Chapter 11 - Appraisal & Market Analysis Flashcards
Appraisal
An estimate of the value of property resulting from an analysis of facts about the property at a specific time. An opinion of value. An appraisal is typically done when there’s a transfer of property, for financial reasons (i.e., refinance), or for tax purposes (i.e., estate planning).
Appraiser
One qualified by education, training and experience who is hired to estimate the value of real and personal property based on experience, judgment, facts, and use of formal appraisal process.
What factors come into play when valuing/appraising a property?
DUST:
- Demand - higher demand results in increased value; lower demand results in decreased value
- Utility - the more useful the property, the higher the value (i.e., handicap bars in a bathroom at senior housing)
- Scarcity - amount of supply available - higher supply, lower value; lower supply, higher value
- Transferability - ability to transfer clean, clear title to another person w/o restrictions
Assessed Value
A valuation placed upon a piece of property by a public authority as a basis for levying taxes on the property.
Cost of a Property
The total dollar expenditure for labor, materials, legal services, architectural design, financing, taxes during construction, interest, contractor’s overhead and profit, and entrepreneurial overhead and profit (may or may not equal value).
Demand
The supply of willing and able buyers in the marketplace or lack thereof.
Insured Value
The value of an asset or asset group that is covered by an insurance policy; can be estimated by deducting cost of non-insurable items (e.g. land value) from market value.
Investment Value
The specific value of an investment to a particular investor or class of investors based on individual investment requirements; distinguished from market value, which is impersonal and detached.
Market Value
The highest price in terms of money which a property will bring in a competitive and open market and under all conditions required for a fair sale / arm’s length transaction
- -equal motivation for both the buyer and seller (neither is affected by undue pressures)
- -acting in parties best interest (buyer and seller are acting prudently & knowledgeably - well informed about the risk and rewards associated with the pending agreement)
Sales Price
The amount a purchaser agrees to pay and a seller agrees to accept in an arms length transaction (no related parties involved in the purchase & sale).
Scarcity
A lack of supply
Transferability
The ability to transfer ownership of property from one person to another.
Utility
The ability to give satisfaction and/or excite desire for possession.
Value
Present worth of future benefits arising out of ownership to typical users/investors.
What are the various types of property values?
- Investment Value
- Insured Value
- Value-in-Use
- Assessed Value
- Mortgage Value
Value-in-Use
value determined by the current use of the property
- -EX: single-site retail facility operated as a pharmacy may not convert well to be a single-site restaurant (i.e., less valuable to a restaurant investor than to another retail investor)
- -typically used for commercial properties
Mortgage Value
value of the mortgage on the property - value changes in the event that the property owner takes out a new mortgage, but is NOT affected if the property increases/decreases in value
What factors affect market value?
- -Equal Motivation
- -Parties Best Interest
- -Exposure on Open Market - must be reasonable time the property is listed for sale & property must have exposure to the open market.
- -Consideration - buyer must be willing to pay for the property in cash or the equivalent of cash
- -Financing Considerations - buyer must be able to secure financing to facilitate the purchase
- -Pricing of Property Sold - price must be considered normal consideration for similar properties
Market Value vs. Sales Price vs. Cost
Market Value - highest price of a property in a competitive and open market
Cost - includes all the money that is spent in purchasing, developing, & owning/financing a property
Price - bottom line in the real estate transaction - what did the buyer agree to pay?
What external factors have an impact on home values?
- Population Trends
- Family Composition
- Aging Population
- Economics - employment opportunities, cost of financing (i.e., interest rates), etc.
- Construction Costs (hard & soft costs)
- Quality of Services (ex: Local Transportation, Fire & Policemen, internet access, trash pickup, etc.)
- Weather
- Taxes
- Quality of Schools
Highest and Best Use
An appraisal phrase meaning that use which at the time of an appraisal is most likely to produce the greatest net return to the land and/or buildings over a given period of time; that use which will produce the greatest amount of profit. This is the starting point for an appraisal.
–Commercial property are most often subjected to this valuation method (i.e., gas station cannot be easily converted to a restaurant)
Principle of Anticipation
Affirms that value is created by anticipated benefits to be derived in the future.
Principle of Change
Holds that it is the future, not the past, which is of prime importance in estimating value. Change is largely the result of cause and effect.
