Appraisal Flashcards
Supply and demand
When demand exceeds supply, scarcity exists, values rise.
When supply exceeds demand, surplus exists, values decline.
When supply and demand are equal, the market is in balance, values stabilize.
Utility
A property’s use in the marketplace contributes to the demand for it.
Transferability
How readily or easily title or rights to real estate can be transferred affects the property’s value.
Anticipation
The benefits a buyer expects to derive from a property over a holding period influence what the buyer is willing to pay for it.
Substitution
A buyer will pay no more for a property than the buyer would have to pay for an equally desirable and available substitute property.
Contribution
The value of an improvement is equal to the change in market value that the addition of the improvement causes.
Change
Market conditions affect the benefits that can arise from the property.
Highest and best use
A property achieves its maximum value when it is put to whichever use generates the greatest income and return. The highest and best use can be legally permissible, physically possible, financially feasible, and maximally productive.
Conformity
A property’s maximal value is attained when its form and use are consistent with surrounding properties and uses.
Progression and regression
The value of a property is influenced by the values of neighboring properties.
Assemblage
Conjoining adjacent properties can create a combined value in excess of the values of the unassembled properties. This excess value is called plottage value.
Subdivision
The division of a single property into smaller properties can result in a higher total value.
Reproduction value
the value based on the cost of constructing a precise duplicate of the subject property’s improvements, assuming current construction costs.
Replacement value
the value based on the cost of constructing a functional equivalent of the subject property’s improvements, assuming current construction costs.
Salvage value
the nominal value of a property that has reached the end of its economic life; also, an estimate of the price at which a structure will sell if it is dismantled and moved.
Assessed value
the value of a property as estimated by a taxing authority at the basis for ad valorem taxation.
Appraisal process
- Identify the purpose
- Assimilate the relevant data
- Assess the highest and best use
- Eliminate the value of the land
- Apply the three approaches to value
- Reconcile the values from the approaches
- Compile the report.
Sales Comparison Approach
- Identify comparable sales
- Compare comps to the subject and make adjustments to the comparables
- Weigh values indicated by adjusted comparables for the final value estimate of the subject
Types of Cost Appraised
Reproduction - cost of making a precise replica
Replacement - cost of making a functional equivalent
Steps in Cost Approach
- Estimate land value
- Estimate replacement cost of improvements
- Estimate total depreciation
- Subtract: (cost of improvements - depreciation) = depreciated improvements cost
- Add land back in: (land value + depreciated improvement = value estimate of property
Functional Obsolescence
outmoded physical or design features: curable or incurable
Economic Obsolescence
loss of value due to adverse changes in surroundings: incurable
Steps in Income Approach
- Estimate potential gross income
- Estimate effective gross income (total potential income - vacancy)
- Estimate net operating income (NOI) (effective income - expenses)
- Select and apply capitalization rate (NOI / cap rate)
GRM
price/monthly rent
Value [GRM]
GRM x monthly rent
Comparative Market Analysis steps
- Identify comparables sold, for sale properties, and expired listings
- Compile comparison date for each comparable: price. sale date, location, age, lot size, site aspects, living area, bedrooms, etc.
- Complete adjustments for differences; rules:
a. Never adjust the subject
b. Add value to the comparable if a feature is inferior to the subject
c. Subtract value from the comp if a feature is superior to the subject - Derive total adjustments for each comparable
- Reconcile all value-adjusted comps to the subject to identify a value estimate
FIRREA
Financial Institution Reform, Recovery and Enforcement Act enacted in 1989 to regulate appraisal practices
requires that competent individuals whose professional conduct is properly supervised perform all appraisals used in federally related transactions
As of January 1, 1993, federally related appraisals must be performed only by state-certified appraisers
USPAP - Uniform Standards of Professional Appraisal Practice - competency standards established by the Appraiser Qualifications Board of the Appraisal Foundation
USPAP
Uniform Standards of Professional Appraisal Practice
requires recognized appraisal methods
must exercise a defined level of due diligence
must properly report results
must make proper disclosures and assumptions
