Chapter 11 Flashcards
Sources of Capital 1930 thru the 1960s
Lending done primarily at local level.
Decisions made by board of directors or loan committee
No formal appraising or underwriting
Sources of mortgage
State or federally chartered savings banks
Savings and loan institutions - mutual or stockholder owned.
Commercial banks
Credit unions
Most Saving and loan institutions were chartered primarily to provide residential mortgages for the local areas. Their purpose was to receive savings loan money at interest and distribute dividends to depositors.
Commercials banks are privately owned institutions that were obviously oriented towards business loans but dabbled in the residential loans. Their interests were usually short term buy they supplied loans for construction and development.
Credit unions primarily loans to their members.
Money to fund mortgages came from:
+ Depositors
+ Sale of stock or shares of ownership in the bank or thrift
+ Repayment of existing mortgages
+ Borrowing of funds from the Fed
Lenders were regulated and had limits on the number of branches and had reserve requirements.
If they had a deposit reserve requirement of 10% and were a $10M bank; one they lent out $9M, they were out of the lending biz. They had to wait to replenish the money supply as money slowly trickled in from deposits and repayment of existing loans.
Money could be borrowed from the Fed, if rates were favorable.
Secondary Mortgage Market
A market created by government and private agencies for the purchase and sale of existing mortgages, which provides greater liquidity for mortgages. Fannie Mae, Freddie Mac and Ginnie Mae are the principal operators in the secondary mortgage market.
The Federal National Mortgage Association (FNMA) was created in 1938 to purchase FHA insured loans.
Once loans sold to FNMA they could reinvest the funds in new mortgages.
In 1948 FNMA began purchasing VA loans and in 1970 it started purchasing conventional mortgages.
In 1968, FNMA was split into two organizations:
+ Fannie Mae; a federally chartered corp owned by private shareholders, and,
+ Government National Mortgage Association (Ginnie Mae), a government agency under the oversight of the Dept. of Housing and Urban Development (HUD)
Fannie Mae purchases single family and multi family FHA, VA, and conventional mortgages.
The mortgages purchased from originators may be held in portfolio or may be securitized and sold to investors as mortgage backed securities (MBS).
Ginnie Mae provides a secondary market for FHA & VA loans.
Ginnie Mae also services a portfolio of mortgages owned by the federal government.
Ginnie Mae also purchases mortgage loans, packages them in securities and sells them to investors. To provide a guarantee on these securities, Ginnie Mae is backed by the full faith and credit of the federal government. If the borrowers fail to perform on a loan the principal and interest will be paid by Ginnie Mae.
in 1970, Congress created the Federal Home Loan Mortgage Corp (Freddie Mac) to provide a secondary market for conventional mortgages, primarily for thrifts. Their initial funding came from Federal Home Loan Bank, the central bank for thrifts.
Historically, they have held little in portfolio; most of the time they purchase mortgages, package them and sell them to investors.
Secondary Mortgage Market II
Tremendous growth over last 30 years.
Annual sales to Fannie Mae, Freddie Mac and Ginnie Mae rose from $69B in 1980 to over $700B by 2000.
Fannie Mae and Freddie Mac were private shareholder owned corps, but were known as “government-sponsored enterprises” or GSEs.
Early 2000s accounting problems, then the economic recession and the subprime mortgage meltdown in late 2000s.
Taken into government conservatorship in 2008. Stock considered worthless and de-listed from NYSE.
Today they operate under the watchful eye of their government overseer, the Federal Housing Finance Agency (FHFA).
They still purchase a majority of he mortgage loans originated in the US.
Future is uncertain.
Mortgage Assumption
Only FHA and VA loans are assumable without the permission of the originating lender.
If permission is given, it will usually at current market rate.
Other fixed-rate loans carry “due-on-sale” clauses requiring that a mortgage be repaid in full if the property is sold.
Assumption are not as common now.
If an assumption is possible, it may make a big difference in the total cost to the buyer. The appraiser will need to determine whether or not the sale should be used as a comparable or if an adjustment would be needed due to favorable financing terms.
Land Contract
A contract in which a purchaser of real estate agrees to pay a small portion of the purchase price when the contract is signed and additional sums, at intervals and in amounts specified in the contract, until the total purchase price is repaid and the seller delivers the deed.
Used primarily to protect the seller’s interest in the unpaid balance because foreclosure can be exercised more quickly then it could be under a mortgage.
Also called contract for deed; installment (sale) contract.
Used when:
+ interest rates are high
+ property is unique and difficult to finance
+ seller not in immediate need of money
This type of sale may require the seller to sue to take custody of the property if a buyer defaults.
Deed of Trust
When a seller transfers the property deed to a trustee that would later be transferred to the buyer when they meet the terms of the loan.
Wrap-Around Contract
A variation of seller financing, and offers buyers an alternative to a mortgage from a financial institution.
The seller keeps the existing mortgage on behalf of the buyer, plus lends additional money to cover the price paid above the balance of the underlying loan.
The appraiser must evaluate the actual terms of the financing to determine if an adjustment for financing terms needs to be made.
Local
Up until the 1970s mortgage lending was typically done at the _____ level.
Fannie Mae, Freddie Mac and Ginnie Mae
The principal operators in the secondary mortgage market include?
