The AI-GRS Designation: Review Theory – General Course in Hawaii

September 12, 2014

The Hawaii Chapter of the Appraisal Institute is hosting the Review Theory – General course in Honolulu in November 2014!  Register here: http://www.myappraisalinstitute.org/education/add2cart.aspx?id=32296

Diamond Head Hawaii

AI-GRS Designation

According to the AI website:

The AI-GRS membership designation is held by appraisers who are experienced in general appraisal review.

To become an AI-GRS member of the Appraisal Institute, an individual must:

  • Have good moral character;
  • Meet standards and ethics requirements;
  • Hold a bachelor’s degree or higher;
  • Meet special education requirements;
  • Pass a comprehensive examination; and
  • Possess experience in general appraisal review that meets specific standards.

These review appraisers possess special experience and knowledge that give them the tools to address the issues unique to general and commercial real property review appraisals. AI-GRS Designated members agree to adhere to the Appraisal Institute code of professional ethics and standards of professional appraisal practice, underscoring their commitment to sound and ethical professional practice.

These review appraisers must stay informed of developments pertaining to review of general and commercial real property appraisals, enabling them to provide review appraisals reflecting the latest in professional practice.

The Review Theory – General class is required coursework for the AI-GRS review designation and will be taught in Honolulu by Joseph C. Magdziarz, MAI, SRA (“Joe Magz”) on November 3, 2014 through November 7, 2014.  More information is here: http://www.myappraisalinstitute.org/education/more_info.aspx?id=32296

 

The following course description is taken from the AI website:

Review Theory—General is the fundamental review course that all reviewers should have in their education background. It is a required course for individuals pursuing the Appraisal Institute General Review Designation.  Participants embark on an in-depth journey of the seven steps that are outlined through the review process, which is at the core of this course. To be a reviewer, an appraiser must learn how to develop opinions of completeness, accuracy, adequacy, relevance, and reasonableness relative to the work under review. These opinions must be refined through tests of reasonableness in order to develop opinions of appropriateness and credibility. By taking this course, participants may gain invaluable confidence on the fundamentals of review.

Upon completion of the course, participants should be able to:

      • Define review.
      • Distinguish between appraisal and review.
      • Evaluate the necessary knowledge and skills required to complete reviews.
      • Distinguish between trivial and material errors.
      • Identify types of review assignments and the process employed in the reviewer’s scope of work.
      • Recognize regulatory compliance issues for review appraisers
      • Identify the steps necessary to effectively communicate the review.

The Review Theory – General course is required for individuals pursuing the Appraisal Institute General Review Designation (AI-GRS – Appraisal Institute General Review Specialist ). For more information regarding the requirements for the review designation, please click here.

If you are currently designated, click here for more information on the alternative path.

If you are currently a candidate for designation, or wish to become a candidate, click here for the specific designation requirements.

Please read my disclaimer.

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Maui Million Dollar Home Sales ($1.0M+) – Day 7 of 10 – “When Were They Built?”

September 24, 2013

From January 1, 2012 through September 16, 2013, a total of 231 “million dollar plus” homes sold in Maui County, generating total volume in excess of $525 million.  There are many ways that Hawaii real estate appraisers analyze sales statistics for luxury homes.  Because a proper market study for this segment would run many pages, I am posting one article per day for ten days.

Day 7 of 10 – Maui Million Dollar ($1.0M+) Single Family Homes By Year Built

Consider the following graph and chart, which categorize Maui million dollar home sales by the year of their construction:

Maui Million Dollar Home Sales By Year Built

Maui Million Dollar Home Sales By Year Built

Maui Million Dollar Single Family Homes By Year Built
Sold From 1/1/2012 through 9/16/2013
Year Built # of Sales % of Total
1920-1929 1 0.4%
1930-1939 4 1.7%
1940-1949 1 0.4%
1950-1959 10 4.3%
1960-1969 3 1.3%
1970-1979 18 7.8%
1980-1989 35 15.2%
1990-1999 40 17.3%
2000-2009 107 46.3%
2010-2019 12 5.2%
Total 231 100.0%

More than 50 percent of the Valley Isle’s million dollar home sales have been built since 2000, with 84 percent constructed since 1980.

