Chapter 16 Flashcards
What is an appraisal?
An independent, impartial, and objective estimate or real estate property value
On what basis is an appraiser paid for performing an appraisal?
Time, difficulty, and expenses for the appraisal
What is USPAP (United States of Professional Appraisal Practice)?
Government standards under which all appraisals in federally related transactions must be performed
What is the difference between cost and price in an appraisal?
Cost is how much money it took to create
Price is how much money someone would be willing to pay for it
What are the elements that interact that affect the value of real estate?
DUST
Demand
Utility
Scarcity
Transferability
What is Market Value?
The most likely price at which a property will sell
Which factors are inherent in the definition of Market Value?
Property on the market for a reasonable amount of time
Buyer and seller are informed an acting in their own interest and not under duress
Seller can convey a title
Payment is made in US Dollars
What is Assessed Value?
Value assigned by the property appraiser for ad valorem tax purporses
What is Insurable Value?
Value used by insurance companies as the basis for insurance coverage
What is Investment Value?
Value of a property to an investor
What is Liquidation value?
Value that is the amount that remains after all assets of a business have been sold and all liabilities have been paid
Used to estimate the value of a failing business, or the minimum value for a profitable business
What is Salvage Value?
Value that can be received from the sale of the parts from a demolished structure
What is Plottage Value?
Value that results from assemblage (combining) two or more adjacent parcels of land under one owner. This value is typically greater than the value of the individual parcels
What is Value-in-use?
Value that is the income (net present value) generated by the property in a particular use
What is Principle of Substitution?
Principle that states that no one will pay more for a property than the amount necessary to acquire a substitute version of the property
This is the basis for sales comparison approach
What is Principle of Change?
Principle that states that circumstances can alter the market, which in turn may affect the value of real estate. Appraisals are made as of a specific date to account for these changes.
What is Principle of Competition?
Principle that recognizes that sellers compete with other sellers, and buyers compete with other buyers
What is Principle of Conformity?
Principle which states that the value of a property is sustained when it is similar in size, architectural style, and other features with properties in the same area
What is Principle of Contribution?
Principle that states that the value of a component of a property is the value it adds to the total value of the property
What is the principle of highest and best use?
Principle that states that the best use for the property is the use that would most likely produce the greatest net return to the land
What is the principle of progression?
Principle that states that a lower priced property in an area that consists of more expensive properties will increase in value. This leads to price conformity in the area
What is the principle of regression?
Principle that states that a higher priced property in an area that consists of less expensive properties will decrease in value. This leads to price conformity in the area
What are two key aspects an appraiser must know?
Purpose - residential, investment, etc
Intended use - what the appraisal will be used for
What are the steps performed in an appraisal?
Define the problem
Determine the scope of work
Data collection & Analysis
Apply 3 approaches to value
Reconcile for final opinion of value
prepare report
What information is required by an appraiser for the first step of the appraisal process? Defining the problem
Who is the user
What is the intended use of the appraisal
Effective date
Property characteristics
Conditions, laws, regulations affecting the work
What types of analysis is done by the appraiser to collect and analyze data?
Market analysis (supply, demand, marketability)
Highest and best use (as vacant and as improved)
What is the purpose of the highest and best use analysis for a vacant lot?
Establishes the value of the land based on how it should be used rather than how it is currently used
What is the purpose of the highest and best use analysis for a property with improvements?
To determine whether the present use is the best use, or if alternative use should be considered in order to maximize the value
What are the 3 approaches to value appraisers use in the appraisal process?
Sales comparison
Cost depreciation
Income
What is the reconciliation process in the appraiser’s appraisal process?
Weighing the 3 results from the value approaches. Greater weight is given to the approach best reflecting the value of the subject home
Which types of reports can appraisers issue?
Form Report - standardized, used most for residential appraisals, required by primary and secondary lenders
Narrative report - explains why of each conclusion
Oral report - given in court testimony
What is the Sales comparison appraisal method?
Appraisal method that is based on an analysis of recent sales of similar properties in the same market
What are the steps in a sales comparison appraisal?
Locate comparable properties
Adjust the comparable sales prices
Reconcile the adjusted sales prices
What is Subject Property in an appraisal?
The property that the appraiser is trying to obtain a value for
What are comparable properties (or comps)?
Properties used in the sales comparison approach to estimate the value of the subject property
What are the characteristics of a suitable comparable property used in a sales comparison approach to determine the value of a subject property?
Properties that have sold recently that are similar in:
design
size
location
age
condition
What adjustments are made in the comparable sales approach of an appraisal?
Financing terms
Conditions of sale
Market conditions
Location
Physical characteristics
What is the cost-depreciation (or cost) approach of doing an appraisal?