VA and FHA loans
What type of loans are assumable without permission of the originating lender?
Mortgage
A pledge of a described property interest as collateral or security for the repayment of a loan under certain terms and conditions.
Homes are good security/collateral as they are secured in one place, stay in one location, typically appreciate in value and have long lives.
Conventional mortgage
Mortgages that are neither insured nor guaranteed by an agency of the government, although they may be privately insured.
Many high loan-to-value conventional loans do have private mortgage insurance (PMI) covering the part of the loan that exceeds 80% LTV.
Guaranteed Loans
Mortgages in which a party other than the borrower assumes payment in the event of default.
Example - Veterans Admin.
Insured Loans
Mortgages in which a party other than the borrower assures payment on default by the mortgagee in return for the payment of a premium.
Example - FHA mortgage charges an up-front mortgage insurance premium (UFMIP) based on a percentage of the loan amount, plus a monthly mortgage insurance premium (MIP). The FHA mortgage insurance program is funded entirely by mortgage insurance premiums paid by borrowers; no taxpayer money in involved.
In the event of a default HUD reimburses the originator.
First Mortgage
A mortgage that has priority over all other mortgage liens on a property.
Junior Lien
A lien placed on a property after a previous lien and has been made and recorded; a lien made subordinate to another by agreement.
e.g., second and third mortgages; also called second lien or third lien.
Mortgage priorities
Are important consideration.
Second and thirds liens carry a higher risk and higher interest rates.
They don’t get paid off until the first one is paid in full.
Amortization
The process of retiring debt or recovering a capital investment, typically through scheduled, systematic repayment of the principal; a program of periodic contributions to a sinking fund or debt retirement fund.
Latin = amort means to kill
Fixed rate loan
A mortgage at a fixed interest rate, with equal payments for each period over the length of the loan.
First kind developed and still the most common.
Interest paid first then the principle.
There is less interest due after each payment and more money going towards principle as the loan ages.
Balloon Mortgage
A mortgage that is not fully amortized at maturity, and thus requires a lump sum, or balloon, payment of the outstanding balance.
Creative Financing
Grew in popularity in the 1970s and 1980s. During periods of high interest rates.
Graduated Payment Mortgage
A debt secured by real estate in which mortgage payments are matched to projected increases in the borrower’s income. The periodic payments start out low and gradually increase.
Adjustable Rate Mortgages (ARMs)
A debt secured by real estate with an interest rate that may move up or down following a specified schedule or in accordance with the movements of a standard or index to which the interest rate is tied.
Started in the 1980s
Start as a lower initial rate than fixed. However can go up as cost of living rises.
May have overall cap and may have a yearly cap.
Reverse Annuity Mortgages (Reverse Mortgages)
Type of mortgage where by senior homeowners systematically borrow against the equity in their home, receiving regular (usually monthly) payments from the lender. Borrowed funds and accrued interest come due when the last surviving borrower dies or permanently vacates the premises. Under current HUD guidelines all of the mortgagors must be at least 62 years of age. When the loan is due the estate usually has approximately 12 months to repay the balance of the reverse mortgage or sell the home to pay off the loan amount. All remaining equity is paid to the vacating homeowner or the estate. An FHA insurance program ensures that the vacating homeowner or estate is not liable if the loan balance exceeds the value of the home at the time the loan is due. Also called a reverse-annuity mortgage or home equity conversion mortgage.
Also called Home Equity Conversion Mortgage (HECMs)
Discount Points
A percentage of the loan amount that a lender charges a borrower making a loan; may represent a payment for services rendered in issuing a loan or additional interest to the lender payable in advance; also called loan fee.
A point is 1%
Conventional mortgage
A mortgage loan that is not government-insured or guaranteed is considered a?
Mortgage
A pledge of a described property interest as collateral or security for the repayment of a loan under certain terms and conditions is the definition of
The beginning of the loan period
With a traditional amortized loan, at what point does most of the payment go toward interest?
True
True or False? FHA charges a mortgage insurance premium to borrowers.
Another name for a land contract is
Installment Sale Contract
First Mortgage
A mortgage that has priority over all other mortgage liens on a property is a?
$4,568.75
$215,000 x 15% = $32,250 Down Payment
$215,000 - 32,250 = $182,750 Amount financed
$182,750 x 2.5% = $4,568.75 Amount paid for points
A purchaser bought a property for $215,000, put 15% down and borrowed the rest @ 6.75% interest for 25 years. The lender charged 2.5 points at closing. How much was paid for points?
The FHA mortgage insurance program is funded by
Mortgage insurance premiums paid by borrowers
Balloon
A mortgage that is not fully amortized at maturity and requires a lump sum payment at the end is call a _____ mortgage.
Conventional
Mortgages that are neither insured nor guaranteed by an agency of the government, although they may be privately insured are called ______ mortgages.
Land Contract
Another name for an installment sale contract is
Which of these is NOT a primary participant in the secondary mortgage market?
FHA
Fannie Mae
Freddie Mac
Ginnie Mae
FHA
A pledge of a described property interest as collateral or security for the repayment of a loan under certain terms and conditions is the definition of a?
