Section 876 IAC 2-14-9 - Real property valuation; appraisalAuthority: IC 25-34.1-2-5
Affected: IC 25-34.1-5
Sec. 9.
(a) The competency and instructional level for subdivisions (1) through (5) is Level 3. The following are basic appraisal concepts: (1) Definition of "appraisal" including the following: (2) Valuation versus evaluation including the following: (A) Valuation-market value estimate.(B) Evaluation as follows: (i) Economic feasibility study.(ii) Land utilization study.(3) Concepts of value including the following: (C) "Value" versus "cost" and "price".(D) Kinds of property value (based on use of the value estimate) as follows: (4) Forces and factors influencing property value including the following: (A) Social ideas and standards.(C) Government activities.(D) Physical or environmental forces.(5) Basic economic principles of value including the following: (H) Highest and best use. (Use example for illustration.)(b) Due to the complexity pertaining to approaches to value (appraisal methods) the competency and instructional level for subdivisions (1) through (4) are noted separately in each subdivision. The following are concepts of approaches to value: (1) Market data approach including the following (also called direct sales comparison approach) (Level 4 students should be afforded practice in the use of this approach for estimating the value of residential properties.): (A) Definition and general use.(B) Procedures as follows: (i) Find recently sold comparable properties ("comparables") as follows: (AA) A minimum of three (3) or four (4) is preferable.(BB) Sources include MLS records, other brokers, broker's own records, sellers, recorded deeds, tax records.(ii) Identify and analyze sales and property data as follows: (AA) Sales data includes sale price, terms of sale, and date of sale.(BB) Property data includes location, size, type, and quality of construction, age, condition, and all other major property characteristics.(iii) Adjust the sale prices of comparables to reflect differences between them and the subject property with respect to property and sales data.(iv) Correlate the adjusted sale prices of comparables to derive estimate of value for subject property.(2) Cost approach including the following (Level 3 except as indicated below): (A) Definition and general use.(B) Estimate of land (lot) value. (Determine by using market data approach.)(C) Estimating building costs as follows: (i) Reproduction cost versus replacement cost.(ii) Methods of estimating reproduction or replacement cost as follows (Level 1: subitems (AA),(BB),(DD); Level 3: subitems (CC) and (EE)):
(AA) Quantity survey method (most complex and most accurate method).(BB) Unit-in-place method.(CC) Square foot (comparative) method (simplest and most widely used method by appraisers).(DD) Use of construction cost services (published estimates of building costs).(EE) Market abstraction method (same concept as used with market data approach; new, recently sold properties are used).(iii) Depreciation as follows (Level 2 except as noted): (AA) Definition and basic concepts, such as "effective age" and "effective life".(BB) Depreciation methods as follows: Age/life (straight-line) method (Level 3); market abstraction method; breakdown method: physical deterioration (curable and incurable), functional obsolescence (curable and incurable), economic obsolescence (incurable only). (D) Formulating the opinion of value (estimated reproduction/replacement cost less (-) estimated depreciation plus (+) estimated value of land equals (=) indication of value).(3) Income approach including the following (Level 3 except as noted below): (A) Definition and general use.(B) Gross rent multiplier (GRM) method as follows: (i) Obtain sales price and gross income (rent) data on recently sold similar (comparable) properties. (Also record property and other sales data for comparative purposes.)(ii) Derive gross rent multiplier for each comparable (sales price divided by gross income equals gross rent multiplier).(iii) Correlate data to determine appropriate gross rent multiplier.(iv) Derive estimate of subject property's value (gross rent multiplier multiplied by gross income of subject equals indicated value of subject).(C) Capitalization of income method as follows: (i) Estimate gross income based on "market rent".(ii) Derive net operating income estimate by deducting projected vacancy and collection losses and operating expenses from gross income projection. (Note: Operating expenses include items such as property taxes, property insurance, maintenance and repair, management salaries, commissions, and replacement reserve. Items such as book depreciation, debt service, and capital improvements are not operating expenses.)(iii) Derive capitalization rate by either subitem (AA) or (BB) as follows: (AA) Market abstraction. (Sales concept as used with market data approach and GRM method. This is most commonly used method.)(BB) Other methods such as "band of investment method", "build-up method", or "mortgage equity method". (These are beyond the scope of this course. Mention only, do not cover.)(iv) Derive estimate of property value (value equals net operating income divided by capitalization rate).(v) Discounted cash flow analysis. (Also called "present value analysis" may be used in connection with the capitalization of income, i.e., rentals from leases to be received at some future time.) (Use present value tables in connection with examples and problems on this topic.)(4) Reconciliation of the three (3) approaches to value including the following: (A) Assign appropriate "weight" to value indicated by each approach according to the reliability of each approach for the particular subject property.(B) Derive final conclusion (estimate) of value.Indiana Real Estate Commission; 876 IAC 2-14-9; filed Dec 1, 1989, 5:00 p.m.: 13 IR 671; errata filed Jun 2, 1998, 11:33 a.m.: 21 IR 3940; readopted filed Jun 29, 2001, 9:56 a.m.: 24 IR 3824; readopted filed Jul 19, 2007, 12:57 p.m.: 20070808-IR-876070067RFA