Appraisal Basics Flashcards
An ___ is the opinion or estimate of value of a particular property as of a particular date.
formal appraisal/valuation
The price at which a willing buyer and a willing seller would strike a deal given normal market conditions
Market Value
What’s included in a appraisal
In addition to using age, square footage, location, recent sales—all the things agents use— they appraiser also consider the cost to replace the property. Will also take into consideration cash equivalency
what a property is worth to the person using it
value in use
what the local taxing authority thinks it’s worth
assessed value
A study of a property that does not necessarily return a price or value
Evaluation
Process of forming an opinion of a property’s value
Valuation
The cost of replacing a building in case of a total loss
Insured value
The return of funds invested
Investment value
The price a lender believes the property will bring at a foreclosure sale
Mortgage value
an unbiased estimate or opinion of the market value of real property by a real estate licensee who isn’t a licensed or certified appraiser. It’s usually provided to a seller.
comparative market analysis (CMA)
usually ordered by a lender in a foreclosure situation. They don’t want to shell out the bucks for a full appraisal, so they’ll hire some real estate broker to give them an opinion of price. Basically, it’s just a CMA with a different name for a different purpose. Sometimes a relocation company will ask a broker to do it
broker’s price opinion (BPO)
CMAs vs BPOs
CMAs and BPOs generally rely upon comparable sales, while appraisals may use multiple methods to determine value.
Steps of the valuation process
- State the Problem
- List the Data Needed and Where to Find It
- Gather the Data
- Determine the Property’s Highest and Best Use
- Estimate the Value of the Land
- Estimate Property Value Using Three Approaches to Value
- Reconcile the Data
- Report the Appraised Value
Types of Data
General Data and Specific data
What’s going on in the national economy, the region, the city, and the neighborhood? Demographics, income level, employers moving in or moving out, employment figures, cost of living, population growing or shrinking,
General Data
The site, positioning on the site, improvements, etc.
Specific Data
three approaches for valuation are:
sales comparison, cost to reproduce, and income and expense approach.
The first step in the valuation process is to identify the problem. What are two benefits of stating the problem up front?
Identifying the problem up front allows the appraiser to take the correct approach to estimating value and decide the data needed to make a final determination of value.
What a buyer has paid for a property and what the seller has accepted
Price
What a property is worth
Value
What it would cost to recreate that property if it disappeared (ie: labor, materials, legal services, zoning, architectural design, financing, taxes
Cost
Two types of costs
Direct costs/hard costs or indirect costs
Labor and materials
Hard/Direct costs
Fees and administrative costs
Indirect costs
Four Significant Factors that Influence Value
Demand
Utility
Scarcity
Transferability
___ is a bit of a popularity contest. How attractive and move-in ready is a property? What’s the market like? Are there more buyers than sellers, or vice versa?
Demand
____ is related to a property’s function. Is it habitable in its current condition? Does it need updating? Repairs? Does the current zoning match the intended use? If a buyer wants a commercial property, but the current zoning is residential, this impacts the value.
Utility
____ is related to demand. If you’ve studied economics, you know that supply and demand are price drivers. The fewer properties there are on the market (the greater the scarcity), the higher the demand. High demand pushes prices upward.
Scarcity
____ refers to the ease with which the seller can convey the property. Factors such as deed restrictions, clouds on title, or tenants in place can make it more difficult to transfer the property, and thus reduce the property value.
Transferability
Principles of value
Anticipation Competition Conformity Contribution Highest and Best Use Plottage Regression Progression Subsititution
The value of property today is the current value of the total anticipated future benefits. For example, a commercial property is leased for $12,000 per year for 30 years. The value of the property is based on the income that is expected to be received in the future.
Anticipation
The more similar properties that are on the market, the lower the price will be driven. ____ is related to supply and demand. The greater the supply (the more competition), the lower the demand (and price). Less competition increases demand and drives pricing upward.
Competition
Value is created and maintained when the characteristics of a property conform to the demands of the market. For example, a house built in the middle of a commercial zone (due to zoning changes) would be valued differently than a house in the middle of a neighborhood made up of similar houses.
Conformity
A change in a property impacts the value as a whole. Does converting a garage into a family room contribute to or detract from value? That would be in the eyes of the buyer.
Contribution
This is the most profitable use that is both legal (conforms to zoning) and economically feasible (won’t cost more than the increase in value).
Highest and Best Use
The joining or assemblage of two neighboring land parcels increases the property value. In such a case, 1+ 1 often equals 3 or even 5. So two parcels worth $40,000 separately might be worth $120,000 when joined.
Plottage
This is the value a higher-quality property loses by being near a lower-quality property.
Regression
This is the value a lower-quality property gains by being near a higher-quality property. For example, if your neighbor builds on a second story in a quality remodel, the bump in value that your property receives is ____.
Progression
A property’s value is determined by what it would cost to purchase a similar substitute property. If someone offered you a car that is an exact replica of another car but was $3,000 less, it would impact your perceived value of the other car.
Substitution
Cost Approach Calculations
Replacement cost
- depreciation
+ land value
= appraised value
Value calculation using income approach
Potential gross income - vacancy collection = effective gross income - operating expenses = net operating income
Then
Net operating income
/ capitalization rate
= value
Capitalization formula
Value = net operating income divided by capitalization rate
