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Real Estate Course (FL) - Sales Associate - Week 4 > Chapter 16 - Appraisal (8%) > Flashcards

Chapter 16 - Appraisal (8%) Flashcards

1
Q

Section 16.1: APPRAISAL CONCEPTS AND DEFINITIONS

Appraiser

A 
Appraiser
 Specific amount
 Impartial (non biased)
 Defendable
 Estimate (Opinion) of value
 Fee based on time and difficulty
 Must follow Uniform Standards of
Professional Appraisal Practice
(USPAP)
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2
Q

Section 16.1: APPRAISAL CONCEPTS AND DEFINITIONS

:::STATE EXAM CONTENT AREA: XVI.B: MARKET VALUE:::

Cost, ** Price, Value (including *** Market Value)

A

 Cost
 Expenditure necessary to bring into
existence
** Price
** Actual amount paid. May or may not be
market value
 Value
 Ability to command other goods in
exchange
*** Usually MARKET VALUE - THE AMOUNT THAT
SHOULD BE PAID FOR A PROPERTY, BUT NOT
NECESSARILY THE AMOUNT THAT IS ASKED OR
ACTUALLY PAID.

 Value, Price and Cost may or may not
be the same number

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3
Q

Section 16.1: APPRAISAL CONCEPTS AND DEFINITIONS

:::STATE EXAM CONTENT AREA: XVI.B: MARKET VALUE:::

/* Characteristics of Value

A

(MEMORY DEVICE: “DUST”)

  • /** Demand
    • /** Desire, need and the means to acquire
  • /** Utility
    • /** Useful and able to fill a need
  • /** Scarcity
    • /** Availability in relation to demand
  • /** Transferability
    • /** Ability to convey
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4
Q

Section 16.1: APPRAISAL CONCEPTS AND DEFINITIONS

:::STATE EXAM CONTENT AREA: XVI.B: MARKET VALUE:::

** Types of Value

A

1) Assessed Value
 Value assigned by the county property
appraiser,
 Also called ad valorem value

2) Insurable Value
     Value placed by insurance company
        – Replacement cost
        – Reproduction cost
     Value is less than market value – land not
       included in insurable value

3) Investment Value
 Value to an individual investor

  • *4) Liquidation Value
      • Amount after all assets have been sold
      • Liabilities have been paid

**5) Market Value (Exchange Value)
**Most probable price the property should
bring in a competitive and open market under
all conditions requisite to a fair sale
** The buyer and seller each acting
prudently and knowledgeably
** Assuming the price is not affected by
undue stimulus
** Assumptions for market value
** Reasonable time on market
** Informed buyer & seller
** own best interest
** No Compulsion (duress)
** Marketable title
** Cash or Equivalent
** no unusual financing or conditions

6) Salvage Value
 Amount that can be received from the sale of
the parts from the demolished structure

7) Plottage Value
 Increase in value due to assemblage

8) Value-in-use
     Value based on current use
     Another use may yield higher value
     May be prohibited from another use –
      government zoning, etc.
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5
Q

Section 16.1: APPRAISAL CONCEPTS AND DEFINITIONS

:::STATE EXAM CONTENT AREA: XVI.B: MARKET VALUE:::

** Principles of Value

A

1) Anticipation - e.g. for income producing properties
2) Change - real estate market is not static
3) Competition - seller’s market vs. buyer’s market
4) Conformity - same size, style, and other features as others in neighborhood
5) Contribution - e.g. adding a pool is only worth it in the long run; not a good contributor

    • 6) Highest and best use - legally permissible, physically possible, financially feasible, and maximally productive
        • Most profitable use
        • Produces the greatest net return

7) Progression - the lower priced property will increase in value toward the level of the others
8) Regression - the higher priced property will decrease in value toward the level of the others

** 9) Substitution - a buyer will pay no more for a property than for an equally desirable alternative property
** A prudent buyer will pay no more for a
property than for an equally desirable
alternative property
** Basis for all value methods

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6
Q

Section 16.1: APPRAISAL CONCEPTS AND DEFINITIONS

Appraisal – Purpose and Intended Use

A 
 Purpose
     Estimate value
 Intended Use
     How the appraisal is used
        – Market value
        – Investment value
        – Liquidation value
        – Assessed value
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7
Q

