of the subject property
• Property rights to be valued
• Limiting conditions
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25. Valuation Process
Scope of Work
• Degree to which the property is inspected or
identified
• Extent of research into physical and economic
factors
• Extent of data research
• Type and extent of analysis applied to arrive
at opinions or conclusions
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26. Valuation Process
Data Collection and Selection
• Market area data
• Comparable property data
• Subject property data
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27. Valuation Process
Data Analysis
• Market analysis
• Highest and best use
analysis
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28. Valuation Process
Highest and Best Use
The reasonably probable and legal use that is
physically possible, appropriately supported,
and financially feasible, and that results
in the highest value.
• Physically possible?
• Legally permissible?
• Financially feasible?
• Maximally productive?
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29. Valuation Process
Land Value Opinion
• Allocation
• Extraction
• Ground rent capitalization
• Land development
• Land residual
• Sales comparison
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30. Recap Day One
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31. Recap Yesterday
and Look at Today
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32. Valuation Process
Three Approaches to Value
• Cost Approach
• Sales Comparison
• Income Capitalization Approach
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33. Valuation Process
Cost Approach
• Develop a value opinion for the land
• Estimate the cost new of the improvement
• Deduct depreciation
• Add land value opinion to the depreciated
improvement value
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34. Valuation Process
Cost Approach
Depreciation: Age-Life Method
Depreciation Percentage = Effective Age
Total Economic Life
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35. Valuation Process
Sales Comparison Approach
• Research the market for comparable data
• Develop relevant units of comparison
• Compare the sales to the subject and
adjust for dissimilarities
• Reconcile the value indications into
a final value opinion
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36. Valuation Process
Income Capitalization Approach
The conversion of income into
value through a rate or a ratio.
• Gross Rent Multipliers
• Direct Capitalization
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37. Valuation Process
Income Capitalization Approach
Gross Rent Multipliers
Gross Rent Multiplier = Sale Price
Gross Rent
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38. Valuation Process
Income Capitalization Approach
• Estimate the subject’s annual potential gross income
• Determine a vacancy and collection loss
• Subtract the vacancy and collection loss from the
potential gross income
• Estimate annual property expenses and subtract the
expenses from the effective gross income to arrive
at the net operating income
• Develop a capitalization rate
• Convert the net operating income into value
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39. Valuation Process
Income Capitalization Approach
Direct Capitalization
Value = Net Operating Income or Vo = NOI
Capitalization Rate Ro
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40. Valuation Process
Reconciliation and
Final Value Opinion
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41. Valuation Process
Defined Value Opinion Report
• Self-contained
• Summary
• Restricted-use
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42. Partial Acquisitions(1)
Larger parcel is the total property
before the taking.
• Contiguity
• Title
• Use
Value of the part taken is determined
by multiplying the quantity taken
times
the before unit value of the item
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43. Partial Acquisitions(2)
Damages to the remainder property
represent the loss in value to the
remainder property
as a result of a partial acquisition
Benefits to the remainder property
represent
the increase in value to the remainder
43 property as a result of a partial

44. Partial Acquisitions(3)
Federal (Before and After) Rule is the
difference between the value before the
acquisition and the value after the acquisition
State (Summation) Rule is the value of the part
taken plus (damages to the remainder
property
minus benefits to the remainder property
[the damages minus the benefits cannot
be less than zero dollars])
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45. Objectives(1)
Right now, you should be able to...
• Express an understanding of basic
real estate terms and principles
• Demonstrate a basic knowledge of the
valuation process and its components
45

46. Objectives(2)
Right now, you should be able to...
• Discuss the definitions of and
steps in each of the three (cost,
sales comparison and income
capitalization) approaches to value
• Solve problems that show an
understanding of the three approaches
to value
46

47. Thank you!
400-PT – Revision 3 – 06.30.06.USA
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