Ch 12: Real Estate Appraisal Flashcards
Principles of Value: Highest and Best Use
An appraiser doesn’t just consider how the property is currently being used, but also what its highest and best use would be.
The highest and best use is the use which, at the time of appraisal, is most likely to produce the greatest net return from the property.
Principles of value: Change
The principle of change states that a property’s value changes constantly, in response to changing social, economic, and government conditions, and in response to changes in the property itself.
Every property has a four-phase life cycle: integration, equilibrium, disintegration, and rejuvenation.
Principles of value: Anticipation
According to the principle of anticipation, people buy property in anticipation of receiving benefits from it in the future.
An appraiser must consider not only the present state of the property, but how it may change in the future.
Principles of value: Substitution
According to the principle of substitution, the maximum value of a property is set by how much it would cost to obtain another property that is equally desirable.
Principles of value: conformity
The principle of conformity states that a reasonable degree of conformity among the properties in a neighborhood has a positive effect on their value.
Principles of value: Progression and Regression
According to the principle of progression, an inexpensive home is generally worth more in a neighborhood of better homes than it would be worth in a neighborhood of similar homes.
The principle of regression holds that a valuable property surrounded by less expensive properties will tend to be worth less than it would be worth surrounded by similar homes.
Principles of value: Contribution
An improvement may contribute less or more to the value of the property than it costs.
The principle of contribution requires an appraiser to distinguish between the cost of an improvement and its contribution to value.
Principles of value: Competition
The value of property is affected by competition. Every property competes with other properties of the same type.
A profitable business will attract competitors to the area, which will tend to lower its profits and, therefore, its value.
General Data
General data is information concerning matters outside the subject property that have an impact on its value, such as the economic situation in the community.
An appraiser performs a neighborhood analysis to evaluate how the neighborhood affects the subject property’s value.o
Specific Data
Specific data is information about the subject property itself.
The appraiser gathers specific data in a site analysis and a building analysis.
Sales Comparison Approach
The sales comparison approach relies on the recent sales prices of comparable properties to estimate the market value of a property.
It is also called the market data approach because it uses information gathered about recent transactions in the local real estate market
Normal Market Condition
To be considered a comparable sale, a transaction must have taken place under normal market conditions, which requires that: the parties to the sale are unrelated, both parties have full knowledge of the property’s merits and shortcomings, neither party is acting under unusual pressure, and the property was on the market for a reasonable length of time.
Arms Length Transaction
An arm’s length transaction is one in which the buyer and the seller are not related by close personal, family, or business ties, making it more likely that the purchase price reflects the true market value of the property.
Unrelated parties are one component of normal market conditions.
Cost Approach
Using the cost approach, the appraiser estimates the replacement cost of the building, deducts depreciation, and adds the value of the site.
Replacement Cost
The replacement cost is the cost of building improvements with the same utility as those on the subject property, using modern materials and construction methods.
Reproduction Cost
The reproduction cost is how much it would cost to build an exact replica of the building.
Since this is usually not a reliable indicator of a building’s value, it is generally not used in the cost approach.
Depreciation
Depreciation is a loss in value due to any cause.
The three categories of depreciation are physical deterioration, functional obsolescence, and external obsolescence.
Physical Deterioration
Physical deterioration is depreciation resulting from property damage, wear and tear, or age.
Physical deterioration may be curable or incurable.
Curable physical deterioration is also called deferred maintenance.
Functional Obsolescence
Functional obsolescence is depreciation caused by functional inadequacies or outmoded design.
Functional obsolescence may be curable or incurable.
External Obsolescence
External obsolescence is also called economic obsolescence.
It is depreciation caused by forces outside the property, such as neighborhood decline or proximity to a nuisance. External obsolescence is always incurable.
Income Approach
In the income approach to value, an appraiser changes net operating income into value by using a capitalization rate.
Potential Gross Income
A property’s potential gross income (also called its economic rent) is the amount it would rent for if it were available for rental in the current market.
Effective Gross Income
Effective gross income is the property’s potential gross income minus a vacancy factor.
Net Operating Income
Net operating income is calculated by subtracting operating expenses from effective gross income.
Capitalization
The capitalization rate is the rate of return an investor wants on his investment in the property.
Gross Income Multiplier Method
An appraiser uses the gross income multiplier method to estimate the value of a small rental property.
The appraiser locates comparable rental properties that have recently sold, then analyzes the relationship between the sales price and the rental rate of each comparable.
