BUSI 330: Foundations of Real Estate Appraisal Session 3 · Real Estate Division UBC Sauder School of Business 3 Introduction Welcome to the webinars for the Foundations of Real Estate

Real Estate Division

BUSI 330: Foundations of Real Estate Appraisal

Session 3

Presented by Chuck Dunn

UBC Sauder School of BusinessReal Estate Division 3

Introduction

Welcome to the webinars for the Foundations of Real Estate Appraisal

• Session 1 Introduction. Lesson 1, 2 – August 22, 2019 Archived

• Session 2 Lesson 3, 4, 5 and 6. Discuss Project 1 – September 12, 2019 Archived

• Session 3 Lesson 7, 8 and 9 – October 10, 2019

• Session 4 Lesson 10 and11. Discuss Project 2 October 31, 2019

• Session 5 Preparation for the Final Exam November 14, 2019

NOTE: Project 1 is due October 9, 2019

Project 2 is due November 13, 2019

Exam is written December 5, 2019


Real Estate NewsNational Post September 12, 2019

• Those living alone account for 28.2% of all households, and out numbered couples with children.

• Also condominium sizes are shrinking. New strata/condominium apartments are 35% smaller than those built in the 1980’s. As household sizes become smaller so do condominiums.

• However, single house sizes are increasing, especially in the suburban areas where land is cheaper.

• Lifestyles are changing to more home based activities-staycations, BBQ, computer games, video streaming services, and home theatres.


Real Estate NewsNational Post October 3, 2019

• Headline

• “Rising construction costs affect housing affordability”

• Prices of newly built units is also sensitive to construction costs. Cost increases are not uniform across the country.

• Ottawa increase was 5.2%, Vancouver 4.8%.

• Hudson Bay Company shareholder urges appraisal of it’s “incredibly valuable” real estate and any upside potential.


Real Estate NewsNational Post October 4, 2019

• Toronto Housing Market….In September prices rose the most over the last 21

months. The benchmark price for all types of homes rose 5.2% to $805,500.

Sales jumped 22% to 7,825 units.All sectors saw double digit gains led by a 29% jump for

detached homes.


About Your Course Tutor

• Chuck Dunn is one of the four BUSI 330 tutors

• Graduated from the Faculty of Commerce, UBC

• Worked as a fee appraiser

• Taught real estate appraisal courses at Langara College.


The Three Approaches

Final Estimated

Value

Direct Comparison

Approach

Cost Approach

Income Approach


Lesson 7

Chapter 16: Land Valuation


Chapter 16 - Lesson 7

Land Valuation

• Each parcel of land is unique, even if side by side

• Land can also be water, by way of a lease or

• Air Parcels located above other free hold sites

• Identify site by - address, legal description, survey maps



• Analyze - consider size, shape, location, depth, irregular shape, corner. Any affect on the value?

• Make sure comparables have similar attributes as subject, otherwise adjustments will be required

• Read and understand any documentation regarding water leases or air parcels

• Consult other professionals if necessary


Chapter 16 - Lesson 7City GIS


Chapter 16 - Lesson 7Land Valuation – continued Value by:1. Comparison – direct comparison, bulk basis

If similar sized lots are selling for $100,000, then the subject is worth this amount

2. Allocation – land ratio to overall valueFrom previous market analysis we know that land is worth about 40% of the sale price. So a property sold for $250,000 the land portion is about 40% x $250,000=$100,000 is the estimated land value

3. Extraction – deduct improvement value from total valueCalculate the depreciated value of the house and other improvements and then deduct the total from the selling price to arrive at an estimated land value. Sale price is $250,000 less depreciated value of improvements of $145,000 indicates an estimated land value of $105,000


Chapter 16 - Lesson 7Development – estimate value of development and deduct cost of labour, capital and management• This method involves estimating the final total value of the completed

development. Next the developer will estimate all the cost necessary to complete the development-hard and soft costs. Hard costs -the actual construction costs and the soft costs -financing, permits, lawyers fees, management overhead marketing fees and contingency allowances

• After deducting all these costs from the estimated sales proceeds the remaining figure indicates what the developer should pay for the raw land

• This approach can be used for developing raw land or residential/commercial developments

• Raw land - Developing residential/commercial building sites

• Developments - Strata Titles units, retail malls, office buildings, commercial developments



Land Valuation – continued Compare on the following basis:1. Dollar per front foot/metre

divide the selling price by the frontage-width. $100,000/50feet = $2,000 /front foot

2. Price per acre/hectare similar to above but use the total acreage size. $1,000,000/10acres = $100,000/acre

3. Bulk basis sale of lots that are the same dimensions, 50’ x 120’

4. Price per Apartment/Condo Unit see next slide


Chapter 16 - Lesson 7Rezoning Application



Data Analysis

• The previous slide showed rezoning for 3 properties

• A search of the property records shows they were purchased for a total price of $2,298,000

• Assuming the 14 units are approved, the cost of the land per unit is $164,142

• Based on this information we know that raw land value for townhomes is around $165,000+/- at the time of the sale


