OLDER HOMES IN NEED OF UPDATING
The subject has an older kitchen with few appliances and could use interior paint and general updating, but this should not effect general marketability due to any potential new owners have differing, parallel personal preferences.
EFFECTIVE AGE
Building’s age based on its condition and use
The effective age of a building is not its actual age. Effective age takes into account any minor or major
renovation made on the building and how it has been maintained. Appraisers, professionals who estimate the value of a property, will use the effective age to calculate accrued depreciation, a value that is used for tax purposes and equal to the difference between the cost to replace the building and its current value.
Typically, a home that has been completely updated or rehabilitated has an effective age of 5-10% of its actual age (for example a 100 year old home that has been gutted and completely redone, will typically have an effective age of 5-10 years, because it much more like a newer home than an older one now) A home that has had major renovations typically has an effective age of 10-20% of its actual age. A home that has been maintained with many minor updated typically has an effective age of 20-40% of its actual age. A home that has been maintained with normal maintenance and some minor updates typically has an effective age of 40-70% of its
actual age. A home that has been maintained, yet has some deferred maintained and is still in livable condition,
typical has an effective age of 70-100% of its actual age.
GLA
ADJUSTMENTS
1.) If the subject property is within 100 sq ft of the comparable, no
adjustment is needed and just put "similar" or "no adj."
Formula:
1.) Add all of the Price/GLA of the comparables.
ie 5 comps, price/gla is 137.14 + 148.11 + 154.32 + 140.16 + 136.27
= Total = 716
Divide the total by the number of comps 716/5 = 143.2, that is your
average
Divide that average by 5 (its always Five regardless of the number of comps
used, because the GLA is 1/5 of the marketable value of the home)
143.2 / 5 = 28.64 That is your number you use for the GLA adjustments
and it gives us a viable "MARKETABILITY" GLA number, in other words,
what the market demands per extra square foot
Why, you may ask do we do this. Well, that's a good question. Here is
how I came about this formula
1.) An underwriter at a recent seminar told me that's how All Underwriters do
it.
Ok, so being the marvelous creatures that they are, I did not accept this
explanation and tested his theory (ok, not really a theory, more like a statement)
against various sales in various markets.
And I will be darned if it didn't make complete sense....My theory behind why
this works is as follows:
I believe this works because it not only takes into consideration the actual
sales values per GLA of the comparables, it isolates the GLA from the land and
various amenities of the various markets and allows for a more
uniform adjustment per each market based on that markets demand for additional
GLA in relation to its Price/GLA. Didn't I just say that?
In technical terms, the relationship of the overall demand per the
market is directly in relation to the Price/GLA, which includes the land
value. When a percentage of that average Price/GLA is separated out (in
this case 1/5) it tends to isolate the other influences mutually
exclusive from the GLA, which when tested by me and evidently
underwriters, appears to be an excellent and uniform adjustment for every
market. We could say that the GLA of the home has a 1/5 relation to the
overall marketability, which when you think about it makes sense. What
are the Five biggest factors that make up a value of a home.
1.) Location (reflected in the land value and location adjustments
(neighborhood))
2.) GLA
3.) Style and quality
4.) Functional Utility (Bedrooms, Baths, Layout, AC, Decks, Amenities)
5.) Age and Condition.
SITE CONDOMINIUMS IN MICHIGAN:
They have become a popular part of Michigan's Real
Estate Development, because they allow developers to cut expensive government
red tape and subdivision costs of the 1967 Michigan Subdivision
Control Act.
You own your real estate lot and building, but usually things like parks
or roadways are in common ownership by the condominium pooled ownership
feature and they may or may not have monthly costs associated with them (they
usually do not), that are the shared ownership items and the cost of their
upkeep and finally what control over the common elements or private sections
is empowered, but mainly it is a way to control the style and quality of
housing within the various "Site Condo" Communities.