Section 16.2: THE APPRAISAL PROCESS

/* Steps

A

1) Define the problem

2) Determine the scope of work
- General data
- Specific data

3) Perform data collection and analysis
- Market Analysis
* /** Highest and Best Use

4) Apply the three approaches to value
* /** Sales Comparison
* /** Cost Depreciation
* /** Income

5) Reconcile the value indications and
estimate a final opinion of value
-  Each of the 3 methods is given a weight (priority)

6) Prepare a report of defined value opinions
     Form report
         Standardized form
         Residential appraisals
     Narrative report
         Not standardized
         Very comprehensive
        - Commercial properties
     Oral report
         Used in court testimony
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8
Q

Section 16.3: THREE APPROACHES TO VALUE

:::STATE EXAM CONTENT AREA: XVI.C.1: APPROACHES TO ESTIMATING REAL PROPERTY VALUE - SALES COMPARISON APPROACH:::

/* Sales Comparison Approach - STEPS

A

** This approach is based on the principle of substitution

STEP 1) Locate comparable properties
 Value may be estimated by
   comparing
 Subject property -property being
   appraised
 Comparables (Comps) - similar
   properties
    – Recently Sold
    – Same Market
    – Similar to Subject Property

/* STEP 2) Adjust the comparable sales prices- ADJUSTMENTS ARE ALWAYS MADE TO THE COMPARABLE PROPERTY, BUT NEVER TO THE SUBJECT PROPERTY. THE SUBJECT PROPERTY SETS THE STANDARD FOR COMPARISON. THE PRICE OF COMPARABLE PROPERTIES MUST BE ADJUSTED TO REFLECT THE CHARACTERISTICS OF THE SUBJECT PROPERTY.
 If comparable is inferior - add
 If comparable is better - subtract

IN THIS ORDER

* */*** a) Financing
* */*** b) Conditions of sale
* */*** c) Market conditions
* */*** d) Location
* */*** e) Physical characteristics

STEP 3) Reconcile the adjusted sales prices
- process
– appraiser assigns a weight
(weighted average)

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9
Q

Section 16.3: THREE APPROACHES TO VALUE

:::STATE EXAM CONTENT AREA: XVI.C.2: APPROACHES TO ESTIMATING REAL PROPERTY VALUE - COST DEPRECIATION APPROACH:::

** Cost Depreciation Approach

A

** USED TO ESTIMATE:
THE CURRENT COST OF REPRODUCING OR REPLACING A BUILDING
- AN ESTIMATE OF DEPRECIATION
+ THE VALUE OF LAND

** This approach is based on the principle of substitution
** Best Uses
 Newer properties
 Renovation
 Insurance purposes
 Infrequently exchanged or sold
 Special purposes
– School buildings
– Government buildings
– Churches

 Replacement cost
     Cost at current prices
     Equal utility
** Reproduction cost
    ** Cost for exact duplicate
    ** Same materials
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10
Q

Section 16.3: THREE APPROACHES TO VALUE

:::STATE EXAM CONTENT AREA: XVI.C.2: APPROACHES TO ESTIMATING REAL PROPERTY VALUE - COST DEPRECIATION APPROACH:::

/* Cost Depreciation Approach - STEPS

A 
STEP 1) Estimate the value of the site as if vacant
Value of the land
    – Determined by Comparable Sales
        approach – only approach
    – Land does not depreciate

STEP 2) Estimate the current reproduction (or
replacement) cost of the improvements
 Three methods
1) Quantity Survey - detailed inventory of
everything required to reproduce a
building
2) Unit-In-Place - cost is calculated for
each individual component
3) Comparative Square-foot (Unit
Comparison) - cost per square or cubic
foot
*** benchmark properties - basis for
comparison

** STEP 3) Estimate accrued depreciation - improvements
 Depreciation - The loss of value due to
any cause
 Accrued Depreciation - The total loss in
value from all types
 Depreciated Cost of structure – Cost of
structure minus accrued depreciation
 Land does not depreciate

  • Three types of depreciation
    1) Physical Deterioration - Wear and tear,
    poor condition - CURABLE
    ** 2) Functional Obsolescence - Does not
    meet current standards, poor floor plan
    or an over improvement - CURABLE OR INCURABLE
    ** 3) External (Economic) Obsolescence -
    influence outside property boundaries - INCURABLE

