Appraisal Flashcards
Chapter 4
Appraisal
an unbiased estimate or opinion of value based on supportable evidence and approved methods. Fees charged for appraisal services are usually based upon the time and effort needed to complete the appraisal as well as what the competitive market will bear. The lender will go by this, and will normally require one.
Purpose of Appraisals
loan purposes, establish market value in order to sell, exchange or purchase, tax purpose, condemnation proceedings, personal representatives of estates, estimate fair market rents, court cases
Four Essential Elements of Market Value DUST
Demand, Utility, Scarcity, Transferability
Demand
the desire to acquire property combined with the economic power to do so
Utility
the ability of the property to satisfy peoples wants, needs and desires
Scarcity
be relatively scarce, demand greater than supply
Transferability
ability to transfer ownership from one person to another
Kinds of value
market or appraised, book, salvage, residual, replacement, insured, assessed, mortgage, depreciated, condemnation
Market Value
the most probably price that a property should bring in a fair sale, given that the buyer and seller are each acting prudently and knowledgeably and assuming the price is not affected by undue stimulus
Market Value vs Market Price
Market value - appraisers estimate of value, where as market price is the actual selling price
Market Value vs Cost
Cost is something that happens in the past. Two houses my cost the same to build, but because of location the price may differ.
Four Great Forces Affecting Value (PEGS)
Physical forces - climate, natural resources, terrain, location, size, shape ; Economic - interest rates, employment, income levels ; Government/political forces- zoning, building codes, police and fire protection, school system, rent control ; Social forces - income, age, marital status, prestige, Location (opinion)
Substitution
person will pay no more for a piece of property than for an equally desirable substitute
Contribution
the value of an improvement depends on how much it contributes to value by its presence or detracts by its absence. (a garage adds value)
Conformity
for maximum value, property should reasonably inform to surrounding properties (style, design, size)
Anticipiation
expectation of future benefits that the property will yield.
Supply and Demand
as supply decreases, demand will usually remain the same or increase.
Highest and Best Use
the most profitable single use to which a property may be put, or the use that is most likely to be in demand in the near future. Must be legal use, physically possible, adaptable, and feasible
Competition
Substantial profits tend to breed competition. Increased Competition may result in les profit in the long term.
Change
neither physical nor economic conditions remain the same subject to natural phenomenon ; change of market demands
Increasing and Diminishing returns
returns are increasing as long as money spent on improvements products an increase in income. Returns decrease where improvements may not produce an increase in value or income.
Regression
between dissimilar properties the worth of the better quality property if adversely affected by the presence of a lesser quality property.
Progression
between dissimilar properties the worth of the lesser quality property is favorably affected by the presence of a better quality property.
Assemblage and Plottage
assemblage is the process of joining several continuous parcels of property together to form one larger parcel. The increase in value by assemblage is known as plottage
Three approaches to Value
- Sales Comparison Approach
Sales Comparison Approach
The estimate of market value is based on the analysis of recently sold properties similar to the subject property. It is mainly used to estimate and indicate value for single-family residences. 3-5 comparable usually provide a sufficient basis for estimate the value.
Steps in competitive market analysis
- Delineate the market area (what market are similar to the one which includes the subject property) 2. Locate Comparable Properties (sold recently within 6 months to a year) 3. Adjust Sales Prices (of at least 3 comparable)
Cost Approach
based on the principal of substitution. It states that acquiring an equally desirable and valuable substitute property set the maximum value of property. Used primarily to value unique properties. (churches)
Reproduction Costs
the cost of to build the property just as it was (always higher)
Replacement Costs
the cost of building the property with todays materials
Steps to Cost Approach
- estimate the value of the land site 2. estimate the current cost of construction the buildings and site improvements 3. deduct total accrued depreciation.
3 Types of Depreciation
Physical Deterioration , Functional Obsolescence, External Obsolescence
Physical Deterioration
loss in value to to normal wear and tear. Can be Curable - economically feasible or does it cost most to cute than it would to increase value ; incurable - repairs would not contribute to comparable value of the building
Functional Obsolescence
a loss in value because the property no longer performs the function as well as it originally could. Technology causes functional obsolescence.
External Obsolescence
loss in value due to conditions beyond the control of the property owner. Usually caused by factors outside of the subject property such as a bad location, environmental, social or economic features.
Depreciation
loss in value due to any cause. It begins to accrue (increase naturally) in every structure or building from the day it was built. Accrued depreciation is often estimated by the straight line method that assumes the depreciation occurs at a steady rate over the estimated economic life of the structure
3 Methods to Estimate Cost
Quantity Survey Method, Unit-In-Place, Square Foot Method (Comparative)
Quantitive Survey Method
Most difficult and time consuming procedure of estimating a buildings cost. Involves details breakdown of everything that goes into the building. It is the most accurate, but very expensive specific and time consuming.
Unit-In-Place
second most reliable method. The appraiser estimates the installed cost of each building component. It is specific, time consuming and expensive for each building component breakdown (plumbing, electric, etc.)
Square foot method
Cost per square foot of a recently built structure is multiplied by the number of square feet in the subject building. It is the least accurate, but most common and most efficient.
Income Approach
based on the present worth of future income. It assumes income will, to a large extent, control the value. IT is used primarily for income producing property.
Capitalization Formula
I/R=V. Converts future net income to market value(v). R is the estimated capitalization rate. I is the annual net income
Steps of Income Approach
Estimate the potential annual gross income (based on market studies), Deduct for vacancy and rent loss (based on experience) “effective gross income”, Estimate the capitalization Rate (the rate of return an investor will demand for his investment.
GRM (Gross Rent Multiplier) or GIM (Gross Income Multiplier)
substitutes for the income approach in single-family homes or duplexes not used as a primary source of income. Sales Price/Gross Income - Gross Income Multiplier
Reconciliation
Apply the 3 approaches to value. All 3 may not be relevant, and the appraiser would have to explain the reason for omitting an approach.
Broker Price Opinion
the estimated value of a property as determined by a real estate broker or other qualified individual or firm. It is based on the characteristics of the property being considered.
FIRREA
Financial institutions Reform, Recovery and Enforcement Act. Intended to upgrade the professionalism and competency of appraisers so federally related transactions must be performed by licensed or certified appraisers.
USPAP Standards
uniform standards of professional appraisal practice - 10 standards that are revised and updated periodically by the Appraisal foundation typically once every 2 years.
Certificate of Reasonable Value
a form indicating the appraised value of a property being financed with a VA loan
Economic Life
The number of years during which an improvement will add value to the land