Appraisal method that is used to determine the current cost of reproducing or replacing a building, minus an estimate of depreciation
How is the value of a property estimated using the cost depreciation approach for an appraisal?
Replacement Cost - estimate cost to construct a comparable building using modern materials, design, and features
Reproduction cost - Estimate cost to construct an identical building by using the same materials, design, and layout
When is the cost-depreciation approach used for an appraisal?
For newer properties, properties proposed for renovation, insurance purposes, properties infrequently sold in the real estate market like a school or church
What are the steps in the cost-depreciation approach of appraisal?
Estimate the cost of replacement
Estimate accrued depreciation
Subtract the depreciated cost
Estimate the value of the land
Add depreciated building cost to land value
What are the methods used for estimating the cost to replace or reproduce the building with a cost depreciation approach?
Quantity Survey method - most accurate - uses a detailed inventory and precise cost for each item needed to be constructed
Unit-in-place method - simple and fast - estimate the cost of each component of the property using nationally published cost manuals that provide cost per sqft
Unit-of-comparison method - uses a benchmark building - estimate the cost per sqft of the entire building, using the known cost of a recently constructed building
What are the methods used for estimating the accrued depreciation of a building with a cost depreciation approach?
Physical deterioration - due to normal wear and tear from use, aging, or negligence (broken windows, faded or peeling paint, worn carpeting)
Functional obsolescence - due to a deficiency or over-improvement of the property (inadequate lighting, one bathroom in a 4br house, a pool, no central AC, inefficient floor plan)
External obsolescence - due to factors beyond the boundaries of the property (location near an airport, busy roadway, a landfill, etc)
What is the economic age-life method in an appraisal?
Simplest method for estimating the percentage of accrued depreciation over the total economic life of a building
What is total economic life of a building?
Estimated number of years that a building will contribute value above the value of the land
What is the effective age of a building?
Age a property appears to be due to extensive updates or excessive wear and tare
How do you calculate the rate of accrued depreciation of a building using the economic age-life approach?
Effective age /Total economic life = rate of depreciation
How do you estimate the dollar amount of accrued depreciation over the life of a building using the age-life approach?
Rate of depreciation * reproduction cost of the building = Total accrued depreciation
What is the income approach used for an appraisal?
Appraisal method that is used to estimate the value that a property’s net earning power will support
Used for income producing properties, or valuation of a business
What are the techniques that can be applied for the income approach of doing an appraisal?
Direct capitalization - Future income is converted into present value
Gross multiplier - value is estimated based on a rent multiplier derived from comparable properties
What is potential gross income?
Term that refers to the total annual income for the coming year
What is effective gross income and how is it calculated?
Actual amount the owner of a property can expect to receive from the property for one year into the future
Potential gross income - vacancy and Collection loss + other income from the property = effective gross income
What is net operating income and how is it calculated?
How much the owner can expect to have after accounting for expenses used to run the property
Effective gross income - operating expenses = net operating income
Which types of expenses are used in the calculation of operating expenses?
Fixed expenses - property tax, insurance
Variable expenses - Utilities, trash removal
Reserves for replacements - funds set aside for replacement of items such as appliances, carpets
Which types of expenses are NOT included in the operating expenses calculations?
Mortgage payments, capital improvements, income tax, and personal expenses unrelated to the property
What is Capitalization rate?
Rate of return on the investment that is derived from comparable properties in the same market
How is the value of a property calculated using the capitalization rate and the net operating income?
Net operating income/capitalization rate = value
Income/value = rate
More income you make, higher return rate
What are the type of gross multipliers used to determine the value of a subject rental property from comparable properties rented at the time of sale?
Gross Rent Multiplier = comparable sales price/gross monthly rent
Gross income multiplier = comparable sales price / annual gross rental income
Which part of FS 475 regulates real estate appraisers?
Part II
What is the Florida Real estate appraisal board (FREAB)?
Board created by FS 475 Part II to administer and enforce the laws governing real estate appraisers
Consists of 9 members appointed by the governor, confirmed by the senate
What are the levels of appraiser licensing?
Registered Trainee
State-certified residential appraiser
State-certified general appraiser
What types of appraisals can a real estate licensee perform without needing additional licensing?
Valuation in a non-federally related transaction
Comparative Market Analysis
Broker Price Opinion
Which term can a real estate licensee never use to refer to their valuation services in connection with listing or sale of a property?
Appraisal
What is Comparative Market Analysis (CMA)?
Type of valuation service based on sales comparison approach that is frequently used by real estate licensees when assisting sellers in establishing a listing price
Where is the data for a CMA obtained?
the multiple listing service (MLS), property appraiser’s office, and the Clerk of Courts
What is a Broker’s price opinion?
Type of valuation service most often requested by lenders for properties that have been foreclosed, or being considered for a short sale transaction
