Appraisal Flashcards
Appraising
Estimate of value for lenders, sellers, buyers, insurance co. etc.
Fair Market Value Requirements
Knowledgeable buyers and sellers AND an arm’s length transaction (no undue pressure)
Supply and Demand Effects
value of homes and rental rates.
Factors: Interest rates, economy, and age demographics.
Sellers Market - Low supply, high demand.
Characteristics of Value (DUST)
Demand, Utility, Scarcity, Transferability.
Value Depreciation
Homes goes down in value due to age, wear and tear. Depreciable base - depreciation + land
3 Types of Depreciation
- Physical Deterioration
- Functional Obsolescence
- External (economic) Obsolescence
Physical Deterioration
Caused by neglect or deferred maintenance. Usually curable
Functional Obsolescence
Items inside property lines that are no longer wanted, useful, or outdated. Ex. Out house. Usually curable except for a bad floor plan (Incurable)
External (economic) Obsolescence
Items outside property lines. Almost always incurable. Road or zoning changes; smokestacks, paper factory, railway, race track, etc
Principals of Value - Highest and Best
Use that provides the greatest net return on the land. The value of today’s use.
Principals of Value - Substitution (Comparables)
Property only worth what one can get another one for that is just like it. Best indicator of value.
Principals of value- Conformity
Properties should be similar to surrounding properties for greatest value.
principals of Value - Anticipation
Look to the future for value
Principals of Value - Competition
High profits attract the competition
Principals of value - Contribution
The cost of an improvement adds that much to the toal value of property
Principals of value - Increasing Returns
The cost of an improvement adds more to the total value of propertyP
Principals of Value - Decreasing Returns
The cost of an improvement does not add that much to the total value of property
Principals of value - Regression
Over built home in subdivision of modest homes. Lowers appreciation rate (maybe value) of over built home.
Principals of value - Progression
Modest home in subdivision of luxurious homes. Increases appreciation rate (value) of modest home.
Principals of value - Unlearned Increment
Increase value to external factors - not the owner’s effort. New infrastructure nearby
Principals of value - Plottage Increment
Total value of the combined properties exceeds the total value of the individual properties. Achieved from performing an assemblage (combining properties into one for resale)
3 types of approaches to estimate value
- Market Data
- Cost (Replacement) Approach
- Income Approach
Market Data (sales Comparison)
Residential and vacant land with comparables (Substitution); make adjustments to the comparable; calculate estimate of value using weighted average of the comparables.
Cost (Replacement) Approach (Summination)
New, no comps, special purpose property, insurance; Estimate current replacement cost then subtract depreciation, add current land value = estimate of value.
2 types of the Income Approach
- Capitalization
- Gross Rent Multiplier (GRM)
Capitalization
Income properties, apartments, shopping centers.
Capitalization Rate
The return on one’s investment (%)
Effective Gross income (EGI)
Gross potential income minus vacancy rates and collections.
Net Operating Income (NOI)
Money available to pay debt and provide profit. EGI minus operating expenses
NOI/Cap rate = Estimate of Value
Gross Rent Multiplier (GRM)
Single family investment properties.
Comparable sold price and divide by monthly rent for GRM
Competitive Market Analysis (CMA)
what agents use to estimate a list price, make an offer or reevaluate an existing listing.
Three types of Comps
- Sold - best, near-by, location, recently sold
- Active - competition
- expired - listing expired because of price
Steps in the Appraising process
State the problem
Gather the data
Analyze and Interpret
Reconcile
Issue the report