Bottom Line: Newer is better, no surprise here.

As wealthy buyer preferences for residential real estate evolve over time, the luxury segment is quick to adapt.  For example, solar energy and “great rooms” are in, rear projection television nooks and galley kitchens are out.

Although they are usually built to high construction standards, an appraiser often observes that residences in the high-end/second-home market can have economic lives that are are shorter than less expensive dwellings–sometimes meaningfully so.  A future article will identify a case study or two where ultra-high end oceanfront homes in Hawaii were torn down for land value/redevelopment, despite being less than 20 years old!

Questions or comments?  Please leave them in the comment box below, I would be happy to clarify and/or expand.

Aloha, Chris

Bonus: Economic Life

economic life

The period over which improvements to real property contribute to property value.

Source: Appraisal Institute, The Dictionary of Real Estate Appraisal, 5th ed. (Chicago: Appraisal Institute, 2010).

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Maui Million Dollar Home Sales ($1.0M+) – Day 6 of 10 – “How much land do they have?”

September 23, 2013

From January 1, 2012 through September 16, 2013, a total of 231 “million dollar plus” homes sold in Maui County, generating total volume in excess of $525 million.  There are many ways that Hawaii real estate appraisers analyze sales statistics for luxury homes.  Because a proper market study for this segment would run many pages, I am posting one article per day for ten days.

Day 6 of 10 – Maui Million Dollar ($1.0M+) Single Family Homes By Land Area

Consider the following graph, which categorizes the Maui million dollar home sales by their lot sizes:

Maui Million Dollar Home Sales By Land Area

Maui Million Dollar Home Sales By Land Area

If you are unfamiliar with the luxury home market in Hawaii, the data presented on this graph might be counter-intuitive.  As  shown, most million dollar home sales are on lots that are smaller than half an acre in size, and only a handful of transactions are on tracts larger than ten acres.

Bottom Line: Once Again, Bigger Isn’t Necessarily Better

Not many people would argue that, all things being equal, more land area is usually better.  But on Maui and throughout the Hawaii high-end residential sector, an experienced real estate appraiser understands that beach frontage and ocean views are the primary drivers of market value.  Since near-ocean properties are typically subdivided into smaller land area configurations, it is easy to see how the most common high-dollar sales have smaller lots.

Questions or comments?  Please leave them in the comment  box below, I would be happy to clarify and/or expand.

Aloha, Chris

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Maui Million Dollar Home Sales ($1.0M+) – Day 5 of 10 – Price Per Square Foot

September 22, 2013

From January 1, 2012 through September 16, 2013, a total of 231 “million dollar plus” homes sold in Maui County, generating total volume in excess of $525 million.  There are many ways that Hawaii real estate appraisers analyze sales statistics for luxury homes.  Because a proper market study for this segment would run many pages, I am posting one article per day for ten days.

Day 5 of 10 – Maui Million Dollar ($1.0M+) Single Family Homes By Price Per Square Foot Of Living Area

Consider the following graph and chart, which measures each of the million dollar sales divided by their respective living areas in square feet:

Maui Million Dollar Sales By Price Re Square Foot

Maui Million Dollar Sales By Price Per Square Foot

 

