Chapter 13 - Types of Value Flashcards
“The monetary relationship between properties and those who buy, sell, or use those properties.”
is the definition of __________
Value
- 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.*
“The present worth of the future benefits that accrue to real property ownership”
is definition of
value
What is definition of 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.
* 2. The present worth of the future benefits that accrue to real property ownership”*
The amount paid in exchange for a good or commodity.
is definition of________
Price
Price is distinguished from value because price becomes a fact when the transaction is consummated as opposed to value, which is an estimate.
Definition of Price
- The amount paid in exchange for a good or commodity.*
- The amount asked, offered, or paid for a property.*
Comment: 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 a property may or may not have any relation to the value that might be ascribed to that property by others.
The total dollar expenditure to develop an improvement; applies to either reproduction of an identical improvement or replacement with a functional equivalent, not exchange (price).
is definition of
Cost
- Comment: Cost is either a fact or an estimate of fact. (USPAP, 2016-2017 ed.)*
- 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.”*
The amount required to create, produce, or obtain a property.
is definition of ________
Cost
- Comment: Cost is either a fact or an estimate of fact. (USPAP, 2016-2017 ed.)*
- 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.”*
Definition of Cost
- The total dollar expenditure to develop an improvement; 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.
Comment: Cost is either a fact or an estimate of fact. (USPAP, 2016-2017 ed.) 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.”
It would take $275,000 to produce a single-family home on the owner’s lot. This $275,000 figure represents the home’s
- cost
- value
- price
- all of these
cost
“The amount asked, offered, or paid for a property” is the definition of
- value
- cost
- price
- worth
price
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 appraises the home at $525,000. The sales contract for $560,000 represents the __________ of the property.
- cost
- value
- price
- none of these answers
price
True or False? Cost and value are the same.
False
Once stated, price is ________.
- an opinion
- a fact
- value
- synonymous with cost
a fact
“The monetary relationship between properties and those who buy, sell, or use those properties” is the definition of
- value
- cost
- price
- money
value
“The most probable price, as of a specified date, in cash, or in terms equivalent to cash, or in other precisely revealed terms, for which the property should sell after reasonable exposure in a competitive market under all conditions requisite to a fair sale, with the buyer and seller each acting prudently, knowledgeably, and for self-interest, and assuming that neither is under duress.”
describes __________
Market Value
“A transaction between unrelated parties who are each acting in their own best interest.”
is definition of _________
arm’s length transaction
Define arm’s length transaction
“A transaction between unrelated parties who are each acting in their own best interest.”
Examples of Non Arm’s-Length transaction:
- Urgent Job transfer
- Death of a spouse or close relative
- Need to buy and control an adjoining property
- Need to purchase a property for an assemblage
- Sale prior to impending foreclosure
- Sale under threat of condemnation
- Sale prior to proposed zoning change
- Sale influenced by tax considerations (it may have been part of a tax-free exchange)
The time a property remains on the market.
is definition of ________
Exposure Time
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.
is definition of _________
Exposure time
Comment: Exposure time is a retrospective estimate based on an analysis of past events assuming a competitive and open market.”
Define 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.
Comment: Exposure time is a retrospective estimate based on an analysis of past events assuming a competitive and open market.”
How does an appraiser develop an opinion of reasonable exposure time?
- statistical information about days on market;
- information gathered through sales verification;
- interviews of market participants; and
- information from data collection services
The opinion of the time period for reasonable exposure is not intended to be a prediction of a date of sale. Instead, it is an integral part of the analyses conducted during the appraisal assignment.
If we have a normal buyer and seller acting in a normal fashion and the property sells under typical conditions in a reasonable time after having a normal exposure to the market and through typical financing means - then the sale price of the property should be consistent with __________.
market value
This can only be the result of an arm’s length transaction in which the two parties are acting calmly and rationally with no ulterior motives and acting under no undue duress.
“A type of value that reflects the amount that can be obtained for an asset if exchanged between parties.”
is definition of ______
Value in exchange
Examples include market value, fair value, liquidation value, and disposition value.
