Chapter 17: Real Property Valuation Flashcards
Comparative Market Analysis : CMA
- informal
- done by real estate brokers for a fee for
prospective or current clients - licensed real estate agent does not need to have
an appraisers license to perform a CMA for a
client - NCREC will hold agents accountable if CMA is not
done in competent manner.
RANGE for probable sales prices found by
- comparing listed properties - properties whose listings have expired - recently sold properties
Licensee acting as a dual agent must perform a CMA for both clients as part of fiduciary duties owed.
- two clients do not have to receive the same CMA
Broker cannot perform a CMA for a third party/customer however they can provide a customer with a factual list of properties that are currently listed or recently sold, withdrawn or expired.
Non client is owed market data but not interpretation of market data.
Broker Price Opinion : BPO
if done for REO asset managers etc for a fee, it is illegal.
Can be done for a fee but MUST be for prospective or current clients.
Value
value may be described as the present worth of future benefits arising from the ownership of real property.
Must have DUST Demand Utility Scarcity Transferability
Demand: Value
the need of desire for possession or ownership backed by the financial means to satisfy that need.
Utility: Value
how future owners can make good use of the property.
Scarcity: Value
Finite supply
Transferability: Value
- relative ease of transfer of ownership rights from one person to another
- often relates to clear title and satisfactory physical condition.
Market Value
Reasonable OPINION of a property’s value
most probable price that a property will bring in a competitive and open market.
GOAL of appraiser
- payment must be made in cash or its equivalent
- buyer and seller must act without undue pressure
- reasonable length of time must be allowed for the
property to be exposed in an open market. - both buyer and seller must be well informed of the
property’s use and potential including its assets
and defects.
Market Price
ACTUAL selling price
Cost
past expenditures on the property
what the owner has spent on the property
May NOT equal either Market Value nor Market
Price
Forces and Factors affecting Property Value
Social Forces
Economic Forces (most important)
Political Forces
Physical Forces
Social Force: of Property Value
- trends in marriage and divorce rates
- family size
- longevity
- desirability of social activities
Economic Force: of Property Value
- income and Employment levels (most important)
- rate of property taxation
- current interest rates
- general economic growth
Political Force: of Property Value
- government activities, zoning, building codes
- growth management
- environmental legislation
- tax structures
Physical Force: of Property Value
- topography
- location
- climate
- size
- shape
- proximity to major arterials
- jobs
- public transportation
Basic Economic Principles of Value
- Highest and best use
- Substitution
- Supply and Demand
- Conformity
- Anticipation
- Contribution
- Competition
- Change
Highest and best Use: Economic Principle of Value
most profitable single use to which a property is adapted and for which it is needed, or the use that is likely to be in demand in the reasonably near future
Substitution: Economic Principle of Value
states when several items with essentially the same amenities and utilities are available, the item with the lowest price will attract the most demand.
Supply and Demand: Economic Principle of Value
value of property will change if the supply decreases and the demand either increases or remains constant and vice versa.
Conformity: Economic Principle of Value
Maximum value is realized if the use of land conforms to existing neighborhood standards.
*subdivision protective covenants rely on the principle of conformity to not build houses that are bigger than surrounding houses.
Anticipation: Economic Principle of Value
holds that value can increase or decrease in anticipation of some future benefit or detriment affecting the property.
Contribution: Economic Principle of Value
value of any component of a property is defined by what it contributes to the value of the value of the whole or what its absence detracts from that value.
Competition: Economic Principle of Value
profits tend to attract competition
Change: Economic Principle of Value
No physical or economic condition remains constant.
Neighborhood Life Cycle
- growth
- stability
- decline
- renewal
Cost Approach to Value
based on principle of substitution
- maximum value of a property tends to be set by
the cost of acquiring and equally desirable and
valuable substitute property.
1) estimate the value of land as if it were vacant and
available to be put to its highest and best use
- based on sales comparison approach because
land cannot be depreciated.
2) separate the land from the improvements and
estimate the current cost of constructing the
buildings and site improvements based, on cost
data and experience.
3) estimate the amount of accrued depreciation of
the improvements resulting from
- physical deterioration
- functional obsolescence
- economic obsolescence
4) deduct the accrued depreciation from the
estimated construction cost of the new buildings
and the contributory depreciated value of site
improvements.
5) add the estimated value of the land to the
depreciated cost of the buildings and site
improvements to determine the total property
value.
Reproduction Cost of construction
- dollar amount required to construct an exact
duplicate of the subject building at current prices. - used when appraising historical buildings
Replacement Cost of construction
construction cost at current prices and using modern materials and methodology of a property that is not necessarily an exact duplicate but serves the same purpose or function as the original property.
- used in appraising because it eliminates obsolete features and takes advantage of current construction materials and techniques.
Square foot method of determining reproduction or replacement cost
Square foot method is the cost per square foot of a recently built comparable structure is multiplied by the number of square feet in the subject building.
- most common method of cost estimation
Unit in place method of determining replacement cost
construction cost per unit of measure of individual building components, including material, labor, overhead, and builders profit.
- most components are measured in square feet
- plumbing fixtures are estimated by unit cost.
Quantity Survey method of determining replacement cost
estimate of cost of raw materials plus their installation and indirect costs to arrive at total replacement cost
- similar to the approach a building contractor takes
when preparing a bill for construction of a building
Depreciation
loss in value for any reason
Land does not depreciate because it is here forever and can always be put to its highest and best use when economically and legally feasible to do so.
1) physical deterioration curable
- roof replacement
- painting
- maintenance
physical deterioration incurable
- repairs to major components of building
such as load bearing walls and foundations
2) functional obsolescence curable
- physical design features that are no longer
desirable but can be replaced.
- plumbing
3) Economic (environmental or External
Obsolescence) - incurable
- caused by factors outside of the property.
- aka location obsolescence
Age Life Method
easiest but least precise way to determine depreciation.
Uses effective age of building and its economic useful life.
Straight line method
when cost of an asset is depreciated evenly over its useful life.
Effective age of a building
Economic life x depreciation
Income Capitalization Approach to value
GIVEN
Gross Income
- Vacancy
- Expenses
= Net Operating Income.
- estimate gross income from rents from comparable properties as well as concessions, laundry facilities, vending machines.
- deduct appropriate allowance for vacancy and rent collection losses= effective gross income
- deduct annual operating expenses ( taxes, insurance, maintenance, repairs, and reserves for replacement) of real estate from the Effective gross income to arrive at annual NOI.
- estimate the price a typical investor would pay for the income produced by this particular type and class of property.
- cap rate is applies to the properties annual NOI = appraisers estimate of the property value.
NOI / cap rate = Value
Capitalization Rate
rate of return
compare NOI to sales price of similar properties that have sold in the current market.
Gross Rent Multiplier GRM
used to appraise one family or two family homes
- relates the sales price of a property to its expected rental income.
Gross monthly income is used for residential properties
gross annual income is used for commercial and industrial properties.
Sales Price
_________ = Gross Rent Multiplier
Rental Income
To establish GRM an appraiser should have data from three comparable properties
Then apply most appropriate GRM to estimated fair market rental of property to find its fair market value
rental Income x GRM = Estimated Market
Value.
Reconciliation
art of analyzing and effectively, weighing the findings from different approaches used.