Until the "plat act" is revised you can expect site condominium
popularity to grow. In fact many new developments are " site
condos " to the point that the local home buying market has become
familiar with the term and accepting of the price benefits. Site
Condominiums are Owned by Fee Simple Ownership and should not be confused with
Other Condominium developments that have common Home Owner Associations and
Common Elements. It is most appropriate to compare them with Subdivided,
parceled and condominium lots
GROSS RENT MULTIPLIER
The Gross Rent Multiplier or GRM is a ratio that is used to estimate the value of income producing properties. The GRM provides a rough estimate of value. Only two pieces of financial information are required to calculate the Gross Rent Multiplier for a property, the sales price and the total gross rents possible. If this information is available for multiple sales of similar types of income properties in a particular area, it can then be used to estimate the market value of other similar properties in that area. Some investors use a monthly Gross Rent Multiplier and some use a Yearly GRM. The monthly Gross Rent Multiplier is equal to the Sales Price of a property divided by the potential monthly gross income and the Yearly GRM is the Sales Price divided by the yearly potential gross income. Example 1: If the sales price for a property is $200,000 and the monthly potential gross rental income for a property is $2,500, the GRM is equal to 80. Monthly potential gross income is equal to the full occupancy monthly rental amount which assumes all available rental units are occupied. Generally speaking, properties in prime locations have higher GRMs than properties in less desirable locations. When comparing similar properties in the same area or location, the lower the GRM, the more profitable the property. This statement assumes that operating expenses are proportionate for the properties being compared. Since the GRM calculation doesn't include operating expenses, this statement might not hold true for similar properties where one of the properties has significantly higher operating expenses. Sales Price $200,000 / Monthly Potential Gross Income$2500 = GRM (monthly) 80
COST TO CURE - REPLACING CARPET
calculate for me (approx) the carpet replacement........
1st house is 2,200 sq. feet......- 3 baths and the kitchen/dining area.....(tile/wood)
2nd house is 1,500 sq. feet.....- 1 bath/kitchen/dining area (tile/wood) Total coverage area of the carpet.....(should be much smaller than actual GLA)
I would say in this case
1st house = 1900 sq ft /9 (Per Yard) = 211 yards x $3.50 per yard (typical cheapy carpet) = $738.50
2nd house = 1200 sq ft/9 (Per Yard) = 133 yards x $3.50 per yard (Typical
Discount carpet) = $465.50
Now, I made some assumptions here, that the floor is all covered by carpet, except the bathrooms, kitchen and pertinent non carpet areas, such as under the cupboards, walls, fridge, etc.
If you feel I am incorrect, recalculate using the sq footage you deem appropriate/9x$3.50
WATERFRONT AND WATER ACCESS ADJUSTMENTS
This is specifically what I am speaking about and I will give you an example.
There was an appraisal on a home in Fenton Michigan. It was in a neighborhood (actually on a
peninsula, that had mostly lakefront properties and this home had a Private deeded access.
Now, the actual fact of having a Private deeded access with docks, etc., The
Appraiser ascertained made very little difference in value of homes nearby with no private deeded access, BUT, it had a unobstructed Lake View from across a parcel that was designated for the lake access and this gave it more value.
We must be very careful when looking at PRIVATE lake access. The Lender, Broker, HomeOwner and most others will try to tell you it has the same value as lakefront, but in reality, IT DOES NOT! Lake Front is Lake
Front..not Deeded Lake Front.
In a case like this, I would attempt to find comparables with similar Lake Access (which, by the way is VERY difficult to do) and if I could not find any, I would make a minimal adjustment IF ANY.
HIGHEST AND BEST USE
THE CONCEPT OF HIGHEST AND BEST USE is one of the most important and least understood principles in real estate. The highest and best use of a property, more than anything else, is what determines its value. Highest and best use is defined as that use, from among reasonably probable and adequately supported alternative uses, which is:
legally permissible
physically possible
financially feasible
maximally productive
Property is always valued on the basis of its highest and best use, which may or may not be its present use. Land value is based on the highest and best use of the property as if vacant and ready for development to that use. Improvements are valued according to how they contribute to (or detract from) the value of the land. The highest and best use must occur within the reasonably near future and can’t be remote or speculative.
In the real world, very few properties are developed to their highest and best use.
What Is Physically Possible?
There's a lot of truth to that old real estate saw about location, location, location. Every site has physical characteristics which determine its highest and best use. Some properties have value-enhancing views and frontages. Other properties are limited by poor access, steep topography or unstable soil. The site may have poor drainage and require an expensive type of septic system. It may be in the path of urban growth or in the middle of nowhere.
Sometimes you have to balance the positive and negative attributes. For example, an ocean front property may have geologic problems which require special foundation work, but the value of the ocean frontage may be worth the expense.
What Is Legally Permitted?
