Pitfalls in the APPRAISAL PROCESS

PITFALLS IN THE APPRAISAL PROCESS

Presentation to: Real Estate Expert Summit June 2014

AUSTIN REAL ESTATE

CONSULTANTSwww.austinrealestateconsultants.ca

IntroductionThe following slides are the frame work of a presentation I made to Ossie Jurock’ Real Estate Expert Summit. After outlining the appraisal process, I have highlighted areas where a person, receiving an appraisal, should carefully review and evaluate their investment, making sure that the appraisal or research received has addressed all the relevant issues.

When reviewing data ask yourself “WHY”.

Project Evaluation

Every investor, prior to making a decision to invest should under take due diligence. This can be achieved in any of the following ways. Your own experience New research Hiring a consultant Order an appraisal Rely on promoters’ documentation

An Appraisal

What is an appraisal? Are there different types of appraisals? Why obtain an appraisal? How is the appraiser remunerated?

A representation of CURRENT circumstances.

Definition of an Appraiser

An appraiser is one who compiles and analyzes voluminous data of problematical accuracy from sources of dubious veracity and derives therefrom a numerical quantification of unquestionable necessity, analogous to a nebulous and euphemistic concept representational of value commensurate with ambient configurations of the open market and promulgates thereby a precise written declamation which delineates his observation, deliberations and conclusions

An Appraisal

There are many different reasons for an appraisal An appraised value is an interpretation of data Poor data can result in an incorrect value as can

an ill informed interpretation Determine why & for whom the appraisal was

done Reliance on a conservative appraisal, could result

in a missed opportunity There can be a range of values for any property

Your Property

Yourself

Your Buyer

Your Bank

Tax department

Assessed ValueBe careful when using the assessed value for making investment decisions.

BC Assessment undertake mass appraisal They may not be aware of physical changes to a

property Their value is based upon economic rent not

actual rent The fee simple interest is appraised. It can be high ( I appeal assessments every

year) or low.

Methods of Valuation1. Income approach2. Gross rent multiplier3. Comparative approach4. Cost approach

Income ApproachComponents

Gross income Vacancy Expenses Yield rate derived from market analysis

Value = Net Income / Yield rateYield rate = Net income/ PriceValue = Gross Income x Gross rent multiplier

ExpensesExpense comparison should be on a per suite basis or $/sf of rentable area NOT as % of rent; actual is best. Each category should be checked out

Management Caretaker Insurance Water and garbage disposal Property Taxes Licences

More Expenses

Repairs & Maintenance Heat & Light Cablevision Elevator Advertising Misc; admin Security/tele, Capital Reserve

Comparative Approach Compares a specific unit of value Comparative unit derived from sales

analysis Square footage Suite Room

In any comparative analysis, whether it be rental, cap rate, expenses or unit of comparison, make sure you are comparing APPLES with APPLES.

Cost Approach Land Building Depreciation

Physical Economical Functional

Value = Land Value plus Building Cost New x % Depreciation Cost may be higher than value

Review of Collected Data Neighbourhood Property Economy Highest and Best Use Rental and expense analysis Capitalization rates Comparative analysis Averages – UGH!!!

Reasonableness of Conclusions

Is the value arrived at in the appraisal logical given the available data?

Has the appraiser taken all reasonable steps to arrive at the conclusion?

Does the appraisal or research completed fully satisfy the needs of the investment analysis?

What other considerations should be taken into account?

Further Considerations Negatives of the property or the area Reliability of the assembled data Physical condition of the building Future requirements for the property Current and proposed competition Alternative uses Value added Rezoning potential

More Considerations Future potential Risk / Reward relationship Security of income Security of capital Liquidity

Questions?Peter Austin, AACI. BSc. CArb.AUSTIN REAL ESTATE CONSULTANTS4099 Springtree DriveVancouver, BC V6L 3E2

Ph: 604-733-3282Email: paustin@telus.net

URL: www.austinrealestateconsultants.ca