Chapter 14 - Real Property Valuation Flashcards
buyers market
any market that is experiencing an excess of sellers or supply, creating more favorable conditions for buyers
cost
the amount of money required to buy, built, or develop something
demand
a measure of the general desire for an asset or commodity at a given time
market value
the price for which a property will theoretically sell under typical conditions
price
the amount a ready, willing, and able buyer agrees to pay
principle of anticipation
states that the present value of a property is affected by the anticipated income or utility that property will give its property owner
principle of change
states that the condition of a property, the desirability of its location, and the market in which it exists can always change
principle of competition
states that the supply and demand, or level of competition in the market, helps determine the value of a property
principle of conformity
states that values are highest when the houses in a neighborhood look roughly the same
principle of contribution
states that the value of each component contributes to the total value
scarcity
the economic characteristic that informs the economic principle of supply and demand
seller’s market
a market condition in which the number of properties for sale does not meet the demand (number of people looking to buy)
substitution
an economic principle stating that the value of a good or service is affected by the cost of getting a similar (substitute) item elsewhere.
supply and demand
basic economic concept that when supply is low and demand is high, prices increase, while when supply is plentiful and demand is low, prices drop
transferability
the ability of the ownership of a property to be transferred
utility
the degree to which something performs a desired function
value
the price for which a property will theoretically sell under typical conditions
highest and best use
the use of a property which is legal, physically possible, financially viable, and produces the greatest yield
real estate appraisal
an official valuation given to a property by a licensed appraiser.
broker price opinion (BPO)
a broker’s opinion of the value of a piece of real property, given in writing (in NC, the same as a CMA)
comparable
any property which has sold and is similar enough in features, location and proximity in time the value of a subject property.
comparative market analysis (CMA)
a report that compares the prices of recently sold or listed homes (“comparables”) in order to estimate the market value of a similar property )the “subject property”) located in the same area (in NC, the same as a BPO)
inferior comparable
a comparable property that lacks a feature or amenity that the subject property has.
paired sales analysis
involves looking at recently sold homes that are identical in all ways except for one feature and then attributing the price difference between the two homes to that one feature.
probable sales price
the price for which a property will theoretically sell under typical conditions which is estimated by a CMA
subject property
the property whose value is being determined
superior comparable
comparable property that has features or amenities the subject property lacks
worth
the value of something.
cost approach
a method of estimating the value of a property by determining how much it would cost to replace the building or other improvements, minus the cost of depreciation, plus the value of the land itself.
depreciation
a reduction in value for any reason.
economic life
the length of time for which an improvement on property is expected to remain functional and useful.
effective age
an estimated age that is influenced by the updates and quality of maintenance of the property.
external obsolescence
the loss of property value caused by negative forces outside the property which are beyond the control of the owner (unfavorable changes in the environment or market)
functional obsolescence
the loss the value because a property’s function or appearance has gone out of style or has been replaced by a more appealing or effective version
obsolescence
a property’s loss of value due to economic of functional factors
physical deterioration
loss of value caused by physical wear and tear over time
quantity survey method
involves the appraiser individually tallying up the value of everything that goes into the cost of improvements.
replacement cost
the actual cost of replacement without regard to the depreciation of the property.
reproduction cost
the cost of procuring exact copies of the building’s components, preserving the styles and materials used at the subject property’s original construction.
square foot method
an appraiser estimates a cost per square foot for that specific type of building and then multiplies it by the square footage of the structure in order to estimate the cost of improvements.
unit-in-place method
takes direct and indirect costs into account, but combines them into a simplified cost for a building component in order to estimate the cost of improvements.
capitalization rate
a rate of return that calculates the percentage of expected annual income earned over a property’s value; the present value for expected future income earned.
correlation
the process in which an appraiser weighs the relevance of each approach to value for the subject property in order to come up with a final value estimate.
effective gross income (EGI)
the total annual income that a property produces; does not account for any expenses.
Gross Rent Multiplier (GRM)
the ratio of the price of investment property to its annual rental income before considering expenses like taxes and insurance, etc.
Income Capitalization Approach
method of estimating the value of a property by applying a rate of return to the net income produces
investment
the purchase of an asset with the intention of profiting from it in the future.
net operating income (NOI)
a property’s annual income that remains after paying its operating expenses
operating expenses
occasional or continuous expenses required for the operation of an income producing property
potential gross income (PGI)
the total rental income a property would receive if the property was 100% leased.
reconciliation
the finding of a fair value using multiple appraised values, whether they be of different approaches or the same
vacancy cost
a property’s loss in income from unrented units, under-market rent, and uncollected rent
weighted average
the final value estimate found by an appraiser through reconciliation
