Chapter 13 Flashcards
Real Property Valuation
A Provisional Broker can provide a BPO
yes
Appraisers
What is an Appraisal
An opinion of value by a licensed appraiser on a specific date
Elements of Value (DUST)
All of these would affect value of a property
- Demand
- Utility
- Scarcity
- Transferability
Forces that influence value
- Environment
- Government
- Economy
- Social Trends
Economic Principles of Value
Read the chapter in the text book for this. Pay attention to italisized words.
- Highest and Best Use (every property only has **one **highest and best use at one time AND it is the most profitable use of the property at that time)
- Principle of Substitution. Items of similar quality are determoined by lowest price
- Supply and Demand: More supply lowers value. Higher supply, increases value.
- Principle of Conformity: Maximun value is maintained with similarity. Basis for CCR.
- Principles of Progression & Regression: Presence of greater value properties with increase value (progression); Presence if lesser valued properties will decrease the value (regression)
- Principle of Anticipation: future benefits & detriments will affect property value
- Contribution: additions to home, updates, etc.
- Principle of Competition: Profits attactt competition, which lowers profits
- Principle of Change: neighborhoods goig through change
- Principle of Assemblage: bringing together multiple properties to increse value of land
- Principle of Plottage: Division of larger pieces of land into smaller pieces
Approaches to Value (3)
Sales Comparision: Market data
Cost
Income: income producing properties (rentals, etc.)
Sales Comparision Approach
- Most often used in residental and land sales
- Based on similar properties (what has recently been SOLD)
- Will need to make adjustments for differences in “like”properties
we will be tested on how to make adjustments
Subject Property
Prooperty being appriased
Comparable Properties (aka “comps”)
Similar propertues that have been sold in the marketplace (within the last 6 months and nearby)
Sales Comparision Approach
- Data collection & analysis
- Selection of 3-4 comps
- Adjustments to sale prices of comps
- Reconciliation and determine of value estimates
Inferior Property
Adjusting the Comparable Sales
If comparable propety has LESS value you would ADD
Superior Property
If comparable house has MORE value you would SUBTRACT
Cost Approach
When no comps are avaliable
Only approach using depreciation.
Unique poperties, non-income producing, new construction
Cost Approach Process
- Estimate the value of the building
- Esimate the value of the land
- ADD together = cost approach value
look at the value land by itself (land never depreciates)
look at the value of the depreciated building
ADD together = cost approach value
Reproduction Cost
Seldomly used
An EXACT replica
Square Foot Method
Most common
Cost per square foot
Ex: 8,000 sq ft x $375 (cost per sq ft) = $3,000,000
Dont forget depretiation
Unit in Place
Breaks down the cost of materials to rebuild
Quantity Survey Method
wont be tested
Total materials + labor to rebuild
Depretiation Methods
- Age/Life
Age/Life
- Physical Life
- Economic Life
- Effective Age
Age/Life Method for Depreciation
Not on exam
Effective Age
**(DIVIDED BY) **
Economic LIfe
= % of Depreciation
Breakdown Method of Depretiation
**1. Physical Deterioration
2. Functional Obsolescence (poor or outdated design - INSIDE of the house)
3. Economic Obsolesence (outside of the house - we cannot control aka train tracks)
Curable vs. Incurable Depreciation
Curable: Easily remedied & economically feasible
Incurable: not capable of being remedied or too expensive
The Income Approach
To determine the value of a property
Used for income producing properties or investment properties
CAP Rate
The way at looking at the rate of return to determin value
Capitalization formula
- Net operating income (net - after expenses) +
- Knowledge of similar sales =
- CAP rate
Cash Flow Analysis Calculation
(How to arrive at NOI)
Potential Gross Income
* - Vacancy
* - Collection losses =
* Effective gross income
* - Operating expenses =
* Net Operating Income (NOI)
you can then plug into the CAP rate formula and determine ROI
you do not include your P&I in any of these numbers
How to Arrive at NOI
Potential Gross Income
* - Vacancy
* - Collection losses =
* Effective gross income
* - Operating expenses =
* Net Operating Income (NOI)
Gross Rent Multipliers (GRM)
smaller rental property
Sales price (divided by) monthly rental income = GRM
Take GRM and put back into formula (see circle chart)
Reconciliation
AKA Opinion
For residentail the CAM method is used
Process of bringing together different appraches to arrive at ONE final opinion of value
1. Comparable Approach Method
2. Cost Approach Method
3. Income Approach Method