Island of Maui Million Dollar Single Family Homes By Price Per Square Foot Of Living Area
Sold From 1/1/2012 through 9/16/2013
Price Per Square Foot # of Sales % of Total
$0-$250 2 0.9%
$250-$500 81 35.1%
$500-$750 77 33.3%
$750-$1000 36 15.6%
$1000-$1250 14 6.1%
$1250-$1500 7 3.0%
$1500-$1750 4 1.7%
$1750-$2000 2 0.9%
$2000-$2250 2 0.9%
$2250-$2500 2 0.9%
$2500-$2750 1 0.4%
$2750-$3000 1 0.4%
$3000-$3250 0 0.0%
$3250-$3500 0 0.0%
$3500-$3750 1 0.4%
$3750-$4000 1 0.4%
Total 231 100.0%

More than 90 percent of Maui’s million dollar home sales in the study period fall in the “price per square foot” range of $250 to $1,250, with the $250 to $1,000 range accounting for 84 percent of the transactions.

Maui real estate agents that are active in the luxury sector report that the high-end/luxury market typically begins at the $1,000 per square foot level.  The sub-$1,000 data shows how raw demand for Maui residences generates a great number of high dollar ($1.0 M plus) sales for “less-than-luxury” homes.

The two sales that cleared the $3,000 per square foot level did so for different reasons: one was a prime white sand beach home on South Kihei Road that sold for $23.0 million.  The other was an older/smaller cottage on an amazing 1.1 acre oceanfront lot near Paia–the high price per square foot of living area was due to the largely insignificant improvements on a very valuable piece of land.

Bottom Line: At least on Maui, a million bucks doesn’t go as far as it used to.

At these prices, it is easy to see how a Maui real estate appraiser could be regularly confronted with homes that sell for prices that easily exceed Fannie Mae, Freddie Mac, and FHA conforming loan limits.

Questions or comments?  Please leave them in the comment  box below, I would be happy to clarify and/or expand.

Aloha, Chris

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Superior Comps, Downward Adjustments

August 30, 2013

When real estate appraisers are using the sales comparison approach to value property, adjustments are made to account for differences in relevant property characteristics.

Over the past week I got a couple of emails about adjustments, specifically: “why are downward adjustments made to superior comparables?”

This video sorts our the concept that at first might be counter-intuitive by looking at two residential features that are common in Hawaii: Swimming Pools and Ocean Views.

Questions?  Please ask in the comment box below.

Aloha, Chris

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Sales Comparison, Adjustments, and Paired Sales

August 23, 2013

This video looks at the sales comparison approach that appraisers use as the primary method to value real estate.

A few appraisal terms that are used in the video are:

Sales Comparison Approach
A comparative approach to value that considers the sales of similar or substitute properties and related market data and establishes a value estimate by processes involving comparison. In general, a property being valued (a subject property) is compared with sales of similar properties that have been transacted in the open market. Listings and offerings may also be considered. A general way of estimating a value indication for personal property or an ownership interest in personal property, using one or more methods that compare the subject to similar properties or to ownership interests in similar properties. This approach to the valuation of personal property is dependent upon the Valuer’s market knowledge and experience as well as recorded data on comparable items.

Adjustments
Mathematical changes made to basic data to facilitate comparison or understanding. When dollar adjustments are used, individual differences between comparables and the subject property are expressed in terms of plus or minus dollar amounts; with percentage adjustments, individual differences are reflected in plus or minus percentage differentials.

Paired Data Analysis
A quantitative technique used to identify and measure adjustments to the sale prices or rents of comparable properties; to apply this technique, sales or rental data on nearly identical properties is analyzed to isolate and estimate a single characteristic’s effect on value or rent. Often referred to as paired sales analysis.

Adjustment Grid
A table used to display comparable data and facilitate adjustment of differences in elements of comparison.

Comparables
A shortened term for similar property sales, rentals, or operating expenses used for comparison in the valuation process. In best usage, the thing being compared should be specified, e.g., comparable sales, comparable properties, comparable rents.

All Definitions Sourced From: Appraisal Institute, The Dictionary of Real Estate Appraisal, 5th ed. (Chicago: Appraisal Institute, 2010).

If you have any questions or comments, please leave them in the comments box below.