Mortgage
FHA and VA
_______ loans are assumable without the permission of the lender.
Elements of Value
For any economic good to have value is must possess four elements:
Supply Factors
1. Desire 2. Utility
Demand Factors
3. Scarcity 4. Effective purchasing power
Desire
A purchaser’s which for an item to satisfy human needs (e.g. shelter, clothing, food, companionship) or individual wants beyond essential life-support needs.
Utility
In economics, the ability of a product to satisfy a human want, need or desire.
It has to be good for something
It has to have purpose
You have to be able to use it
Functional Utility
The ability of a property or building to useful and to perform the function for which it is intended according to current market tastes and standards; the efficiency of a building’s use in terms of architectural style, design and layout, traffic patterns and the size and type of rooms.
Scarcity
The present or anticipated undersupply of an item relative to the demand for it. Conditions of scarcity contribute to value.
Scarcity usually triggers demand.
The opposite of scarcity is oversupply
Effective Purchasing Power
The ability of an individual or group to participate in a market, i.e., to acquire goods and services with cash or its equivalent.
Influences on Value
Value is created and sustained by external market forces.
Value is not created by appraisers, buyers or sellers.
The four main categories of External market forces:
+ Governmental
+ Economic
+ Social
+ Environmental
Governmental Forces
Planning Zoning Building Codes Environmental restrictions Taxes Utilities Transportation Education Cultural Parks and recreation Police Fire protection Public safety
External Market Forces
Who or what creates value?
False
True or False? All major cities in the US have zoning ordinances.
True
True or False? In addition to federal environmental authorities, each state has its own agency that controls environmental issues.
Governmental
Taxes would be a ________ force affecting the property values.
Economic Forces
Tend to be the most powerful and exert the most influence on value of the four categories.
National economy CPI Interest rates availability of financing Wage rates Types of employment Unemployment rates Cost of construction Rental vacancies Expense levels
Cost of construction
The total cost of construction, residential or commercial, is really an amalgam of three factors:
Land costs
Materials Costs
Labor costs
Expense Levels
Utilities Taxes Insurance Maintenance Supplies Employees
Social Influences
Population trends Population migrations Ages Family formations Lifestyle changes
Reasons for smaller households
Young people waiting longer to get married
More adults never marrying
More divorces
More single mothers
More older women outliving their husbands
More unmarried men and women living together
More same sex partners living together
Declining birth rate
Lifestyle Changes - Community Living
Condos Cooperatives Planned Unit Development (PUD) Retirement villages Gated communities Resort complexes
Benefits Shared maintenance Common recreation areas Companionable activities Increased security
True
True or False? In the US, the average family size has been decreasing over the last 50 years.
In analyzing a market area, an appraiser finds that most of the residents are middle-aged and some are empty-nesters. This would typically mean?
There is a demand for more expensive homes
The lessened availability of mortgage loans
The mortgage meltdown of the late 2000s resulted in?
False
True or False? Over the last several years in the US, there has been a substantial decrease in the number of people working from home.
The cost of construction is based on three factors. What are they?
Land
Materials
Labor
Environmental Influences
Nearness to…
Shopping, Schools, Employment, Houses of worship, Cultural facilities, Recreational facilities, Educational facilities, Restaurants, Police & Fire protection….
Physical….
Climate, Topography, Soil conditions, Nature of improvements in the area, Density, Natural hazards, Man-made hazards,
Physical
Environmental influences on property values are sometimes called ______ influences.
Additional footings or structural support man be required
What would be a drawback of building a structure on sandy soil?
True
True or False? The presence of man-made hazards may affect property values over a wide geographic area.
Generally, low interest rates encourage ______, while high interest rates encourage ______.
Borrowing, Saving
Governmental forces would include all of the following EXCEPT?
Unemployment rates
Unemployment rates
Total construction costs are a combination of _____ costs.
Land, Materials and labor
All of the following would be social influences EXCEPT?
Ages of Residents
building codes
family formations
population trends
Building codes
Economic forces would include all of the following EXCEPT?
zoning and building codes
interest rates
unemployment rates
cost of construction
zoning and building codes
An example of something that likely has no value in most situations is
Air
Retail space is usually compared on the basis of
Dollars per square foot per year
NOAA
Which federal agency is responsible for monitoring coastal habitats?
Social forces would include all of the following EXCEPT?
population trends
ages of resident
family formations
police protection
police protection
US Army Corps of Engineers
The federal agency responsible for navigation and flood control is?
The ability of a product to satisfy a human want, need or desire is the definition of?
Utility
Functional Utility
The ability of a property or building to be useful and to perform the function for which it is intended according to current market tastes and standards; the efficiency of a building’s use in terms of architectural style, design and layout, traffic patterns and the size and type of rooms is the definition of?
EPA
The most prominent federal agency in the environmental arena is?
A purchasers which for an item to satisfy human needs (e.g. shelter, clothing, food, companionship) or individual wants beyond essential life-support is the definition of?
Desire
Value
The monetary relationship between properties and those who buy, sell or use those properties.
Value expresses an economic concept.
As such, it is never a fact but always an opinion of the worth of a property at a given time in accordance with a specific definition of value.
In appraisal practice, value must always be qualified - for example, market value, liquidation value or investment value.
