Chapter 10 - Appraisal Flashcards
What is an appraisal
An estimate (opinion) of value
Based on info from marketplace
Cost or price is not a value
Appraisers base fee on
Time, effort, and expertise to finish an assignment
T/F - Lenders only loan on appraised value
True
What is market value
The true value of real estate- the most probable price it could sell for under normal conditiosn
What is required for market value to be legit?
Both buyer and seller must be knowledgeable
Neither buyer or seller can have abnormal pressure to act (like a divorce)
Property must be reasonable exposed to market place
Price agreed upon must be for terms of cash
Four Economic Characteristics of Value
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DUST*******
Demand - is it desirable and in demand by people
Utility - is it useful
Scarcity - amount of land is fixed
Transferability - Can you transfer it for sale
Principles of VALUE
abbreviated PV
Substitution Highest & Best Use Conformity Supply & Demand Anticipation Competition Plottage Increment (assemblage plottage)
Cap Rate =
annual net income (ANI)
PV - Substitution
Buyer will pay no more than what they would for equal property of the like
PV - Highest & Best Use
Property’s greatest use for return
Can change over time
(bungalow home on busy road is now store front)
PV - Conformity
Property has best value if it fits into neighborhood.
Progression = smallest house in subdivision (will gain value)
Regression = largest house in subdivision (will lose value)
PV - supply and demand
Supply goes down, demand goes up (price goes up)
Supply goes up, demand goes down (price goes down)
PV - Anticipation
Expectation of what the future value of a property would be (can cause value to go up or down)
PV - Competition
If there is too much or too little competition, it will have an effect on value
PV - Plottage Increment (assemblage plottage)
Putting several properties together increasing overall value.
Monopoly
Can property depreciate
Whats another word for depreciation
Yes - it can by two ways
Obsolecense
Depreciate for tax purposes
Allows investors to deduct % of investment property’s value each year to reduce taxes.
Only the improvements depreciate - never the land
Actual Depreciation (loss in value) from 3 sources or categories
Physical Obsolescence:
Functional Obsolescence:
External (Economic) Obsolesence:
Physical Obsolescence
wear and tear on the physical
lack of maitenance
Functional Obsolescence
a use problem that can’t be fixed
Outdated
(small stair case in old two story house)
External (economic) Obsolescence
Loss in value from outside the property’s boundaries
-busy road now cuts through your property
Age & Life of Property
2 types of age
Chronological Age Effective Age (the age assigned because of it's functionality)
Age & Life of Property
2 types of life
Economic Life: how long will it be useful
Physical Life: How long will it exist
Square footage of property
width x length
Exterior measurements only (doesn’t include garage etc.)
Site analysis
Analysis of the lot itself (slope, View, sun, trees etc)
What are the 3 approaches to value used by appraisers
Sales Comparison Approach (market data approach) Cost Approach (summation approach) Income Approach (capitalization approach)
Sales Comparison Approach -
Market Data Approach
PV - SUBSTITUTION
Compare property sold within six months & 1 mile
If comp is superior - subtract from yours
Cost Approach
Summation Approach
- Estimate current replacement cost
- Subtract for depreciation
- Add current land value
2 types of cost approches
Replacement Cost
Reproduction cost
Income Approach
Capitalization Approach
Used in commercial properties that are income producing
(based on rate of return)
1) add up all the rents
2) deduct vacancy or rent loss = effective gross income
3) subtract operating expenses = net income
4) determine Cap Rate (rate of return a property produces as investment)
5) Determine value, net income divided by cap rate
Relationship between cap rate & value
inverse
What are the first and last steps to the appraisal process being done?
1) state the problem
2) Reconciliation - find the final value estimate