Aloha, Chris

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New Book – The Appraisal of Real Estate, 14th Edition

August 20, 2013

The newest edition of the appraisal bible, “The Appraisal of Real Estate, 14th Edition” is being released in mid-September 2013.  It’s a book that will act as the Gold Standard for real estate appraisers worldwide.

According to the Appraisal Institute, it will be available for the first time in digital formats: as a PDF in September 2013 and in E-pub and Kindle formats in January 2014!

It is an essential text if you are in the appraisal field, or engage appraisers in your practice:

http://www.appraisalinstitute.org/14thedition/

The Appraisal of Real Estate - 14th Edition

UPDATE: The Appraisal Institute just released the table of contents for the 14th Edition.

You can download the PDF here: The Appraisal of Real Estate 14th Edition – Table of Contents

I’m looking forward to Chapter 14, “Statistical Analysis in Appraisal”–it appears to be new in this edition.

Table of Contents
Foreword – ix
Acknowledgments – xi

PART I Real Estate and Its Appraisal
Chapter 1 Introduction to Appraisal – 1
Chapter 2 Land, Real Estate, and Ownership of Real Property – 11
Chapter 3 The Nature of Value – 19
Chapter 4 The Valuation Process – 35

PART II Identification of the Problem
Chapter 5 Elements of the Assignment – 49
Chapter 6 Identifying the Type of Value and Its Definition – 57
Chapter 7 Identifying the Rights to Be Appraised – 69

PART III Scope of Work Determination
Chapter 8 Scope of Work – 87

PART IV Data Collection and Property Description
Chapter 9 Data Collection – 95
Chapter 10 Economic Trends in Real Estate Markets and Capital Markets – 129
Chapter 11 Neighborhoods, Districts, and Market Areas – 163
Chapter 12 Land and Site Description – 189
Chapter 13 Building Description – 219

PART V Data Analysis
Chapter 14 Statistical Analysis in Appraisal – 275
Chapter 15 Market Analysis – 299
Chapter 16 Highest and Best Use Analysis – 331

PART VI Land Value Opinion
Chapter 17 Land and Site Valuation – 359

PART VII Application of the Approaches to Value
Chapter 18 The Sales Comparison Approach – 377
Chapter 19 Comparative Analysis – 397
Chapter 20 Applications of the Sales Comparison Approach – 427
Chapter 21 The Income Capitalization Approach – 439
Chapter 22 Income and Expense Analysis – 463
Chapter 23 Direct Capitalization – 491
Chapter 24 Yield Capitalization – 509
Chapter 25 Discounted Cash Flow Analysis and Investment Analysis – 529
Chapter 26 Applications of the Income Capitalization Approach – 541
Chapter 27 The Cost Approach – 561
Chapter 28 Building Cost Estimates – 581
Chapter 29 Depreciation Estimates – 597

PART VIII Reconciliation of the Value Indications and Final Opinion of Value
Chapter 30 Reconciling Value Indications – 641

PART IX Report of Defined Value
Chapter 31 The Appraisal Report – 649

PART X Appraisal Practice Specialties
Chapter 32 Appraisal Review – 671
Chapter 33 Consulting – 683
Chapter 34 Valuation for Financial Reporting – 689
Chapter 35 Valuation of Real Property with Related Personal
Property or Intangible Property – 703

ADDENDA
Appendix A Professional Practice and Law – 717
Appendix B Regression Analysis and Statistical Applications – 733
Appendix C Financial Formulas – 753
Bibliography – 797
Index – 819

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Is that thing a “fixer upper” or a “tear down”?

August 15, 2013 3 Comments

Today a friend asked me how real estate appraisers value properties that are in “below average” condition.  He wanted to know if we valued them in their “as is” condition, and whether or not repair costs were factored in.

In essence, how do you know if a property is a “fixer upper” or a “tear down”?