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The present worth of the future benefits that accrue to property ownership.
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The price most likely to be concluded by the buyers and sellers of a good or service that is available for purchase. Value establishes the hypothetical or notional price that buyers and sellers are most likely to conclude for he goods or service. Thus, value is not a fact, but an estimate of the likely price to be paid for a good or service available for purchase at a given time.
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Value is what a property is worth.
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Appraisers render opinions of value.
Price
The amount asked, offered or paid for a property.
Once stated, price is a fact, whether it is publicly disclosed or retained in private.
Because of the financial capabilities, motivations or special interests of a given buyer or seller, the price paid for property may or may not have any relation to the value that might be ascribed to that property by others.
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Value is a price that would tend to prevail.
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A pattern of prices set a range of values.
Cost
The total dollar expenditure to develop an improvement (structure); applies to either reproduction of an identical improvement or replacement with a functional equivalent not exchange (price).
The amount required to create, produce or obtain a property. In USPAP, the term cost is used either as a historic fact or as an appraisal estimate of current future or historic reproduction or replacement cost.
Cost is related to production.
It delineates what it would cost to produce a structure brand new.
Cost has a price. It may or may not have a direct relationship to value.
We cannot assume that cost is equal to value.
A property owner purchases a lot for $100,000 and pays $400,000 to have a home constructed on it. When it is completed, the owner sells the home for $560,000. The appraiser for the buyer’s mortgage company appraisers the home at %525,000. The sales contract for $560,000 represents the _______ of the price.
Price
Cost
It would take $275,000 to produce a single-family home on the owner’s lot. This $275,000 figure represents the home’s?
Price
The amount asked, offered and paid for a property is the definition of?
Market Value
The major focus of most real property appraisal assignments. Bother economic and legal definitions of market value have been developed and refined.
The most widely accepted components of market value are incorporated in the following definition:
+ The most probable price that the specified property interest should sell for in a competitive market after a reasonable exposure time, as of a specified date, in cash, or in terms equivalent to cash, under all conditions requisite to a fair sale, with the buyer and seller each acting prudently knowledgeably for self-interest and assuming that neither is under duress.
Market value is described in the USPAP as: A type of value, stated as an opinion, that presumes the transfer of a property (i.e., a right of ownership or a bundle of such rights), as of a certain date, under specific conditions set forth in the definition of the term identified by the appraiser as applicable in an appraisal. Certain items be included in every appraisal report.
+Identification of the specific property rights to be appraised.
+Statement of the effective date of the vale opinion.
+ Specification as to whether cash, terms equivalent to cash or other precisely described financing terms are assumed as the basis of the appraisal.
+ If the appraisal is conditioned upon financing or other terms, specification as to whether the financing or terms are at, below or above market interest rates and/or special incentives must be clearly set forth; their contribution to, or negative influence on, value must be described and estimated; and the market data supporting the opinion of value must be described and explained.
The following definition of market value is used by agencies that regulate federally insured financial institutions in the US: The most probable price that a property should bring in competitive and open market under all conditions requisite to a fair sale the buyer and seller each acting prudently and knowledgeable and assuming the price in not affected by undue stimulus. Implicit in this definition is the consummation of a sale of a specified date and the passing of title form seller to buyer under condition whereby:
+ Buyer and seller are typically motivated:
+ Both parties are well informed or well advised and activating in what they consider their best interest;
+ A reasonable time is allowed for exposure in the open market: Payment is made in terms of cash in US dollars or in terms of financial arrangements comparable thereto; and
+ The price represents the normal consideration for the property sold unaffected by special or creative financing or sales concessions granted by anyone associated with the sale.
The international Valuation standards Council defines market value for the purpose of international standards as follows: The estimated amount for which a property should exchange on the date of valuation between a willing buyer and a willing seller in an arm’s-length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently and without compulsion.
Market value is the amount in cash, or on terms reasonably equivalent to cash, for which in all probability the property would have sold on the effective date of the appraisal, after a reasonable exposure time on the open competitive market, from a willing and reasonably knowledgeable seller to a willing and reasonably knowledgeable buyer with neither acting under any compulsion to buy or sell, giving due consideration to all available economic uses of the property at the time of the appraisal.
Market Value - USPAP
In developing a real property appraisal an appraiser must:
Identify the type and definition of value and, if the value opinion to be developed is market value, ascertain whether the value is to be the most probable price:
(I) in terms of cash; or
(ii) in terms of financial arrangements equivalent to cash; or
(iii) in other precisely defined terms; and
(iv) if the opinion of value is to be based on non-market financing with unusual condition or incentives, the terms of such financing must be clearly identified and the appraiser’s opinion of their contributions to or negative influence on bale must be developed by analysis of relevant market data;
Comment: When exposure time is a component of the definition for the value opinion being developed, the appraiser must also develop an opinion of reasonable exposure time linked to the value opinion.
Exposure Time
The time a property remains on the market.
The estimated length of time the property interest being appraised would have been offered on the market prior to the hypothetical consummation of a sale at market value on the effective date of the appraisal.
A retrospective estimate based on an analysis of past events assuming a competitive and open market.