–EX: changes in supply & demand, interest rates, and property conditions
Principle of Conformity
Holds that the maximum of value is realized when a reasonable degree of homogeneity of improvements is present. Use conformity is desirable, creating and maintaining higher values - a time when being unique is invaluable!
Principle of Contribution
A component part/feature of a property is valued in proportion to its contribution to the value of the whole–add or subtract in a CMA. Holds that maximum values are achieved when the improvements on a site produce the highest (net) return, commensurate with the investment.
–EX: gourmet kitchen would not be a selling point for a buyer that’s single and eats out most nights
Principle of Progression
The worth of a lesser valued residence tends to be enhanced by association with higher valued residences in the same area.
- -Increasing & Diminishing returns
- -EX: if most properties in a neighborhood consist of 4-bedrooms homes with gourmet kitchens and there’s 1-2 homes built 15 years ago with 2 bedrooms and a standard kitchen, the larger homes may suffer a small decrease in value while the smaller homes may see a small increase.
Principle of Substitution
Affirms that the maximum value of a property tends to be set by the cost of acquiring an equally desirable and valuable substitute property, assuming no costly delay is encountered in making the substitution.
Principle of Competition
Supply & Demand always affects property valuation - the more buyers there are, the higher demand for property thus driving value up. The fewer buyers, or the more properties that exist, the lower the value of the property.
Principle of Regression
The worth of a higher valued residence tends to be diminished by association with lower valued residences in the same area.
- -Increasing & Diminishing returns
- -EX: Sub-division surrounded by 2 mobile home parks - higher valued properties in the sub-division will be considered worth less because of the surrounding properties values of the mobile homes
Sales Comparison Approach Appraisal
The appraisal/valuation method which compares a subject property’s characteristics with those of comparable properties which have recently sold in similar transactions.
- -compares property to other similar properties (i.e., ranch home to another ranch home) in the immediate area that were sold within the past 6 months
- -typically used with residential properties (1-4 dwelling units)
1. Appraiser compares the subject property w/ a minimum of 3 similar properties that were recently sold nearby (calculates the average square footage value)
2. Using the principle of contribution, the appraiser determines what features add/subtract value to/from the subject property (i.e., home capacity, home condition/age, rights/location/financing)
3. The appraiser then adjusts the prices to determine the value of the subject property
Cost Approach Appraisal
An analysis in which a value estimate of a property is derived by estimating the replacement cost of the improvements, deducting therefrom the estimated accrued depreciation, then adding the market value of the land.
- -typically used for buildings with a specific use, like schools & churches AND newly constructed homes
1. Valuation of the Land - location, size, whether the land is level, shape, etc. affect the value
2. Determine the Cost of Development - reproduction vs. replacement (how much would it cost for the property to be newly constructed?)
3. Calculate Depreciation, taking physical deterioration, functional obsolescence, and location obsolescence into consideration
4. Value = value of land + replacement cost - depreciation
Quantity Survey Method
Determining the cost of development by adding up everything from the most minor of fees to each piece of material the builder would need to construct the property.
–Rarely used - a lot of work
Unit-in-place Method
Determining the cost of development by combining direct and indirect cost for a specific piece of construction - accurately and consistently estimates the cost of installing bathrooms, elevators, etc.
Square Foot Method
Determining the cost of development by using the floor area of the structure - cost assigned per square foot or cubic foot
–least accurate method and least commonly used
Income (Capitalization) Approach
An appraisal method applied to income producing properties, which involves applying a market capitalization rate to the property’s net operating income
- -typically used for commercial properties, large apartment complexes, & multi-family homes (> 4units)
1. Calculate the NOI by obtaining the Market Rent, average vacancy rates, & operating expenses - Effective Gross Income - Operating Expenses
2. Calculate the capitalization rate - net operating income / sales price
3. Calculate the appraised value - NOI / cap rate
Capitalization Rate
The % of the investment the investor will receive each year from the net income of the property
–The rate of interest which is considered a reasonable return on the investment, and used in the process of determining value based upon net income - indication of risk.
Capitalization Rate = Net Operating Income (NOI) / Purchase Price
**The lower the capitalization rate, the higher the property value (less risky)
**The higher the capitalization rate, the lower the property value (more risky)
Net Operating Income
Income (Rents) - Operating Expenses (normal expenses such as taxes, insurance, maintenance, utilities, excludes mortgage payments)
Effective Gross Rent
Rents if 100% occupied - Anticipated Vacancy Rate
