Chapter 13: Valuation and Economics Flashcards
An appraisal is an _______________ of value?
estimate
The goal of an appraiser is to estimate ____________ value.
fair market (market value)
What 4 criteria are necessary for a property to have value in the real estate market?
- Demand
- Utility
- Scarcity
- Transferability
What is fair market value?
The most probable or highest price a property will bring if (D. U. S. T.) applies
Economic Principles that affect value:
- Highest & Best Use
- Substitution
- Supply & Demand
- Conformity
- Anticipation
- Increasing and decreasing returns
- Progression & regression
- Plottage
- Contribution
- Competition
- Change
What is highest and best use?
The most profitable use to which the property is adapted and needed
The use that is likely to be in demand in the reasonable near future
Will provide owner with the highest “net return”
What is substitution?
The maximum value of a property tends to be set by the cost of purchasing an equally desirable and valuable substitute
Based on comps
What is conformity?
Maximum value is realized if he use of the land conforms to existing neighborhood standards.
What is anticipation?
Value can increase or decrease in anticipation of some future benefit or detriment affecting the property.
What are increasing & decreasing returns?
Improvement to land and structures will eventually reach a point at which they will no longer have an effect on property values
What is progression and regression?
Between dissimilar properties, the worth of the better property is adversely affected by the presence of the lesser-quality property and vice versa.
What is plottage?
consolidating units has more value combined than when the units were added up individually
The process of merging 2 lots under one owner is called?
Assemblage
The increase in value due to plottage is called?
Plottage increment
What is unearned increment?
Appreciation in the value of real estate without any improvement undertaken by the owner.
What is contribution?
The value of any component of a property consists of what its addition contributes to the value of the whole or what its absence detracts from the value of the whole.
What is competition in appraising?
States that excess profits tend to attract competition
What is Change in appraising?
When natural or other forces affect real estate
What are the 4 major forces that influence the value of property?
- Physical
- Governmental/Political
- Economic
- Social
P-E-G-S
What is the #1 physical factor affecting the value of property?
The location
What are the 7 physical characteristics that influence the way land is bought?
- Immobility: Its location can’t be changed
- Indestructibility: Remains same through natural and man-made changes
- Nonhomogeneity: No 2 parcels are exactly alike
- Location or situs: the location & econ. factors together
- Improvements
- Fixed Investments (Fixity): Improvements made with the intent of lasting a long time
(Physical is longer than economical)
- Scarcity:
What is a neighborhood’s cycle?
- Growth: 10-15 yrs.
- Stability: 20-25 yrs.
- Decline: 5-10 yrs.
- Renewal (Revitalization)
What are the 4 main steps in the appraisal process?
- Define the problem
- List the data needed and the sources
- Gather and analyze data
- Determine the highest and best use
What is reconciliation?
Arriving at an estimate of the value of the subject property being appraised by assessing the 3 appraising approaches making sure to target the approach that best fits the property.
What are the 3 approaches used to estimate the value of property?
- Market: (Residential)
- Cost: (Special buildings and construction)
- Income: Income producing establishments
What is the market comparison approach (direct approach)?
An estimate of value is obtained by comparing the “subject” property with the recently sold “comparable properties”.
- Based on the principles of substitution
- Most reliable approach in appraising residential prop.
What are the 4 factors affecting the market approach?
- Date of sale
- Location
- Physical features
- Terms and conditions
When is “square footage” used for appraisal?
When dealing with subdivided lots zoned for commercial, industrial, or apartment buildings.
When is acreage used for appraisal?
When dealing with rural land and large parcels that have not been subdivided.
What is the 4-3-2-1 approach?
It states that the land in the front 1/4 of the lot is worth 4x as much as the back 1/4.
What are the steps in the cost approach (summation approach)?
- Estimate the value of the land?
- Estimate the current cost of constructing the bldg. & sit improvements
- Estimate the amt of accrued depreciation
- Deduct accrued deprec.