USPAP
Estimated length of time the property interest being appraised would have been offered on the market prior to the hypothetical consummation of a sale at market value on the effective date of the appraisal.
Comment: Exposure time is a retrospective opinion based on an analysis of past events assuming a competitive and open market.
Statement on Appraisal Standard Number 6 in the 2012-2013 USPAP
The opinion of the time period for reasonable exposure is not intended to be a prediction of a date of sale or a one line statement. Instead, it is an integral part of the analyses conducted during the appraisal assignment. The opinion may be expressed as a range and can be based on one or more of the following:
+ statistical information about days on market
+ information gathered through sales verification; and
+ interview of market participants.
The reasonable exposure period is a function of price, time and use not an isolated opinion of time alone. As an example, an office building, an important artwork, a fine gemstone, a process facility, or an aircraft could have been on the market for two years at a price of $2M, which informed market participant considered unreasonable. Then, the owner lowered the price to $1.6M and started to receive offers, culminating in a transaction at $1.4M six month later. Although the actual exposure time was 2.5 years, the reasonable exposure time at a value range of $1.4M to $1.6M would be six months. The answer to the question “what is reasonable exposure time?” should always incorporate the answers to the question “for what kind of property at what value range?” rather than appear as a statement of an isolated time period.
Value in Exchange
Attribution of value to goods or services based on what can be obtained for them in exchange for other goods and services. As reflected in Financial Accounting Standards Statement No. 157, financial assets may be valued “in use” or “in exchange” under specified conditions.
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The value as recognized by a market in which exchange of asset ownership hypothetically or notionally, takes place. The IVSC definition of Market Value appropriate for financial reporting is based upon the principle of value in exchange, not value is use.
The value, in terms of cash, or a property which is bartered for another asset or assets, cash being the yardstick by which the comparative value of each can be assessed.
Market value is an example of value in exchange. It gets back to the historic system of barter or exchange. How much of something else (money) is a party willing to give up to acquire a piece of real estate in exchange.
Value in Use
The value of a property assuming a specific use, which may or may not be the property’s highest and best use on the effective date of the appraisal. Value in use may or may not be equal to market value but is different conceptually.
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The present value of estimated future cash flows expected to arise from the continuing use of an asset and form its disposal at the end of its useful life.
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The present value of future cash flows expected to be derived from an asset or cash-generating unit. It should be noted that the above definitions, which apply to financial reporting, consider the value of an asset at the end of its useful life. This meaning differs from the way the term is commonly used in valuation practice.
Investment Value
The value of a property interest to a particular investor or class of investors based on the investor’s specific requirements. Investment value may be different from market value because it depends on a set of investment criteria that are not necessarily typical of the market.
Insurable Value
A type of value for insurance purposes.
Assessed Value
The value of a property according to the tax rolls in ad valorem taxation;
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May be higher or lower than market value or based on an assessment ratio that is a percentage of market value.
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A value which is based upon definitions contained within applicable laws relating to the assessment, rating and/or taxation of property. Although some jurisdictions may cite market value as the assessment basis, required valuation methodology may produce results which differ from market value as defined herein.
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assessed value may not be reliable as an estimate of market value.
Intangible Value
A value that cannot be imputed to any part of the physical property. e.g., the excess value attributable to a favorable lease or mortgage, the value attributable to goodwill.
USPAP, Standards 9 & 10 deal with the valuation of intangible assets.
Going Concern Value
- The market value of all the tangible and intangible assets of an established and operating business with an indefinite life, as if sold in aggregate; more accurately termed the market value of the going concern.
- The value of an operating business enterprise. Goodwill may be separately measured but is an integral component of going-concern value when it exists and is recognizable.
Public Interest Value
Monetary worth attributed to features that have no measureable worth in the market but may benefit the public or a specific segment of the public. While contrary to the theory of market value, public interest value is sometimes used to rationalize payment of a price that exceeds market value based on benefits to society resulting from the increased ad valorem tax revenues, benefits of increases or changes in the value of surrounding property values, aesthetics, broad social benefits and other factors. Reliance on public interest value to justify an above-market price is driven by politically motivated public policy and/or the efforts of special interest groups. Public interest value has sometimes been referred to as natural value, intrinsic value, aesthetic value, scenic value, preservation value and similar terms.
Book Value
The capital amount at which property is shown on the account books of a corp. or individual. The net amount at which an asset is carried on the books or reported in financial statement; the assets cost at acquisition, reduced by the amount of accumulated depreciation on the asset.
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With respect to a business enterprises, the difference between total assets (net of depreciation, depletion and amortization) and total liabilities of an enterprise as they appear on the balance sheet. It is synonymous with net book value, net worth and shareholders equity.
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In accounting, the net amount shown for an asset on the balance sheet. The book value equals the gross cost less the related valuation account. For example, the book value of an automobile is its initial cost less the accumulated depreciation. Because book value is based on historical cost, it may differ from market value.
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With respect to assets, the capitalized cost of an asset less accumulated depreciation, depletion or amortization as it appears on the account books of the business. With respect to a business entity, the difference between total assets (net of depreciation, depletion and amortization) and total liabilities of a business as they appear on the balance sheet. It is synonymous with net book value, net worth and shareholder’s equity.
