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Chapter 12 Value Theory_ Highest and Best use Analysis_ and the

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Chapter 12 Value Theory_ Highest and Best use Analysis_ and the Powered By Docstoc
					         Chapter 12

Value Theory, Highest and Best
  use Analysis, and the Cost
         Approach
Major Topics
 •   Value, Price and Cost Concepts
 •   Market Price Formation from Reservation Prices
 •   Traditional Methods of Valuation
 •   Newer Approaches to Value
 •   Highest and Best Use Defined
 •   Improved or unimproved (vacant)
 •   The Impact of Option Value
 •   When Cost approximates market value
 •   Methods to estimate cost new
 •   Methods to estimate accrued depreciation
 •   Replacement versus reproduction cost
Terms
   •   Subject Property
   •   Appraisal = “opinion of value”
   •   Cost
   •   Reservation Price/Investment Value
   •   Liquidation value
   •   Market Value
       • Most probable selling price, assuming
          “normal” sale conditions.
       • Value for the “typical” market participant.
Price and Value Formation
Methods of Valuation
   • Cost Approach

   • Market or Sales Comparison

   • Income Approach
Highest and Best Use
     Definition of Highest and Best Use (H&B Use)
      “The reasonably probable and legal use of vacant land
      or improved property, which is physically possible,
      appropriately supported, financially feasible, and that
      results in the highest value” as of the date of the
      appraisal

     Option Value


  Site Value = Current Use value +
                Future Use Value/ Option Value
Improved Site Value
• Usually, H&B use of an improved property is the
  current use
• Cost of construction and demolition > cost of
  construction alone and also the opportunity cost of
  time for the conversion
                                          Lost income
                                          during
                                          construction


                                          Demolition
                                          Cost and
                  New market              Site Prep
                  value with a
                  new building
                  at H&B use              Existing
                                          Building
                                          Value
The Steps in the Cost Approach

   Step 1: Estimate land value

   Step 2: Estimate the structure cost new
     Comparative-Unit Method

     Unit-in-place Method

     Quantity Survey Method
         Costs

   Step 3: Deduct accrued Depreciation
Depreciation

 Depreciation
 1. Physical
 2. Functional
 3. Location or External
 Curable Defects
 Negative Value of Incurable Depreciation
 Accrued Depr
   Cost New * Effective Age ÷ Economic Life
Cost Approach

2 acre lot, 3-year-old house, 60-year life
2000 square feet finished living areas
500 SF unfinished garage
Estimates:
  $50/SF for finished
  $28/SF for unfinished
  Lot = $25,000
Cost Approach

1.   Lot = $25,000
2.   Finished = 2000SF * $50/SF = $100,000
     Garage = 500SF * $28/SF = $14,000
     Reproduction Cost = $114,000
3.   Depreciation = 3/60*$114,000 = $5700

Estimate = $25K + 114K - 5700 = $133,300

				
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posted:12/3/2011
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