Chapter 17: Real Property Valuation

Question 1

Comparative Market Analysis : CMA

Answer 1

• 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however they can provide a customer with a factual list of properties that are currently listed or recently sold, withdrawn or expired.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.

Question 2

Broker Price Opinion : BPO

Answer 2

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.

Question 3

Value

Answer 3

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

Question 4

Demand: Value

Answer 4

the need of desire for possession or ownership backed by the financial means to satisfy that need.

Question 5

Utility: Value

Answer 5

how future owners can make good use of the property.

Question 6

Scarcity: Value

Answer 6

Finite supply

Question 7

Transferability: Value

Answer 7

• relative ease of transfer of ownership rights from one person to another
• often relates to clear title and satisfactory physical condition.

Question 8

Market Value

Answer 8

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.

Question 9

Market Price

Answer 9

ACTUAL selling price

Question 10

Cost

Answer 10

past expenditures on the property
what the owner has spent on the property

May NOT equal either Market Value nor Market
Price

Question 11

Forces and Factors affecting Property Value

Answer 11

Social Forces
Economic Forces (most important)
Political Forces
Physical Forces

Question 12

Social Force: of Property Value

Answer 12

• trends in marriage and divorce rates
• family size
• longevity
• desirability of social activities

Question 13

Economic Force: of Property Value

Answer 13

• income and Employment levels (most important)
• rate of property taxation
• current interest rates
• general economic growth

Question 14

Political Force: of Property Value

Answer 14

• government activities, zoning, building codes
• growth management
• environmental legislation
• tax structures

Question 15

Physical Force: of Property Value

Answer 15

• topography
• location
• climate
• size
• shape
• proximity to major arterials
• jobs
• public transportation

Question 16

Basic Economic Principles of Value

Answer 16

• Highest and best use
• Substitution
• Supply and Demand
• Conformity
• Anticipation
• Contribution
• Competition
• Change

Question 17

Highest and best Use: Economic Principle of Value

Answer 17

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

Question 18

Substitution: Economic Principle of Value

Answer 18

states when several items with essentially the same amenities and utilities are available, the item with the lowest price will attract the most demand.

Question 19

Supply and Demand: Economic Principle of Value

Answer 19

value of property will change if the supply decreases and the demand either increases or remains constant and vice versa.

Question 20

Conformity: Economic Principle of Value

Answer 20

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.

Question 21

Anticipation: Economic Principle of Value

Answer 21

holds that value can increase or decrease in anticipation of some future benefit or detriment affecting the property.

Question 22

Contribution: Economic Principle of Value

Answer 22

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.

Question 23

Competition: Economic Principle of Value

Answer 23

profits tend to attract competition

Question 24

Change: Economic Principle of Value

Answer 24

No physical or economic condition remains constant.

Neighborhood Life Cycle

• growth
• stability
• decline
• renewal

Question 25

Cost Approach to Value

Answer 25

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.

Question 26

Reproduction Cost of construction

Answer 26

* dollar amount required to construct an exact duplicate of the subject building at current prices. * used when appraising historical buildings

Question 27

Replacement Cost of construction

Answer 27

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.

Question 28

Square foot method of determining reproduction or replacement cost

Answer 28

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

Question 29

Unit in place method of determining replacement cost

Answer 29

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.

Question 30

Quantity Survey method of determining replacement cost

Answer 30

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

Question 31

Depreciation

Answer 31

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

Question 32

Age Life Method

Answer 32

easiest but least precise way to determine depreciation. Uses effective age of building and its economic useful life.

Question 33

Straight line method

Answer 33

when cost of an asset is depreciated evenly over its useful life.

Question 34

Effective age of a building

Answer 34

Economic life x depreciation

Question 35

Income Capitalization Approach to value

Answer 35

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

Question 36

Capitalization Rate

Answer 36

rate of return compare NOI to sales price of similar properties that have sold in the current market.

Question 37

Gross Rent Multiplier GRM

Answer 37

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.

Question 38

Reconciliation

Answer 38

art of analyzing and effectively, weighing the findings from different approaches used.