In a nutshell:

  1. If a property is in poor condition, an appraiser considers whether or not the value of the real estate, in its “as is” condition, exceeds the value of the underlying land.
  2. An appraiser determines this by analyzing the cost to repair the building to typical/average condition, and comparing the net value against the value of the underlying land, less demolition costs.

In detail:

It’s a relatively simple process, the appraisal buzzwords associated with this valuation method are “highest and best use” and “cost to cure”.

To demonstrate the analysis, I went on the Honolulu MLS and found a commercial property built in 1959, the same year Hawaii became a State.

Here, in all of its glory, is the poor condition (according to MLS)  office / retail property known as “1339 North School Street”:

1339 North School Street

1339 North School Street, Honolulu, Hawaii

A bunch of appraiser math/mumbo-jumbo below, skip to the chart at the end to see the answer.

For our purposes, the asking price is irrelevant, especially because the listing includes additional land parcels.  The figures used below are part of a simplistic appraisal demonstration only.

Let’s assume an appraiser determines that vacant land in the subject neighborhood is worth $100 per square foot.  Similarly, let’s assume average/typical commercial buildings are selling for $300 per square foot of building area.  The values would compare as shown below.

HYPOTHETICAL APPRAISED VALUES – 1339 N. School St.
Item Area in Square Feet Value Per Square Foot Total Value
Vacant Land 20,000 $100 $2,000,000
Less: Demolition Costs     -$100,000
Equals: Property Value   $1,900,000
       
Average Condition Building 7,500 $300 $2,250,000
    Difference $350,000

Since the value of an average condition building “as improved” is worth more than the property “assuming demolition”, we proceed to the next step: determining the value of the building in poor condition (its “as is” condition).

HYPOTHETICAL APPRAISED PROPERTY VALUE – COST TO CURE
Item Building Area
in Square Feet		 Building Value
Per Square Foot		 Total Value
Average Condition Building 7,500 $300 $2,250,000
Less: Cost to repair to average condition   -$500,000
Equals: Poor Condition Property Value   $1,750,000

Let’s assume a reputable contractor estimated the construction/repair cost necessary to renovate the subject building to “average” condition to be $500,000.  This amount is deducted from the “if in average condition” building value to arrive at the value of the overall property in poor condition of $1.75 million.

So, where are we at?

How does land value (assuming demolition) compare to property value (assuming renovation)?

HYPOTHETICAL APPRAISED VALUES – HIGHEST AND BEST USE
Item Total Value
Land Value Assuming Demolition $1,900,000
   
Poor Condition Property Value $1,750,000
Yep, it's a tear down.

Yep, it’s a tear down.

In this hypothetical scenario, the value of the underlying land, even after deducting demolition costs, exceeds the value of the poor condition property “as is”.  Therefore, the highest and best use of the property is demolition of the built-in-1959 (54 year old) improvements to make way for new development.

Questions, comments?  Please leave them in the comment box, I would be happy to clarify and/or expand.

Aloha, Chris

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Land Value via the Income Approach – A Quick Primer

July 22, 2013

If you’re generally familiar with real estate appraisal, you are no doubt aware that the sales comparison approach is the preferred method of valuing land in most situations.

That said, there are other techniques that can be developed: Market Extraction, Allocation, Land Residual, Ground Rent Capitalization, and Discounted Cash Flow Analysis.

The last three procedures in that list are income capitalization techniques–they are the focus of this article.

Ewa SubdivisionSubdivisions are often valued via the income approach.

Ground Rent Capitalization

Due to the large amount of leasehold land in Hawaii, local appraisers frequently employ this technique to convert ground lease rents into land values.

In appraisal school, one of the first formulas taught is: Income / Rate = Value ( I / R = V )

Here is an example of how it works:

IRV Land Example

As shown, a property’s annual income can be converted to a land value if a capitalization rate, or “rate of return” as it is commonly called in Hawaii, can be derived from the market.  In this example, if an eight percent (8.0%) rate of return was applied to a ground rent of $50,000 per year, the indicated land value would be $625,000.