Liquidation Value
The most probable price that a specified interest in real property should bring under the following conditions:
- consummation of a sale within a short time period.
- The property is subjected to market conditions prevailing as the date of valuation.
- Both the buyer and seller are acting prudently and knowledgeably.
- The seller is under extreme compulsion to sell.
- The buyer is typically motivated.
- Both parties are acting in what they consider to be their best interests.
- A normal marketing effort is not possible due to the brief exposure time.
- Payment will be made in cash in US dollars or in terms of financial arrangements comparable thereto.
- The price represent the normal consideration for the property sold, unaffected by special or creative financing or sales concessions granted by anyone associated with the sale.
This definition can also be modified to provide for valuation with specified financing terms.
The value of assets estimated with regard to specific circumstances under which the assets are sold. Liquidation value describes a situation where a group of assets employed together in a business are offered for sale separately, usually following a closure of the business. Although associated with forced sale, these terms have distinct meanings. There is no reason why assets cannot be liquidated by an orderly sale following proper marketing.
Salvage Value
The price expected for a whole property, e.g., a house or a part of a property, e.g. a plumbing fixture, that is moved from the premises usually for use elsewhere,
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The value of an asset estimated with regard to the specific circumstances under which the asset is sold. Salvage value described the value of an asset that has reached the end of its economic live for the purpose it was made. The asset may still have value for an alternative use or for recycling.
4 Months
A comparable property was offered on the market for 12 months at $229.000, with no offers. It was reduced to $219,000 and was on the market for another 10 months. It was reduced again to $159,000 and it sold for $156,000 in 4 months. What is the reasonable exposure time indicated by this property?
Value In Use
What type of value is based on a specific use, which may or may not be the property’s highest and best use?
Market Value
Which type of value begins with “the most probable price that a property should sell for….”
Price
The amount asked, offered or paid for a property is the definition of?
An artificial amount that is constructed using accounting procedures is called _____ value.
Book
The amount a particular purchaser agrees to pay and a particular seller agrees to accept under the circumstances surrounding their transactions is the definition of
Price
USPAP say When exposure time is a component for the definition of value being developed, the appraiser must also develop an opinion of ______ time linked to the value opinion.
Reasonable Exposure
A comparable property was offered on the market for 8 months at $429K with no offers. It was reduced to $419K and was on the market for another 6 months. It was reduced again to $359K and it sold for $355K in 3 months. What is the reasonable exposure time indicated by this property?
3 Months
Market Value
What is the most common type of value sought by appraisers?
Retrospective Opinion
Exposure time is a _____________ developed by the appraiser.
Single-family property
Which of these property type would NOT typically be appraised based on a going-concern value?
hotel
restaurant
retail sales property
single-family home
Which of the following statements is FALSE?
+ Price is a fact.
+ Price and value are always the same.
+ Price and value could be the same in some situations.
+ Price could be higher than value.
Price and value are always the same.
_____ is related to production.
Cost
Anticipation
The perception that value is created by the expectation of benefits to be derived in the future.
Value = the present worth of future benefit.
Principle of Change
The result of the cause and effect relationship among the forces that influence real property value.
Change is constant..
Real property values are dynamic and subject to constant and immediate change.
Change is the result of a cause and effect relationship between external market factors such as social, economic, governmental and environmental.
Principle of Supply and Demand
In economic theory, the principle that states that the price of a commodity, good or service varies directly, but not necessarily proportionately, with demand, and inversely, but not necessarily proportionately, with supply. In a real estate appraisal context, the principle of supply and demand states that the price of real property varies directly, but not necessarily proportionately, with demand and inversely, but not necessarily proportionately, with supply.
+ If something is in short supply it generally will command a higher price
+If something is in abundant supply it generally will command a low price.
The theory states that price and supply have an inverse relationship. In other words, if there is a large supply of a product or service the price we can charge will probably be reduced.
This will have a direct effect on competition for that product or service.
With real estate, the supply side of the equation is relatively fixed and slow to change, whereas the demand side of the equation can change quickly (the principle of change).
Principle of Competition
- Between purchasers or tenants, the interactive efforts of two or more potential purchasers or tenants to make a sale or secure a lease.
- Between sellers or landlords, the interactive efforts of two or more potential sellers or landlords to complete a sale or lease.
- Among competitive properties, the level of productivity and amenities or benefits characteristic of each property considering the advantageous or disadvantageous position of the property relative to the competitors.
It studies the relationships between participants in the marketplace, such as buyers and sellers or landlords and tenants.
Principle of Substitution
The appraisal principle that states that when several similar or commensurate commodities, goods, or service are available, the one with the lowest price will attract the greatest demand and widest distribution. This is the primary principle upon which the cost and sales comparison approaches are based.
The value of a home tends to be set by the cost of an equally desirable substitute.
The concept assumes two important things:
- that there will be no long delay in acquiring a substitute
- that a buyer will accept a substitute.
Principle of Contribution
The concept that the value of a particular component is measured in terms of its contribution to the value of the whole property, or as the amount that its absence would detract from the value of the whole.
The principle of contribution is used when determining how much to adjust for differences between various components of a property.
Principle of Externalities
- The principle that economies outside a property have a positive effect on its value while diseconomies outside a property have a negative effective on its vale.
