Case 1
You are appraising a single-family residence located in the Huntington neighborhood at 4632 NW 56th Drive. The property is being acquired by a mortgage applicant and you have been asked to appraise the property by the lender. Seven potential comparable sales were initially identified. However, three of these seven were highly similar to the subject property in their transactional, physical, and locational characteristics. You therefore decided to exclude the other four transactions from the comparable set.
The elements of comparison you used to compare and adjust the sale prices of the comparable properties are listed in the market data grid below. The property rights being conveyed in the acquisition of the subject property are fee-simple absolute. Conventional mortgage financing will be used by the purchaser and the acquisition appears to be an arm’s-length transaction. Thus, no adjustments need to be made to the sale prices of the comparable properties for the type of property rights conveyed, financing terms, or conditions of sale. However, the buyer of Comparable 2 was aware that she would have to replace one of the air-conditioning units immediately after acquiring the property (which she did); thus, she was able to negotiate a $3,000 price reduction from the seller.
Comparable 1 sold three months ago, while Comparables 2 and 3 sold six months ago. Based on your knowledge of recent price appreciation in this market, you have decided that Comparable 1 would sell for 2 percent more if sold today and that Comparables 2 and 3 would sell for 4 percent more if sold today. The subject property is located in Huntington, as is Comparable 1. However, Comparables 2 and 3 are located in Kensington and Millhoper, respectively. Although Huntington is a high-end neighborhood, both Kensington and Millhoper are generally considered to be slightly more desirable. In fact, homes in these two neighborhoods generally sell for about a 3 percent price premium relative to similar homes in Huntington.
In these neighborhoods, an incremental square foot of lot size or living area is worth about $20 per square foot and $80 per square foot, respectively. Each year of effective age reduces the value of properties in this market by about $3,000 per year. Your experience suggests that each additional half-bath is worth $500; each additional full bath $1,000. Additional garage spaces, wood decks, and pools in Page 189these neighborhoods are worth $8,000, $1,000, and $12,000, respectively. No significant nonrealty items were included in the comparable transactions.
Elements of Comparison Subject Comp Sale 1 Comp Sale 2 Comp Sale 3
Sale price of comparable $510,000 $525,000 $499,000
Transaction characteristics
Property rights conveyed Fee Simple Same Same Same
Financing terms Conventional Same Same Same
Conditions of sale Arm’s Length Same Same Same
Expenditures immed. after purchase None $3,000 None
Market conditions Today
3 mos. ago: add 2% total
6 mos. ago: add 4% total 6 mos. ago: add 4% total
Property characteristics
Location Huntington Huntington Kensington Millhoper
Physical characteristics:
Site/lot size 6,662 sq. ft. 6,700 sq. ft. 6,800 sq. ft. 6,600 sq. ft.
Construction quality Typical Typical Typical Typical
Condition Average Average Average Average
Effective age 5.5 years 7 years 8 years 10 years
Living area 3,473 sq. ft. 3,920 sq. ft. 3,985 sq. ft. 3,835 sq. ft.
Number of baths 3.0 baths 3.5 baths 3.0 baths 2.0 baths
Garage Spaces 2-car 2-car 2-car 1-car
Porch, patio, deck Cov. Porch/wood deck Cov. Porch Cov. Porch Cov. Porch
Fence, pool, etc. None None Pool Pool
Economics characteristics N.A. N.A. N.A. N.A.
Use Single-family Same Same Same
Nonrealty components None None None None
Questions :
1. Based on the above discussion of the elements of comparison, complete an adjustment grid for the three comparable properties.
2. What is the final adjusted sale price for Comparables 1, 2, and 3?
Case 2:
Given the following owner’s income and expense estimates for an apartment property, formulate a reconstructed operating statement. The building consists of 10 units that could rent for $550 per month each.
Owner’s Annual Income Statement
Rental income (last year)
$60,600
Less: Operating & capital expenses
Power
$2,200
Heat
1,700
Janitor
4,600
Water
3,700
Maintenance
4,800
Reserve for capital expenditures
2,800
Management
3,000
Tax depreciation
5,000
Mortgage payments
6,300
Estimating vacancy and collection losses at 5 percent of potential gross income, reconstruct the operating statement to obtain an estimate of NOI. Assume an above-line treatment of CAPX. Remember, there may be items in the owner’s statement that should not be included in the reconstructed operating statement.
Questions:
1. Using the NOI and a Ro of 11.0 percent, calculate the property’s indicated market value. Round your answer to the nearest $1,000.
Case 3:
You have been asked to estimate the market value of an apartment complex that is producing annual net operating income of $44,500. Four highly similar and competitive apartment properties within two blocks of the subject property have sold in the past three months. All four offer essentially the same amenities and services as the subject. All were open-market transactions with similar terms of sale. All were financed with 30-year fixed-rate mortgages using 70 percent debt and 30 percent equity. The sale prices and estimated first-year net operating incomes were as follows:
Comparable 1: Sale price $500,000; NOI $55,000
Comparable 2: Sale price $420,000; NOI $50,400
Comparable 3: Sale price $475,000; NOI $53,400
Comparable 4: Sale price $600,000; NOI $69,000
Question:
1. What is the indicated value of the subject using direct capitalization?