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 real property in exchange.
Define Value in Exchange
A type of value that reflects the amount that can be obtained for an asset if exchanged between parties. Examples include market value, fair value, liquidation value, and disposition value.”
“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.”
is definition of _______________
Value in use
Value in use may or may not be equal to market value but is different conceptually.
Comment: This may come into play in appraising commercial or industrial properties. A factory may be specialized and have a substantial value for one use only. An example might be a bottling plant which has been built and configured for that use.
But what if that use is no longer economically viable or is illegal under the current zoning? A property that has a specific use may be desirable to a limited market of purchasers. Care should be taken when appraising to identify if there is a market for that use.
Define 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.”
“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.”
is definition of ______________
Investment value
Comment: Market value examines the typical motivations of the average buyer and seller under all normal conditions of marketing and financing. Let us say that in arriving at an opinion of the market value for an income producing property, the appraiser concluded $500,000.
A different result might occur if an investor hires you and poses the question, “How much can I afford to pay for that property – assuming only a 10% down payment, tax free annual net income, and the ability to recapture my investment over a holding period of 10 years?” The answer to that question would be investment value; that is, what the property would be worth to that one specific investor, in order to achieve his personal investment goals. Depending on the individual investor’s specific requirements, investment value may differ substantially from market value.
Define 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.”
A type of value for insurance purposes.”
is definition of _________
Insurable value
Comment: You may be asked to do an appraisal for this type of value, instead of market value. Basically, this would require you to come up with the value of the part of a property that would be replaced in the event of a total loss by fire, hurricane, or other catastrophic event.
Usually this means the building improvements only and does not include the land or other site improvements such as a well or septic system. (Although site improvements can be included, if the client and/or the assignment specifies their inclusion.)
Owners of real property often confuse this value, which is based on replacement or reproduction cost, with market value.
Define Insurable Value
“A type of value for insurance purposes.”
The value of a property according to the tax rolls in ad valorem taxation; may be higher or lower than market value, or based on an assessment ratio that is a percentage of market value.
is definition of _________
Assessed value
Define Assessed Value
“The value of a property according to the tax rolls in ad valorem taxation; may be higher or lower than market value, or based on an assessment ratio that is a percentage of market 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.”
is definition of _______
Intangible value
An example of this would be a long term lease for a property at $15 per square foot, when the market rate is now $10 per square foot. The owner of this property would probably be able to sell the property for more than market value because it is rented at an above-market rate. The additional value created by this favorable lease would be attributed to intangible value.
Define 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.”
In USPAP, STANDARDS ___ and _____ deal with the valuation of intangible assets.
STANDARDS 9 and 10
This includes items such as business and goodwill, franchises, patents, etc.
“The market value of an established and operating business including the real property, personal property, financial assets, and the intangible assets of the business.”
is definition of _________
Market value of the going concern
This could be a substantial factor in the sale of a hotel or motel, or a retail sales property. There may be fixtures and business equipment, plus there may be customer loyalty and perhaps an assumable inventory and customer list.
Define Market value of the going concern
“The market value of an established and operating business including the real property, personal property, financial assets, and the intangible assets of the business.”
Monetary worth attributed to features that have no measurable worth in the market but may benefit the public or a specific segment of the public.
is definition of __________
Public interest value
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 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.”
The capital amount at which property is shown on the account books of a corporation or individual. The net amount at which an asset is carried on the books or reported in financial statements; the asset’s cost at acquisition, reduced by the amount of accumulated depreciation on the asset
is definition of ________
Book value
Define Book Value
The capital amount at which property is shown on the account books of a corporation or individual. The net amount at which an asset is carried on the books or reported in financial statements; the asset’s cost at acquisition, reduced by the amount of accumulated depreciation on the asset.