- Add the estimated land value
What are the 2 ways to view construction costs of a building for appraisal purposes?
- Reproduction: Make an exact replica
2. Replacement: Make a similar construct that’s comparable but not exactly the same
What are the 3 methods used when computing the reproductive or replacement cost of a building?
- Square-ft or Cubic-ft method
- Unit in place method
- Quantity-survey method
What is the cost approach?
a real estate valuation method that estimates the price a buyer should pay for a piece of property is equal the cost to build an equivalent building. In the cost approach, the property’s value is equal to the cost of land, plus total costs of construction, less depreciation.
What is the unit-in-place method?
Provides the cost to construct a building by estimating the installation costs, including materials, of the individual components of the structure.
So if you know you need 1,000 square feet of sheet rock to cover the walls, you need to find out the cost of buying, installing, and finishing the sheet rock on a per-square-foot basis and then multiply by 1,000 square feet.
What is the square foot or cubic foot method?
Involves calculating the cost of construction by multiplying the square footage of the structure by the construction cost for that particular type of building.
For example, you’d multiply a $100 per square foot cost to build the kind of house you’re appraising by the 2,000 square foot total area of the house to arrive at a cost estimate of $200,000 to replace the structure.
The square footage method is the one more commonly used by appraisers to estimate replacement or reproduction cost.
What is the quantity survey method?
it requires you to break down all the components of a building and estimate the cost of the material and installation separately.
Considered the most accurate method, but the most cumbersome and time consuming.
Land never ___________________ in value.
depreciates
What are the 3 classes of depreciation?
- Physical
- Functional Obsolescence:
- Economical Obsolescence: Normally incurable
When do you use the cost approach?
Special purpose buildings, schools, churches, post offices, etc.
What is the income approach?
a real estate valuation method that uses the income the property generates to estimate fair value.
It’s calculated by dividing the net operating income by the capitalization rate
Based on the principal of anticipation
Believes income from the property will drive its value
When do you use the income approach?
Valuation of income producing properties:
- Apartment buildings
- Central business districts
- Shopping centers
What are the steps for utilizing the income approach?
- Estimate annual potential gross income
- Deduct an appropriate amt. for vacancy and rent loss to arrive at the “Effective Gross Income”
- Deduct annual operating expenses from the effective gross income to arrive at the “annual net income” (Mortg. payments are not considered operating expenses)
- Estimate the price a typical investor would pay for the income produced by this particular type and class of property.
Find investor’s price by estimating the rate of return (yield) an investor will demand for the investment of his or her capital in this type of building. This is called “capitalization”
What is the capitalization rate?
It indicates the rate of return that is expected to be generated on a real estate investment property.
Computed based on the net income which the property is expected to generate and
Is calculated by dividing net operating income (NOI) by property asset value and is expressed as a percentage.
It is used to estimate the investor’s potential return on their investment in the real estate market.
- Cap rate = NOI/Market Value
- Market Value = NOI/Cap rate
- NOI = Cap rate x Market Value
Cap rates and risk have what type of relationship?
Direct: When risk increase, cap rate increases
What is the Gross Rent Multiplier (GRM) or Gross Income Multiplier (GIM)?
Used to assess value since property is not used primarily for generating income:
- GRM is used for residential and GIM commercial
- Sales Price/Monthly Rental Income = GRM
- Sales Price/Annual Rental Income = GIM
- Sales Price = Rental Income x GRM or RI x GIM
Appraiser must use 4 similar properties when determining comparable sales and rental information.
The reconciliation process what it is and isn’t
- It is not the average of all the approaches.
2. The validity & reliability of the approach is considered
What factor in appraising is used to determine which appraisal approach gets the most “weight”
- The type of property being appraised
2. The purpose of the appraisal
What are the 4 types of appraisal reports
- Oral
- Appraisal letter: In form of a business letter with info
- Form appraisal: Uses a pre-printed form
- Narrative appraisal: A complete report (10-100 pages or longer
