Chapter 13 Flashcards
appraisal
an estimate of value
Comparative Market Analysis
(CMA) presentation and analysis of the competition in the marketplace for a particular property for the purpose of arriving at a market price or listing price (for clients)
Broker Price Opinion
(BPO) same as CMA but for customers; non-provisional brokers not allowed to do for a fee
probable sales price
a broker’s estimated price of a property being listed
value/market value
the anticipation of future benefits resulting from ownership of a particular property
cost
a measure of expenditures of labor and materials made some time in the past
price
the amount of money paid for a property
value in use
a special value to a person, usually the owner of a property. The property takes on either a subjective or objective value to the owner
subjective value
stems from pride of ownership and is not reflected by the general public (when an owner believes her property is worth more that its market value)
objective value
an income from a use of the property for which there is little or no competitive market demand (the value in use may be greater than its value in exchange)
valuation
estimating what the average buyer would pay for a property, or its fair market value
evaluation
the economic feasibility of a project
effective demand
the absorption rate of the market
Characteristics of Value
(DUST) 1. Demand 2. Utility 3. Scarcity 4. Transferability
Demand
a desire or need for a property that is coupled with the financial ability to satisfy the need
Utility
how one can use a property
Scarcity
based on the supply of the property in relation to the effective demand for the property
Transferability
owner is able to transfer title
Forces that Influence Value
- Social trends 2. Economic forces 3. Government controls & regulations 4. Physical force
Principles of Value
- Supply & Demand
- Anticipation
- Substitution
- Conformity
- Contribution
- Competition
- Change
- Highest & Best Use
Supply & Demand (Principles of Value)
the greater the supply of any commodity in comparison with the demand for that commodity, the lower the value (high supply, low demand=lower value); the smaller the supply and the greater the demand, the higher the value (low supply, high demand=higher value)
Anticipation
property value is based on the anticipation of the future benefits of ownership; present value of future income
Substitution
the principle providing that the highest value of a property has a tendency to be established by the cost of purchasing or constructing another property of equal utility and desirability, provided the substitution could be made without unusual delay
Conformity
homogeneous or compatible uses of land within a given area; these properties have tend to be of similar size, style, age, construction, and quality
Contribution
carious elements of a property add value to the entire property
comparable
a recently sold property that is compared to the subject property to determine the value of the subject property
Competition
when the net profit generated by a property is excessive, the result is to create very strong competition
Change
all properties undergo a life cycle; phase include: growth, stabilization, decline, renewal
Highest & Best Use
use which will give the owner the highest net rate of return or profitability
Sales Comparison Approach (Market Date)
compares subject property to similar properties sold recently
Cost Approach
theoretically rebuilds the structure anew and then adjusts it to its present condition
Income Method
applies the capitalization formula to the income (rent) produced
subject property
the property being appraised
reconciliation
a weighted average of the adjusted sales price of the comparable to determine a single reliable estimate of value for the property being appraised (subject property)
Cost Approach
the primary method for estimating value when there are not sufficient comparables and when it does not involve an income-producing property.
Reproduction Cost
cost to rebuild an exact duplicate of the property when new
Replacement Cost
cost to rebuild using today’s modern building materials and construction techniques
quantity survey method
cost approach method that breaks down the task into an in-depth materials cost and then add in the costs of labor, permits, overhead, taxes, and profit
unit-in-place method
cost approach method that breaks the costs into an estimate for various units
square-foot method
cost approach method; determine what similar properties are costing per square foot to construct and then multiply this cost by the number of square feet within the improvements
depreciation
an actual loss of value from any cause
effective age
age that a property appears to be based on its condition
chronological age
the actual age of the property
physical deterioration
wear & tear; deferred maintenance; one cause of depreciation in the Breakdown Method
Functional obsolescence
poor or outdated design, inside the property lines; one cause of depreciation in the Breakdown Method
economic obsolescence
external factors, always outside the property lines; one cause of depreciation in the Breakdown Method
Causes of Depreciation in Breakdown Method
- physical deterioration
- functional obsolescence
- economic obsolescence
Depreciation Methods
- Age/Life (Straight-line)
- Market Abstraction
- Breakdown
curable
easily remedied and economically feasible
incurable
not capable of being remedied or too costly
income approach
(income capitalization approach) the primary method used to estimate the present value of properties that produce rental income
capitalization
the process of converting net operating income into an indication of value
net operating income
(NOI) Income remaining after deducting all vacancy losses and operating expenses from gross income.
( Gross Income - Vacancy Loss - Operating Expenses = NOI )
