Appunti di Topics in Economics and Project Valutation - A.A. 23-24

STEP

Identifying the problem consist in identifying information the appraiser uses to determine the scope of the work in an

assignment:

1. Client or other intended user

2. Intended use: what the appraisal practice is needed for

3. Type and definition of value: the type of value that will be defined depending on the intended use

4. Date of value: we define two types of dates:

a. Effective date: date to which we are estimating the value of a property

b. Report date: date in which the report has been completed

5. Relevant property characteristics

Other assignment conditions

6. (extraordinary assumption, hypothetical condition, limiting assumptions…)

Extraordinary assumption:

a. condition that if resulted false could change my opinion of value. For

example if I cannot access a property and I’ve been told that property is not occupied, in my

extraordinary assumptions I will write that I’m giving for granted that the property is unoccupied.

Hypothetical assumption:

b. condition that I suppose. For example, if I have been assigned an appraisal

procedure for a property that I’ve been told will be free in the future, I will suppose the property is free.

c. Limiting assumptions 46

STEP 2 – Scope of Work

The scope of work decision is driven by the information learned while defining the problem. The scope of work defines:

1. How to identify the property

2. How to inspect the property

3. Type and extent of data researched (quanto è approfondita la mia analisi di mercato)

4. Type and extend of analysis applied (quanto è approfondito il mio report).

STEP 3 – Data collection of analysis

It is necessary to develop the approaches to value. The data collected is relative to describing the property and later

for analysis purposes. We distinguish between

• General/Indirect data sources: government repositories, professional repositories, or other sources that

study and analyze sample of market transactions and then produce reports that can be consulted.

• Specific/Direct data sources: it can be property specific (data that we obtain directly from our property) or

data that we obtain comparing our property with other property that are or have been on the market.

Market analysis

With market analysis we mean the study of the supply and demand ina specific area for a specific type of property. To

do that we need to:

1. Define the Real Estate market areas

2. Define the property type

3. Analyse the market conditions and the four forces that can influence the real estate market (PEGS)

Physical

a. (environmental, geographical…)

Economic

b. (world events, local events…)

Governmental

c. Social

d.

Subject property data

The data collected relative to describing the property and later for analysis purposes

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HBU analysis

The Highest and Best Use is “the reasonably probable and legal use of vacant land or an improved property that is

physically possible, appropriately supported, financially feasible and that results in the highest value.”

1. Physically possible

2. Legally permissible

3. Financially feasible

Maximally productive

4.

To see an example view the slides.

STEP 4 - Approaches to value

SCA – Sales Comparison Approach

In the sales comparison approach an opinion of value of market value is developed by comparing properties similar to

the subject property that have recently sold, are listed for sale or are under contract.

The process of deriving a value indication for a subject property by comparing similar properties that

SCA have recently sold with the property being appraised, identifying appropriate units of comparison, and

making adjustments to sale prices (or unit prices, as appropriate) of the comparable properties based

on relevant, market derived elements of comparison.

We can divide the SCA into two categories:

1. Mono-parametric models

2. Pluri-parametric models

Mono-parametric models

The phases are:

1. Data collection

2. Analysis of the market to develop units of comparison and select attributes for adjustment (model

specification)

3. Development of reasonable adjustments (model calibration)

4. Application of the model to adjust the sales prices of comparables to the subject property

5. Analysis of the adjusted sales prices to estimate the value of the subject property

1+2+⋯+

µ=

For prices with gaussian distribution:

1∙1+2∙2+⋯+∙

µ=

For prices with non-gaussian distribution:

Where are prices and are weighting coefficients

p ξ

∑

= ∙ + −

6. Average calculation:

∑

Where Vx is the subject’s value, Vi are comparables prices, pi is the unit of measure of comparables, px is the

subject’s unit of measure and A and D are additions and deductions.