“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 of the date of valuation.*
- Both the buyer and seller are acting prudently and knowledgeably.*
- 4. 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 U.S. dollars (or the local currency) or in terms of financial arrangements comparable thereto.*
- 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.*
is definition of ________
Liquidation value
Define 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 of the date of valuation.*
- Both the buyer and seller are acting prudently and knowledgeably.*
- 4. 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 U.S. dollars (or the local currency) or in terms of financial arrangements comparable thereto.*
- 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 price expected for a whole property, e.g., a house, or a part of a property, e.g., a plumbing fixture, that is removed from the premises usually for use elsewhere.”
is definition of ________
Salvage value
Define 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 removed from the premises usually for use elsewhere.”
What type of value requires an appraiser to consider the expectations of a particular investor or class of investors?
- book value
- salvage value
- insurable value
- investment value
investment value
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?
- 4 months
- 14 months
- 22 months
- 26 months
4 months
The most common type of value sought by appraisers is
- liquidation value
- value in use
- market value
- going concern value
market value
When is an appraiser required to develop an opinion of reasonable exposure time in an appraisal?
- when reasonable exposure time is a component of the definition of value being used
- only in appraisals for federal land acquisitions
- when liquidation value is being developed
- none of the above
when reasonable exposure time is a component of the definition of value being used
What type of value is based on the market value of an established, operating business, as if sold in the aggregate?
- book value
- investment value
- salvage value
- market value of the going concern
market value of the going concern
A bank acquires a property at foreclosure, and they need to sell it very quickly. They ask an appraiser to provide them a value opinion based on a restricted marketing time, and considering they are under extreme compulsion to sell. What type of value is this client asking for?
- investment value
- going concern value
- book value
- liquidation value
liquidation value
Which type of value begins with “the most probable price that a property should sell for…”
- assessed value
- value in use
- insurable value
- market value
market value
Exposure time is a _____________ developed by the appraiser.
- prediction
- statement of fact
- personal opinion
- retrospective opinion
retrospective opinion
What type of value is based on a specific use, which may or may not be the property’s highest and best use?
- assessed value
- value in exchange
- value in use
- book value
value in use
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.
“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” is the definition of ___________ time.
- marketing
- exposure
- market
- hypothetical
exposure
_________ is related to production.
- Cost
- Price
- Value
- Demand
Cost
True or False? Market value must be as of a specific point in time.
True
The market value definition says that __________ is allowed for exposure in the open market.
- 90 days
- 6 months
- a reasonable time
- a restricted time
a reasonable time
An artificial amount that is constructed using accounting procedures is called ________ value.
- Book
- tangible
- Trade Fixture
- investment
Book
“The price expected for a whole property, e.g., a house, or a part of a property, e.g., a plumbing fixture, that is removed from the premises usually for use elsewhere” is the definition of ____________ value.
- scrap
- replacement
- marginal
- salvage
salvage
________ may be more prevalent when appraising industrial properties.
- Value in exchange
- Assessed value
- Public interest value
- Value in use
Value in use
An appraisal for insurable value on a single-family home usually does not include the
- windows and doors
- land
- plumbing fixtures
- interior walls
land
A value that cannot be imputed to any part of the physical property is called ___________ value.
- intransient
- intangible
- invisible
- impartial
intangible
The most common market value definitions specify payment in terms of ____________ or in terms of financial arrangements comparable thereto.
- promissory notes
- good and valuable consideration
- pounds sterling
- cash in U.S. dollars
cash in U.S. dollars
Which of these property types would NOT typically be appraised based for the market value of the going concern?
- hotel
- restaurant
- retail sales property
- single-family home
single-family home
“The total dollar expenditure to develop an improvement” is the definition of
- price
- value
- production
- cost
cost
The amount a particular purchaser agrees to pay and a particular seller agrees to accept under the circumstances surrounding their transaction” is the definition of
- value
- market value
- price
- cost
price
USPAP says appraisers can use _________ in developing an opinion of reasonable exposure time.
- interviews with market participants
- information gathered through sales verification
- statistical information about days on market
- all of these
all of these
Market value is “the __________ price which the specified property interest _________ sell for…..”
most probable
should
The value of a property according to the tax rolls in ad valorem taxation is the definition of ___________ value.
- insurable
- ad valorem
- book
- assessed
assessed