- In appraisal, off-site condition that affect a property’s value. Exposure to street noise or proximity to a blighted property may exemplify negative externalities, whereas proximity to attractive and well-maintained properties or easy access to mass transit many exemplify positive externalities.
This mean that good things or bad things can happen to your property’s value based on what is located around it.
Things like, exposure to hazards, convenience to work or shopping, adequacy and cost of government services, proximity of recreation, quality of schools, etc.
Principle of Balance
The principle that real property vale is created and sustained when contrasting, opposing or interacting elements are in a sate of equilibrium.
This principle embodies the concepts of some of the previous principles such as contribution, supply and demand, anticipation and competition.
Principle of Conformity
The appraisal principle that real property value is created and sustained when the characteristics of a property conform to the demands of its market.
Properties fare better when they meet the expectations of the market.
Directly
The principle of supply and demand states that price varies _____ with demand.
Which valuation principle has it strongest application in the valuation of income-producing properties?
Anticipation
A large three-car detached garage is constructed on a home site at a cost of $65K. The appraiser researches the market and finds that this garage only adds $30K in value to the property. Which valuation principle does this demonstrate?
Contribution
Principles of Progression and Regression
These two principles are the result of what happens when the principle of balance is violated.
==> The Principle of Progression
In appraisal, the concept that the value of an inferior property is enhanced by its association with better properties of the same type.
==> The Principle of Regression
In appraisal, the concept that the value of a superior property is adversely affected by its association with an inferior property of the same type.
Principle of Opportunity Cost
The cost of options forgone or opportunities not chosen.
Closely tied to the principle of substitution, in that a prudent investor will choose the investment which offers the highest rate of return at the lowest level of risk.
Agents of Production
Land, Labor, Capital and Entrepreneurial coordination.
Alfred Marshall in 1890
It presume that the value of real estate is influenced by the cost of producing it.
It was postulated by Marshall that each component required a return to make it work.
+ The return on land would be rent.
+ The return on labor would be wages.
+ The return on capital would be interest.
+ The return on entrepreneurship would be profit.
Surplus Productivity
The net income that remains after the costs of various agents of production have been paid.
Anything at all left after satisfying the four agents of production, the excess profit would be returned to the land.
Land was felt to be the most basic component and nothing would be possible without it.
Increasing and Decreasing Returns
The concept that successive increments of one or more agents of production added to fixed amounts of the other agents will enhance income, in dollars, benefits, or amenities at an increasing rate until a maximum return is reached. Then, income will decrease until the increment to value become increasingly less than the value of the added agent or agents.
Also called law of increasing returns or law of decreasing returns.
Highest and Best Use
The reasonably probable and legal use of vacant land or an improved property, which is physically possible, appropriately supported, financially feasible, and maximum productivity. Alternatively, the probable use of land or improved property-specific with respect to the user and timing of the use-that is adequately supported and results in the highest present value.
The most probable use of a property which is physically possible, appropriately justified, legally permissible, financially feasible and which results in the highest value of the property being valued.
+ Legally permissible
+ Physically possible
+ Financially feasible (sometimes called “economically feasible)
+ Maximally productive
Highest and Best use of land or site as though vacant
Among all reasonable, alternative uses, the use that yields the highest present land value, after payments are made for labor, capital and coordination. The use of a property based on the assumption that the parcel of land is vacant or can be made vacant by demolishing any improvements.
Highest and Best Use of Land or a site as improved
The use that should be made of a property as it exists. An existing improvement should be renovated or retained as is so long as it continues to contribute to the total market value of the property or until the return from a new improvement would more than offset the cost of demolishing the existing building and constructing a new one.
Maximally productive
When developing an opinion of highest and best use, what is the final criteria that is applied?
The net income that is left over after the four agent of production are paid is returned to the
Land
True or False? When developing an opinion of site value of an improved property, an appraiser needs to consider the highest and best use of property as though vacant.
True
Regression
In appraisal, the concept that the value of a superior property is adversely affected by its association with an inferior property of the same type is the definition of the principle of?
Progression
In appraisal, the concept that the value of an inferior property is enhanced by its association with better properties of the same type is the definition of the principle of?
In the agents of production theory, the return on land would be ___ and the return on labor would be ____.
Rent, wages
Balance
The principle that real property value is created and sustained when contrasting, opposing or interacting elements are in a state of equilibrium, is the definition of the principle of?
The perception that value is created by the expectation of benefits to be derived in the future is the definition of the principle of?
Anticipation
Supply and Demand will tend to move towards
Equilibrium
The result of the cause and effect relationship among the forces that influence real property value is the definition of the principle of?
Change
The appraisal principle that real property value is created and sustained when the characteristics of a property conform to the demands of its market is the definition of the principle of?
Conformity
Anticipation
When there is a new set of facts in the marketplace and buyers and sellers are reacting accordingly.
Market Analysis
A process for examining the demand for and supply of a property type and the geographic market area for that property type?
Studies the market for any particular economic good (i.e., real estate)
Real Estate Market
Buyers and sellers of particular real estate and the transactions that occur among them.
Market Area
The area associated with a subject property that contains its direct competition.