Rezoning - Lesson 7


Rezoning - Lesson 7


Rezoning - Lesson 7


Rezoning - Lesson 7


Lesson 8

• Chapter 17: Cost Approach

• Chapter 18: Building Cost Estimates



The Cost Approach



The Cost Approach

The cost approach is summarized as follows:

1. Estimate the land/site value2. Estimate the current cost of all the attached

improvements3. Estimate depreciation for all attached improvements4. Deduct 3 from 2 to arrive at the depreciated value5. Calculate the depreciated value of site improvements6. Add 1, 4 and 5 together to arrive at the final value



Value of Siteas if Vacant

$100,000

Cost New of House

Depreciation to Date

Depreciated Value of House

Depreciated Value of Site

ImprovementsFinal Estimated

Value by the Cost Approach




$100,000

Cost New of House

$350,000









$100,000

Cost New of House

$350,000


- $25,000








$100,000

Cost New of House

$350,000


- $25,000


+$325,000







$100,000

Cost New of House

$350,000


- $25,000


+$325,000


Improvements

+$ 10,000

Final Estimated Value by the Cost

Approach




$100,000

Cost New of House

$350,000


- $25,000


+$325,000


Improvements

+$ 10,000

Final Estimated Value by the Cost

Approach

$435,000(round final figure)



The Cost Approach

Know the Limitations of this approach and when it can be used

1. Remember cost does not equal value, it can be less or more

2. Cost is best for new or newer construction as costs are current and there is no/little depreciation

3. Depreciation calculation is very subjective4. Useful when market data is scarce or special use

buildings



Reproduction and Replacement Costs

Know the difference between the two terms and when to use them

1. Reproduction is the construction of an exact duplicate

2. Replacement is the construction of one with the same utility

3. Replacement is the most commonly used method


Reproduction CostRichmond Speed Skating Oval for 2010 Olympics


Reproduction Cost



Cost Estimates

1. In Canada all costs include the GST and/or the HST

2. Costs include a contractor’s and an entrepreneurial profit

3. Costs are categorized as “hard” or “soft” costs“Hard” being the direct costs - materials and labour“Soft” being permits, financing, legal, marketing costs



Building Cost Estimates

Cost estimates are found by 4 methods with the Cost Estimating Services and the Comparative methods being the most common• Make sure you understand what is included/excluded in

these cost estimates• Cost Estimating Services are companies who specialize

in researching costs to construct buildings • Comparative Methods are based on actual construction

costs and are quoted on a price per square foot or square metre


Lesson 9Chapter 19: Depreciation Estimates



Depreciation

• Know and understand the definitions of physical life, economic life, remaining economic life and the effective age (WB 9.5)

• Effective age is very subjective and is based on the general condition, upgrading of the property, and the appraisers experience/knowledge

• The two (2) Age-Life methods are the most commonly used methods (WB 9.7-9.8)



Breakdown Method of Depreciation

This method is to help you understand how differentbuilding materials depreciate at different rates. (WB 9.9)

Physical Deterioration

1. Deferred maintenance are items that need immediate repair

2. Short Lived Items are those items that will not last as long as the structure itself, i.e. furnace, hot water tank, floor coverings, painting, roof, exterior finish

3. Long Lived is usually the structure itself, i.e., 50-70 year life span


Chapter 19 - Lesson 9Functional Obsolescence

This represents a loss of utility where an item does not perform its proper function according to today’s standards

• It can be classified as curable, meaning it pays to correct it

OR• It can be classified as incurable, where the cost to

cure is greater than the increased utility. It does not pay to correct it

In both cases this loss of utility must be accounted for when calculating the depreciation of an improvement



External Obsolescence

• This form of obsolescence is external to the property and affects both the building value and the site value

• When the external obsolescence has been estimated then apply a certain percentage to the land value and the remainder as depreciation to the improvements

• Percentage is based on the land to building ratio

• Can affect value positively or negatively



• External Obsolescence

• Owners have little control over this type

• Examples are an airport runway, incompatible use of adjacent property, extra busy road, i.e., all night grocery store or gas station, major highway or rapid transit system


Introduction

Welcome to the webinars for the Foundations of Real Estate Appraisal

• Session 1 Introduction. Lesson 1, 2 – August 22, 2019 Archived

• Session 2 Lesson 3, 4, 5 and 6. Discuss Project 1 – September 12, 2019 Archived

• Session 3 Lesson 7, 8 and 9 – October 10, 2019

• Session 4 Lesson 10 and11. Discuss Project 2 October 31, 2019

• Session 5 Preparation for the Final Exam November 14, 2019

NOTE: Project 1 is due October 9, 2019

Project 2 is due November 13, 2019

Exam is written December 5, 2019


Question Time

Questions

Real Estate Division UBC Sauder School of Business 4545

Feedback and Questions

For further questions related to the course content presented in this session, contact your tutor (please include the course number in the subject line):

[email protected]

For all other feedback about the webinar please contact the Real Estate Division (please include the course number in the subject line):

[email protected]

mailto:[email protected]

mailto:[email protected]

BUSI 330: Foundations of Real Estate Appraisal Session 3 · Real Estate Division UBC Sauder School of Business 3 Introduction Welcome to the webinars for the Foundations of Real Estate

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