Chapter 12 Flashcards
Principle of Progression and Regression
The principle of progression and regression explains the value affect a property will experience when it does not conform to the overall level of quality of the surrounding community. When the property is not located in a neighborhood of similar quality, it will tend to seek the value of those surrounding it.
The principle of regression explains the old adage; “You don’t want to own the best house in a neighborhood.” The most expensive house loses value because of its association with less valuable properties. At the same time, the principle of progression explains the least expensive property in the neighborhood gains value because its located near properties of greater quality.
Assemblage and Plottage
*combining with other key lots
Assemblage is the process of combining several individually owned adjoining parcels into one tract. Two or more tracks assembled to create one large parcel may result in greater utility and therefore an increase in value known as plottage. The difference between the value of the new parcel and the cost of the assemblage is known as the plottage increment.
Making Adjustments
Adjustments are made so that comparables will be a similar to the subject property as possible. Never make any adjustments to the subject property. If a comparable property is inferior to the subject property, the sales price of the comparable should be adjusted upward. The acronym to remember is CIA meaning Comparable Inferior, Add
Subtracting Comps
If a comparable property is superior to the subject property, the sales price of the comparable should be adjusted downward. The acronym to remember is CBS meaning Comparable Better Subtract
Cost or Summation Approach
Like the comparison approach, the cost approach to value is based on the principle of substitution, example, property is worth no more than the cost to replace it with an equally desirable substitute. The cost approach is most appropriate for special purpose properties, new properties, or in any situation where comparable and income data are lacking. The difficulty of evaluating depreciation makes it less reliable for older buildings. Real estate agents usually rely on professional appraisers for this type of evaluation since it requires special data and expertise for reliable results.
Unit in place method
In this method the appraiser estimates the installed cost of each component of the building, such as floors, walls, roof, plumbing, electrical systems, heating and air-conditioning. This method is more reliable than the square foot or cubic foot method, but requires specialized knowledge in data sources.
Physical Deterioration
Physical deterioration occurs because of normal wear and tear, by exposure to the elements, or by lack of proper maintenance. The owner usually has the ability to repair such things as worn carpeting or peeling paint. This type of depreciation is often curable although sometimes it has progressed to the point where the cost would exceed the value added and it becomes in curable. Some very rundown structures are better torn down then repaired.
Functional obsolescence
Functional obsolescence is loss of value due to inadequate, over adequate or out of date improvements. Examples are a septic tank another example is wiring an older homes such as fuses another example is a finished basement with five extra bedrooms over adequate
Economic obsolescence
Think of Detroit decline. Economic obsolescence, also called environmental, external, locational or social obsolescence, arises from forces outside of the property and is therefore, beyond the owners control. It is almost always incurable
The income approach
Usually for an investor
Although the income approach also employs the principle of substitution, the principle of anticipation is at the core of this approach to value. The value of the property is based on the present worth of future benefit or the anticipated amount of income. In other words the investor will decide how much he is willing to pay based upon the amount of income the property will produce.
Gross Rent Multiplier and Gross Income Multiplier
A method based on the idea that a properties value is the present worth of future benefits to be derived from the ownership. It is less sophisticated and less accurate than the capitalization approach. This approach compares income to value but does not account for vacancies or expenses.