** EFFECTIVE AGE / TOTAL ECONOMIC LIFE = TOTAL DEPRECIATION RATE FOR ENTIRE TIME PERIOD

** TOTAL DEPRECIATION (%) X REPRODUCTION COST ($) = TOTAL ACCRUED DEPRECIATION AMOUNT FOR THE ENTIRE TIME PERIOD ($)

STEP 4) Subtract accrued depreciation from today’s
cost (#2) = depreciated value of improvements

STEP 5) Estimate cost of nonstructural site improvements
(driveways, landscaping)

STEP 6) Add #1 + #4 + #5 = property value

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11
Q

Section 16.3: THREE APPROACHES TO VALUE

:::STATE EXAM CONTENT AREA: XVI.C.3: APPROACHES TO ESTIMATING REAL PROPERTY VALUE - INCOME APPROACH:::

** Income Approach - STEPS

A

 Value - Present worth of Future
income of the subject property
 Based on the Principle of Anticipation

    • TWO TECHNIQUES:
    • 1) DIRECT CAPITALIZATION TECHNIQUE
    • 2) GROSS MULTIPLIER TECHNIQUE

** 1) Direct Capitalization

PGI Potential Gross Income
- V&C Vacancies and loss collections
——–
EGI Effective Gross Income
- OE Operating Expenses (FE + VE + R)
——–
NOI Net Operating Income (THE “I” IN IRV)

 Three categories of OE
1) Fixed Expenses (FE) - e.g. taxes and
hazard insurance
2) Variable Expenses (VE) - e.g. utilities,
maintenance
3) Reserve for Replacements (R) - e.g. roof
covering, air-conditioning
 Operating expenses do not include
 Mortgage Payments (Debt Service)
 Income Taxes

 Overall Capitalization Rate (OAR) -
   average rate of return received on
   similar properties (THE "R" IN IRV)
 Net Operating Income (NOI) ÷ Rate =
   Value (Sale Price) (THE "V" IN IRV)

Note: When the rate goes up, the value goes

down. When the value goes up, the rate goes
down. Rate and Value have an inverse
relationship. (see math supplement)

/* 2) Gross Multiplier
/* a) Gross Rent Multiplier (GRM) =
Sales Price/MONTHLY Gross Rent
** Multiply the subject property rent by the GRM to
estimate value
** b) Gross Income Multiplier (GIM) =
Sales Price/ANNUAL Gross Income
 Multiply the subject property income by the GIM
to estimate value
 Estimates value from all sources including rental
income plus any other income source
** Derive GRM & GIM using several properties

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12
Q

Section 16.3: APPRAISAL REGULATION

:::STATE EXAM CONTENT AREA: XVI.A: APPRAISAL REGULATION - USPAP:::

UNIFORM STANDARDS OF PROFESSIONAL APPRAISAL PRACTICE

A
  • The Appraisal Standards Board - ASB (One of the 4 independent boards of the Appraisal Foundation - TAF) develops, interprets, and amends the USPAP, the generally ACCEPTED STANDARDS OF THE APPRAISAL PROFESSION
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13
Q

Section 16.3: APPRAISAL REGULATION

Appraiser Licensing and Certification

A

 30 hours Continuing Education – 2 years
 Registered Trainee
 Must be directly supervised
 Certified Residential
 Limited to residential (1-4 units) without regard to
value
 Certified General
 Permitted to appraise any type of property

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14
Q

Section 16.4: VALUATION SERVICES PERFORMED BY REAL ESTATE LICENSEES

:::STATE EXAM CONTENT AREA: XVI.D: COMPARATIVE MARKET ANALYSIS - CMA:::

A 
Real estate licensees:
 Usually prepare a Comparative
Market Analysis (CMA)
 Purpose of pricing listings
    – Recent sales
    – Other properties currently listed
    – Expired (failed to sell)
 Sales no older than 12 months
 Similar - adjustments
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15
Q

Section 16.4: VALUATION SERVICES PERFORMED BY REAL ESTATE LICENSEES

:::STATE EXAM CONTENT AREA: XVI.E: BROKER’S PRICE OPINION - BPO:::

A 
Broker’s Price Opinion
 Estimate of value
 Requested by lenders
 Licensees may prepare
 May receive compensation
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Real Estate Course (FL) - Sales Associate - Week 4 (4 decks)

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