Appraisal Approaches Flashcards
This approach uses a process of comparison with similar properties that have a known sale price to determine a subject property’s market value. This is the most reliable of the three approaches when appraising single-family homes for market value.
The Sales Comparison Approach
The sales comparison approach relies on the value principle of ___, which says that the value of a property is equal to the value of an equivalent substitute property.
Substitution
Steps when conducting the sales comparison approach:
- Analyze the subject property to identify its characteristics, particularly those that are in demand in the current market.
- Identify comparable properties that have been recently sold.
- Compare the comparables to the subject property and make adjustments to the sales price of the comparables where they are different.
- Use the data to arrive at an opinion of value for the subject property on the date of appraisal.
Categories of Comparison
Elements of comparison and Units of comparison
Analyze comparables’ locational/physical property characteristics and transaction differences. They explain why different prices
Elements of comparison
Allow the comparison to be standardized. Units may be price per square foot, per apartment unit, per acre, etc.
Units of comparison
The appraiser identifies at least three comparables to use, then makes adjustments to the sales price of the comparable properties to estimate the value of the subject property.
If the subject property has a superior amenity (a two-car garage while the comparable property has a one-car garage, for example), the sales price of the comparable property is increased by an appropriate amount or factor.
If the subject property is inferior in an area (for example, the yard is not well-maintained, while the comparable property is beautifully landscaped), the sales price of the comparable property is decreased.
The amount of the adjustment is based on the value of the item in the market. For example, if the comparable home has a fireplace and the subject property doesn’t, and homes with fireplaces sell on average for $1,000 more, then the comparable property’s sales price is adjusted down by $1,000.
To be able to make valid computations of adjustments, the elements of comparison must be applied in this order:
- Financing terms and cash equivalency
- Conditions of sale
- Market conditions
- Location
- Physical characteristics
This is often offered by builders for new construction or as seller concessions in resale transactions.
Financing terms and cash equivalency
Was it an arm’s length transaction? Were personal items included, or fixtures excluded?
Conditions of sale
Underwriters assume appraisers understand the local marketplace, and will accept comparables that exceed distance, time, or other guidelines, if the appraiser supports the decision with written, detailed explanation that demonstrates that local expertise.
Location
This includes the site, view, construction quality, amenities, size, etc.
Physical characteristics
A process in which an appraiser determines a probable range of values for a property by comparing a group of comparable sales to the subject. The appraiser attempts to include both superior and inferior units of comparison such as age, transaction price, etc.
Bracketing
The ___ approach to finding appraised value measures value as a cost of production, including the acquisition of the land and the construction costs. Its reliability depends on valid reproduction cost estimates (i.e., the cost of rebuilding) and appropriate
depreciation estimates.
The Cost Approach
The cost approach is often used in three circumstances:
New construction of both residential and commercial property
Unique properties, such as highly energy-efficient houses, residential acreage with excess land, historic houses, and high-dollar houses with many amenities
Special-purpose commercial uses, such as hospitals, some manufacturing plants, hotels, and other single-purpose properties
The cost approach, site value is based on the opinion of the subject’s _____ , as though the land is vacant.
Highest and best use
The ___ reflects the cost to build a functionally equivalent improvement.
The replacement cost
The ___ is the cost to build an exact replica of the subject, with the same materials and deficiencies.
The reproduction cost
The Three Types of Depreciation
Physical depreciation
Functional obsolescence
External depreciation or “economic obsolescence”
___ is a loss in value caused by deterioration in physical condition.
Physical depreciation
___ is a loss in value caused by defects in design, such as a poor floor plan or atypical or inconvenient sizes/types of rooms. Examples include houses where there are bedrooms on a level without a bath(s), or where the only access to a bedroom is through another bedroom.
Functional obsolescence
___ is a loss in value caused by an undesirable or hazardous influence offsite. Examples are heavily trafficked areas, industrial odors, or airport noise
External depreciation or “economic obsolescence”
__ refers to an item that can be repaired or replaced, and where the cost to cure the item is less than or the same as the anticipated increase in the property’s value after the item is cured. This includes items of deferred maintenance such a painting or repair of faucets. The cost to cure should be reasonable and economically feasible.
Curable depreciation
___ includes items not practical to correct. Examples are a furnace or a roof that hasn’t reached the end of its economic life.
Incurable depreciation