Market Area Analysis
The objective analysis of observable and/or quantifiable data indicating discernible patterns of urban growth, structure and change that may detract from or enhance property values; focuses on four sets of considerations that influence value: social, economic, governmental and environmental factors.
Macroeconomics
The study of the economy as an aggregate system; focusing on national/domestic production, national/domestic income, the supply of money, the rate of inflation, the national budget, the balance of trade and the interrelationships among constituent sectors.
The big picture.
Microeconomics
The study of the economics of individual spheres of activity or patterns and behaviors, e.g., a firm, an industry, a retail market, a consumer segment, pricing, local employment.
The little picture.
The forces that we are most concerned with and that have the strongest an most immediate impact are the governmental, economic, social and environmental forces that occur at the neighborhood or market area level.
Submarket
A division of a total market that reflects the preferences of a particular set of byers and sellers, e.g., fast food restaurants as a submarket of the overall restaurant market.
Market Segmentation
The process by which submarkets within a larger market are identified and analyzed.
Disaggregation
The differentiation of a subject property from other properties on the basis of sub-classifications with differing product characteristics.
Supply and Demand Characteristics
We need to identify:
+ A property type
+ Particular property characteristics
+ The most probable users of this type of property (demand)
+ Available competing properties (supply)
Demand Analysis
In residential properties we may research and analyze factors such as:
Population trends Income and wage levels Employment types and patterns Unemployment rates Mortgage information Land use patterns Physical factors Local government
Which field of study focuses on the economy as an aggregate system, considering national/domestic income, the supply of money, the rate of inflation and the national budget
Macroeconomics
What process would an appraiser use to identify submarkets within a larger market?
Market segmentation
Buyers and sellers of particular real estate and the transactions that occur among them is the definition of
Real estate market
Supply analysis
We may investigate:
\+ Existing stock \+ Volume of new construction \+ Planned construction - new building permits \+ Availability and price of vacant land \+ Costs of construction \+ Properties offered for sale \+ Conversions in progress \+ Availability of financing
Market Study
A macroeconomic analysis that examines the general market conditions of supply, demand and pricing or the demographics of demand for a specific area or property type. A market study may also include analyses of construction and absorption trends.
Market studies concentrate on market trends.
A market study might be undertaken by a developer prior to planning a new development or project.
Absorption Trends
The rate at which properties for sale or lease have been or are expected to be successfully marketed, sold or leased in a given area over a duration of time.
Absorption Period
The actual or expected period required from the time a property, group of properties, or commodity is initially offered for lease, purchase or use by its eventual users until all portion have been sold stabilized occupancy has been achieved.
Marketability Study
A microeconomic study that examines the marketability of a given property or class of properties, usually focusing on the market segment(s) in which the property is likely to generate demand. Marketability studies are useful in determining a specific highest and best use, testing development proposals and projecting an appropriate tenant mix.
Feasibility Analysis
An analysis undertaken to investigate whether a project will fulfill the objectives of the investor. The profitability of a specific real estate project is analyzed in terms of the criteria of a specific market or investor. Often interchangeable with investment analysis. Both studies forecast property revenue and expenses. Feasibility analysis is more often undertaken as part of a highest and best use study for a proposed property use.
True or False
While material costs vary greatly throughout the US, labor costs do not vary with location.
False
If you are trying to determine the number of existing single-family residences in a local municipality, your best source of this information would be?
Assessor’s office
Researching and analyzing the number of new building permits issued is primarily an element of _____?
Supply
A local employer announces plans for immediate expansion, which will add 600 new jobs. There are only 120 houses available for sale in the market at this time. What is MOST likely to happen in the near future?
The number of building permits issued will increase.
An analysis undertaken to investigate whether a project will fulfill the objectives of the investor is a _____ analysis?
Feasibility
Which of the following would NOT be considered supply analysis?
existing stock
conversions in progress
properties offered for sale
population trends
Population trends
The objective analysis of observable and/or quantifiable data indicating discernible patterns of urban growth, structure, and change that may detract from or enhance property values is the definition of?
Market Area Analysis
Researching and analyzing the number of build conversions in process would be considered part of ______ analysis?
Supply
Identifying the most probable user for a particular type of property is a component of _____ analysis?
Demand
A macroeconomic analysis that examines the general market conditions of supply, demand and pricing or the demographics of demand for a specific area or property type is the definition of?
Market Study
The study of the economics of individual spheres of activity or patterns and behaviors, e.g., a firm, an industry, a retail market, a consumer segment, pricing, local employment is the definition of?
Microeconomics
Converting percents to decimals
Move the decimal point two places to the left and drop the percent sign.
67% = .67
Converting decimals to percents
Go the other way. Move the decimal point two place to the right and add a percent sign.
.12 = 12% 1.00 = 100% .645 = 64.5%
Total x Percent (rate) = The part
The total is 180
The percentage is 15
Trying to find the part
180 x 15% = 27
To find the Total
= Part / Percent
27 / 15% = 180
To find the Percent
= Part / Total
= 27 / 180 = 15%
To solve for percent change
Percent change = New Amount / Base Amount
A share of stock was purchased for $124. It was sold 3 years later for $156. What was the percent change?
156 / 124 = 1.26 or 26%