Pluri-parametric models: Market Comparison

Approach (MCA)

The market comparison approach (MCA) is a

multi-parameter comparative estimation method,

based on the assumption that the prices of a

property can be calculated as the sum of a finite

series of prices, each linked to a specific

characteristic. 48

factors that affect a Real Estate value are:

The • Location (influence of the environment of the neighborhood)

• Exposure (Where the windows face the neighborhood, level of the floor, luminosity…)

• Technological (Structure, systems..)

• Economic (If the property is leased, or it generates revenue in any way)

These factors can be measured in different ways, for these reason each factor can be:

• Quantitative: measurable, according toa continuous or descreate cardinal scale, using specific units of

measurement (square meters, percentage, number, euros…)

• Qualitative orderable: when their entity can be appreciated in degrees, according to a discrete ordinal scale,

using specific nomenclators (for example poor-normale-excellent)

• Qualitative non orderable: when their entity can be appreciated according to a dichotomous scale (present-

non present, 0-1)

Adjustments - ratio assessment

When comparing two properties that have different

adjustments

characteristics, we have to make that are

in the form of a ratio. For each factor there a minimum

and maximum adjustment ratio.

An example of adjustments for a specific feature are the

ones for the story at which an apartment is located. If,

for example, the subject property we are appraising is

located at the third floor and we have a comparable

located at the first floor, we will have to make a positive

adjustment to the comparable.

- Marginal price of a property characteristic

Adjustments

marginal price p

The of a property’s characteristic represents the change in price (ΔP ) when the characteristic

n n

changes (Δc ).

n = ∙

Market Comparison Approach the prices of characteristics for each comparable are adjusted as compared to

In the

the subject’s characteristics using marginal prices of those characteristics. The aim is to get a homogenous

comparable set.

Riconciliation

The “adjusted” market prices of comparable should be the same, however they may differ from each other. To validate

results, we need to calculate the absolute percentage divergence between the estimated values of the maximum and

minimum “adjusted” market prices. This must be less than 5%.

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There is another thing to consider: in the SCA the maximum adjustment mustn’t be over 20%. If the total gross

adjustment od a comparable is greater than 20%, this should be discarded.

To summarize the SCA steps:

1. Analysis of the market

Data collection

2. (Selection of the comparables)

3. Identification of the RE characteristics that

can affect prices

4. Compilation of the data matrix

5. Development of reasonable adjustments

6. Calculating the adjusted prices of the

comparable and determining the price of the

subject

Riconciliation

7. (validating the comparable used)

Costs approach

The cost approach is an appraisal method used to develop opinion value for RE by estimating the cost of replacing or

reproducing now the structure, subtracting the depreciation and adding the value of the site.

is based on the logic that informed buyer will not pay more for a property than it will cost them to build to a similar

It

property from scratch and with the same level of utility. The cost approach is appropriate for unique properties, such

as churches or schools with unique components. Also, for a new property, it is easy to estimate the cost of contruction

since the improvements were recently built.

= +

−

The definition of cost approach would be:

A set of procedures through which a value indication is derived for the fee simple interest in a property by estimating

the current cost to construct a reproduction of (or replacement for) the existing structure, including an entrepreneurial

incentive; deducting depreciation from the total cost; and adding the estimated land value. Adjustments may the be

made to the indicated fee simple value of the subject property to reflect the value of the property interest being

appraised. 50

Replacement The estimated cost of building the functional equivalent (substitute) of the original structure using

cost modern materials and workmanship and current day standards of size, layout, quality and utility.

It is the cost of constructing, using current construction methods and materials, a substitute

structure equal to the existing structure in quality and utility. Replacement cost is generally used

for mass appraisal purposes. It provides expediency and a reliable indication of the cost for most

structures.

Reproduction The estimated cost of replacing the original building, using identical materials, workmanship,

cost construction standards, size, layout, quality and utility present in the current structure. It is the

cost of constructing, as closely as possible, an exact replica of the existing structure.

Cost approach steps (Independently from reproduction or replacement)

1. Estimate the reproduction or replacement cost of an improvement. The step involves estimating the current

cost of building the structure from scratch of the site improvements:

a. Definition of the unit of measurement

b. Definition of the Unit