Land Residual

Similar to the Ground Rent Capitalization technique described above, this method converts the allocated portion of a property’s income that is attributable to the land, and again divides it by a land capitalization rate that is market derived.  Most often, this method is employed when testing the feasibility of alternative uses in highest and best use analyses.

The key difference between this technique and the one above is that income for an improved property is typically the starting point, and it must be segmented (with market support) into the income attributable to land (IL) and income attributable to the building (IB).

The following chart is an example of the Land Residual technique used for Highest and Best Use testing purposes:

H&BU - Land Residual

(Note: In my experience in Hawaii, this method is used so infrequently for market value purposes that the term “Land Residual” is most often meant by appraisers to describe Yield Capitalization/DCF/Subdivision/Development Analyses–described below)

 Discounted Cash Flow Analysis / Subdivision Development Analysis

Yield Capitalization can also be used to value land, it is sometimes referred to as one of the following techniques:

  • Discounted Cash Flow Analysis
  • Subdivision Analysis
  • Development Analysis
  • Subdivision Development Analysis
  • Yield Capitalization
  • Land Residual (Hawaii)

In this technique, gross sale prices are estimated and costs (such as construction, management, or developer’s profit) are deducted to arrive at net income.  This net income is then discounted to a present value estimate for the underlying land.

An example of a Subdivision Development Analysis is shown below:

DCF Example - Subdivision

Comments and/or Questions?  Please leave them in the comments section below–I’d be happy to clarify or expand.

Aloha, Chris

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Resort Homesites – Front Row vs. Second Row – A Big Island Paired Sales Analysis

July 18, 2013 2 Comments

Hawaii real estate appraisers are often asked to value residential properties that have spectacular ocean views.

Not a bad gig, I admit.

I recently did some appraisal work in Maniniowali, a luxury subdivision in the Kukio membership community on the Big Island of Hawaii.

I was valuing a front row lot, and this time, fortunately, there were several recent sales of similar properties to analyze.  But this is not always the case.  In high-end resort subdivisions, sales occur relatively infrequently–as such, quality comparables are sometimes hard to come by.

When appraising oceanfront or front-row properties, it is common to have no recent front-row sales in the subject subdivision.  But often times, there are timely sales of second row lots that can give an appraiser a better sense of values in the front row market.

Consider these two properties at Maniniowali:

Manini Paired Sale AerialImage Source: Bing Maps  (Click to Enlarge)
Manini Paired Sales Tax MapHawaii County Tax Map  (Click to Enlarge)

The aerial photo and tax map show a front row homesite, Lot 14, and a second row homesite, Lot 6.

For persons interested in real estate analysis, especially appraisers, these transactions are a stroke of analytical luck because they:

  • Closed just six days apart, in early May 2013
  • Both have ocean views
  • Are similar in size
  • Have the ability to purchase a membership in the same exclusive club (Kukio)

In short, a perfect opportunity for a pure paired sales analysis! (An appraiser geek term that speaks to the ability to test the value impact of a single, isolated variable)

The chart below shows a paired sales analysis for this set of comparables:

Manini paired saleSource: Chris Ponsar. MAI  (Click to Enlarge)

As shown, the second row lot at Maniniowali sold for approximately 27 cents on the dollar compared to its front row counterpart.  Said differently, Lot 14 sold for 3.6 times the price of Lot 6.

As an appraiser, I use relationships like this to help me in situations where I am challenged for data.  Obviously, this is only one pairing, and I’ll post similar paired sales of front row and second row lots as I come across them, but to the extent this relationship becomes a consistent trend, an appraiser may be able to check the reasonableness of their value conclusions for a front row lot against sale prices of second row lots, and vice-versa.

Comments and/or Questions?  Please leave them in the comments section below–I’d be happy to clarify or expand.

Aloha, Chris

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