Chapter 15 - Estimating Real Property Value Flashcards
Active real estate licensees are allowed to perform a _______________ for the purpose of obtaining a listing or a prospective sale.
Comparative market analysis (CMA)
What is a federally related transaction?
Any real estate-related financial transaction that a federal financial institutions regulatory agency has either contracted for, or regulates, and requires the services of an appraiser
What are the types of values that an appraiser may be hired to estimate?
Assessed value Insurance value Investment value Liquidation value Going-concern value Salvage value
What is assessed value?
The value used as a basis for property taxation
What is insurance value?
An estimate of the amount of money required to replace a structure in the event of some catastrophic event such as fire
What is investment value?
The price an investor would pay, given his or her own financing requirements and income tax situation
What is liquidation value?
The value associated with a rapid sale; the amount of dollars a property should bring in a foreclosure sale, for example
What is going-concern value?
The value of an income-producing property characterized by a significant operating history
What is salvage value?
The estimated amount for which improvements can be sold at the end of a structure’s useful life
How is value determined?
By a good or service’s ability to command other goods or services in exchange
What is price?
The amount of money (or its equivalent) for which a good is actually sold
What is cost?
The total expenditure required to bring a new improvement into existence plus the cost of land
What is an overimprovement?
Occurs when an owner invests more money in a structure that he may reasonably expect to recapture
What are the for traits of value?
Demand
Utility (useful)
Scarcity
Transferability (without ability to sell it, it has no value)
The most profitable use to which a property may be put is the property’s:
Highest and best use
A property’s highest and best use must be:
Legally permissible (zoning) Physically possible (soil type, site's shape, size, and slope) Financially feasible (income generated considering cost of improvements)
What are the three approaches to estimating real property value?
- Sales comparison approach (comparable sales method)
- Cost-depreciation approach (cost method)
- Income capitalization approach (income method)
What is the principle of substitution?
The basis for all three approaches to market value
Means that a prudent buyer or investor will pay no more for a property than the cost of acquiring, through purchase or construction, an equally desirable alternative property
What is the sales comparison approach?
Based on the theory that a knowledgeable purchaser will pay no more for a property than the cost of acquiring an equally acceptable substitute property
Because time can affect property values, the sales used for comparison purposes must meet two qualifications:
- They must have occurred recently in the same market area where the subject property is located
- The comparable properties selected must be similar to the subject property
What is the cost-depreciation approach?
Based on the theory that a knowledgeable purchaser will pay not more for a property than the cost of acquiring a similar site and constructing an acceptable substitute structure
What are the four steps in the cost-depreciation approach?
- Estimate the current reproduction (or replacement) cost of the improvements as of the appraisal date
- Estimate the amount of depreciation from all causes (physical deterioration, functional obsolescence, and external obsolescence) and deduct it from the reproduction (or replacement) cost
- Estimate the value of the site and nonstructural site improvements, assuming the site is vacant and will be put to its highest and best use
- Add the estimated value of the site, including site improvements, to the depreciated structure value
What is the income capitalization approach?
The object is to measure the flow of income projected into the future
Develops an estimated market value based on the present worth of future income from the subject property
What is potential gross income?
Total annual income a property would produce if it were fully rented and no collection losses were incurred
What is effective gross income?
The potential gross income minus vacancy and collection losses
What is net operating income?
Income remaining after subtracting all relevant operating expenses from effective gross income
What is the formula to find the net operating income?
Potential gross income (PGI)) - Vacancy and collection losses + Other income (laundry room, vending machine) = Effective gross income (EGI)
EGI - Operating expenses (fixed, variable) = NOI
Income =
Rate of return x value
What is assemblage?
The combining of two or more adjoining properties into one tract; the process of consolidating properties
What is plottage?
The added value as a result of assembling two or more properties into one large parcel
What is situs?
Refers to people’s preferences, both physical and economic, for a certain area owing to factors such as weather, job opportunities, and transportation facilities
Site you chose to live and work and why you chose it
The total expenditure required to bring a new improvement into existence is referred to as:
Cost
The approach to estimating value that is referred to as “the real estate market speaking through past sales” because it utilizes actual sales transactions is the:
Sales comparison method
When more money is invested in a building than can reasonably be expected to be recaptured, it is referred to as:
Overimprovement
The approach to value most likely to be relevant for appraising a community college is the:
Cost-depreciation approach
In the income capitalization approach, value equals:
Net operating income / an appropriate capitalization rate
In the comparable sales approach:
Adjustments are made to the comparable properties
When applying the cost-depreciation approach, what is not subject to depreciation?
Land
When applying the cost-depreciation approach, what is subject to depreciation?
A poor traffic pattern in a home
New solid oak wood cabinets and marble tile floors in a neighborhood of $80,000 homes
Older site improvements
A small income-producing property has a projected effective gross income of $48,000. Expenses are estimated at 20% of effective gross income. An appraiser has determined that an appropriate capitalization rate, based on property type and competing properties, is 9%. The estimated market value of this property (rounded up to the nearest dollar) is:
$426,667 PGI 48,000 - V&C - 0 \+ Add. Inc. + 0 = EGI = 48,000 - Exp. - (48,000 x .2) = NOI = 38,400
I 38,400
/ R / .09
= V 426,666.667
Analyzing the sale price and income of comparable investment properties (NOI / sale price) is a common way of determining the:
Overall capitalization rate
Real estate investment can be considered to be:
A relatively long term investment
Karen has always wanted a home near the ocean. She recently received an inheritance that would help her purchase the house she’s always wanted down the street. This is an example of:
Demand
A builder is looking to develop an area of several acres. Concrete in the area is hard to get due to a large complex being built down the street. He is being affected by:
Supply
Demand may be influenced by:
The ability of a buyer to get a loan
Key indicators of a change in the market could be:
A change in the sales volume
A seller’s market occurs when:
Not enough inventory is available for buyers
The most important understanding of the vacancy rate is:
To indicate how much movement there is in the market
What is not a demand factor?
Availability of skilled workers
The principle of property being nonhomogeneous means:
No two properties are the same
A large factory closed in the area. Many workers lost their jobs as a result. This will probably result in:
A buyer’s market
Government interference influences the real estate market. What is included in government interference?
PETE Police power Escheat Taxation Eminent domain
What is a seller’s market?
When there are too many buyers are too little property
What is a buyer’s market?
When there are too many homes and not as many buyers