Legally permissible uses are normally defined by current zoning and other land use regulations. Some types of land use restrictions, such as easements, are relatively permanent. Zoning restrictions, on the other hand, can change depending on who is sitting on the City Council, County Board of Supervisors or State Coastal Commission.
The city or county general plan determines overall land use goals and policies. Zoning ordinances and subdivision regulations implement the general plan. In addition, planning commissions, review boards and public agencies often have the authority to attach a wide variety of permit conditions.
A thorough title search will reveal any easements or CC&Rs (covenants, conditions and restrictions) which may be recorded with the deed. In Mendocino County, some property owners have been able to divide their land by obtaining Certificates of Compliance for previously-owned substandard parcels.
A surveyor may uncover encroachments or boundary line problems which could affect the legal use of the property. On some properties, others may claim prescriptive rights or squatters rights through long-term use or adverse possession.
What Is Financially Feasible?
Financial feasibility is based on supply and demand finding out who is the competition and who are the potential buyers, tenants and customers. This often requires extensive market research and the accurate prediction of trends.
Franchise operations such as McDonald's and Taco Bell have made a science out of location studies. They know exactly who their customers are. They analyze traffic patterns and study community age and income profiles. Successful businesses even know what side of the street to be on (donut shops on the way to work, liquor stores on the way home). They don’t locate anywhere by accident.
What Will Produce The Highest Rate Of Return?
For income property, figuring out the highest rate of return might involve studying several alternatives and design configurations. These kind of studies help determine such things as the optimum number of units in a motel or apartment building and what sort of rents and rates can be charged.
Even if you are building or remodeling a house, there are ways to deterime what will produce the highest value. If you over-improve for the neighborhood, you may put more money into the house than you would get if you sold it. If you under-improve, you may not be creating the highest value.
Remodel, Expand, Convert or Demolish
With careful research and analysis, it's possible to come up with some idea of the highest and best use for bare land. But for improved property, you often have to decide whether to remodel, expand, convert or demolish.
Consider, for example, an older run-down single family house in an area zoned for commercial use. If there is more demand for residential than commercial use, it may pay to remodel the house and rent it out. If the residential demand increases, it may pay even more to expanded the rental to a duplex. As commercial demand increases, you might get more rent money by converting the house into office space. But when the demand for conventional retail buildings becomes high enough, it's time to demolish and rebuild.
Legally Nonconforming Uses and Use Permits
Legally nonconforming uses are those which become "grandfathered" when new zoning regulations are adopted. Legally nonconforming uses change the highest and best use and often produce a higher value than what the current zoning ordinance will allow.
For example, an automotive repair shop in the middle of a residential neighborhood might be a legally nonconforming use. Most zoning ordinances allow nonconforming uses to continue until they fall out of use for a period of time (usually one year) or are destroyed by fire, disaster or neglect. Sometimes neighboring property owners can bring enough political pressure to abate the nonconforming use, especially if it creates a nuisance or a health hazard.
Most zoning ordinances include provisions for granting conditional use permits, which allow the permitting agency to attach conditions to their permits. Use permits can have a significant effect on the highest and best use.
Interim and Ultimate Highest and Best Use
Properties often have an interim highest and best use because there may not be a ready market for the ultimate highest and best use.
For example, If a 10-acre parcel is zoned R-1 the ultimate highest and best use would be single family homes on one-acre lots. However, there may already be hundreds of one-acre lots on the market and little or no demand for them. Therefore, the only buyers will be those who are willing to speculate on the property’s future worth. And land speculators don’t generally pay top dollar.
Excess Land
Excess land is surplus land beyond that which is needed to support the property's highest and best use. Excess land can be dividable or undividable and often has a separate highest and best use. There are several types of excess land.
surplus land which is undividable
surplus land which could be sold to an adjacent landowner through a boundary line adjustment
surplus land which is subdividable under existing planning and zoning regulations
surplus land which is subdividable through the county Certificate of Compliance process
For example, a house on a 200-acre lot zoned RL-160 (Range Land with 160 acre minimum lot sizes) has excess land. If the land required to support the house, a garage and a few outbuildings is five acres, then the other 195 acres is excess land. The highest and best use of the five-acre portion is residential while the highest and best use of the 95-acre portion is probably agricultural.
Before and After Analysis
Earthquakes, floods and storms can inflict major damage on real estate. Properties can also be severely altered through contamination, easements, encroachments and eminent domain acquisitions for roads and utilities. In most of these cases
