Chapter 16, RE Appraisal Flashcards
Appraisal
an opinion of value based on supportable evidence and approved methods
Appraisal report
an opinion of market value o a property given to a lender or a client with detailed market information
an appraiser
and independent professional trained to provide and unbiased opinion of value in an impartial and objective manner, following an identified appraisal process
Appraiser Independence Requirements
Regulations issued by Fannie Mae that must be followed by appraisers to ensure accurate and objective appraisals.
FIRREA
Requires that any appraisal used in connection with a federally related transaction be performed by a competent individual who is licensed or certified by the state in which the appraiser practices,
Uniform Standards of Professional Appraisal Practice (USPAP)
in conducting an appraisal an appraiser must follow these standards established by the Appraisal Standards Board (ASB) of the Appraisal Foundation
Comparative Market Analysis
is distinctly different from an appraisal report offered by a license or certified appraiser.
An appraisal is based on a detailed analysis of market condition, the features of the subject property and comparable properties in the neighborhood, recent sales and listings, land value and current construction cost.
Brokers’ Price Opinion
a less expensive alternative of evaluating property that is often used by lenders working with home equity lines, refinancing, portfolio management, loss mitigation and collections.
Uniform Residential Appraisal Report
the form required by many gov’t agencies. It highlights the extensive list of certifications required to of the appraiser and is accompanied by a page of instructions.
The appraise, relying on experience and expertise in valuation theories, develops an objective report that supports the value indicated by the market.
Value
monetary worth based on desirability a property must have DUST
DUST
Demand-the need or desire for possession or ownership backed by financial means to satisfy that need
Utility- the property’s usefulness for its intended purpose
Scarcity- a finite supply
Transferability- the relative ease with which ownership rights are transferred form one person to another.
Market Value
generally considered the most probable price that a property should bring in a competitive and open market under all conditions requisite to a fair sale.
The opinion of value based on an nanlysis of data
Market Price
is a property’s asking, offer or sales’ price
Cost
The total amount of money incurred for products or services.
Anticipation
Value is created by the expectation that certain events will occur. The Income approach to value is based on the principle of anticipation.
Change
the principle where no physical or economic condition remains constant;
An appraiser must be knowledgeable about both the past and the predictable future effects of natural phenomena and the behavior of the marketplace
Competition
the interaction of supply and demand
Conformity
means that maximum value is created when a property is in harmony with its surroundings.
Contribution
the value of any part of a property is measured by its effect on the value of the whole parcel.
Highest and Best Use
the most profitable single use of the property
can change with social, political and economic forces.
law of increasing returns
as long as money spent on improvements produces an increase in property value this law applies.
Law of diminishing returns
the point where additional improvements do not increase income or value.
Plottage
is evidence when the consolidation of adjacent lots into a single larger one produces a greater total land value than the sum of the two sites valued separately.
The amount that the value of the combined properties is increased by successful assemblage
Assemblage
the process of merging two separately owned lots under one owner
Regressin
the worth of a letter-quality property is adversely affected by the presence of a lesser-quality property
progression
the value of a modest home would be higher if it were located among larger, fancier properties
Substitution
The maximum value of a property tends to be set by how much it would cost to purchase an equally desirable and valuable substitutes property.
Supply and demand
the value of a product depends on the supply. when supply increases…value decreases. When supply decreases value increases.
The Sales Comparison Approach
aka Market Data Approach
value is obtained by comparing the property being appraised-the subject property - with recently sold comparable properties-properties similar to the subject in location and features.
The cost approach
to value also is based on the principle of substitution and consists for 5 steps:
1) Est. value of land
2) est. current cost of constructing buildings and improvements
3) eat the amount of accrued depreciation (loss in value)
4) Deduct the accrued depreciation estimated in step 3 for the construction in step 2.
Add the best land value from step 1 to the depreciation cost of building and improvements derived from step 4 to arrive at eh total property value
Depreciation
is a loss in value for any reason.
Land is not considered a depreciating asset, it retains its value indefinitely.
It is the result of a negative condition that affects real property.
Physical deteriorations
a curable items one in need of repair, such as painting (deferred maintenance) that would result in an increase in value equal to or exceeding its cost.
Fictional obsolescence
means a loss in value from the market’s response to the item. Outmoded or unacceptable physical or design features that are no longer considered desirable by purchasers are considered curable if they can be replaced redesigned at a cost that would be offset by the anticipated increase in ultimate value.
External Obsolescence
the loss in value cannot be reversed by spending money on the property. It is incurable.
Annual Depreciation
Property’s cost ./. economic life in years= amount of annual depreciation
Straight line method
easiest but least precise method of determining depreciation.
it is assumed to occur at an even rate over a structures economic life.
Economic life
the period during which it is expected to remain useful for its original intended purpose.
The cost approach is most useful in the appraisal of
newer and special purpose buildings such as schools, churches, and public buildings.
The Income Approach
to value is based on the present value of the right to future income. It assumes that the income generated by a property will determine the property’s value.
used for income producing properties and is based on anticipation.
Income Approach
Gross Income Vacancy Expenses Net Operating income
NOI
deduct the annual operating expenses from the effective gross income to arrive a the annual NOI
management costs are always included, even if the current owner manages the property.
capitalization rate
is determined by comparing the relationship net operating income with the sales prices of similar properties that have sold in the current market.
Gross Rent Multiplier
If a buyer is interested in buying a one to four unit residential rental property the GRM based on monthly rental income could be used for a rough approximation of value
Gross Rent Income
based on annual income be use for purchasing five or more units.
