Chapter 19- Real Estate Appraisal Flashcards
Appraisal
Is the act of process of developing an opinion of value. An appraisal report is the written or oral communications of an appraisal.
Appraisal is a distinct area of specialization within the world of real estate professionals.
What are the three categories of appraisers?
-Associate real estate trainee appraiser: Entry level appraiser; all reports must be co-signed by a state-certified residential real estate appraiser or state-certified general real estate appraiser.
-Certified residential real estate appraiser: Qualified to apprise residential property of one unit to four units without regard to transaction value or complexity- can appraise other types of real property less than $250,000
-Certified general real estate appraiser: Qualified to appraise all types of real property with out restrictions as to the scope of practice subject to USPAP requirements.
COMPARATIVE MARKET ANALYSIS
CMA is distinctly different from an appraisal report offered by a licensed appraiser and should reflect that difference as per 225 ILCS454/10-45.
An appraisal is based an analysis on properties that have been sold, as well as competitive listings. The CMA, in contrast, features properties similar to the subject property in size, location, and amenities and based on
-recently sold properties (solds),
-Properties currently on the market (competition for the subject property), and
-Properties that did not sell (expired listings in the area)
BROKERS PRICE OPINION (BPO)
Is a less expensive alternative of valuating properties often used by lenders working with home equity lines, financing, portfolio management, foreclosures, loss mitigation, and collections.
To have value in the real estate market-What are the four characteristics that a property must have?
Remember DUST
Demand- The need or desire for possession or ownership backed by the financial mans to satisfy that need.
Utility- The property’s usefulness for it’s intended purposes
Scarcity- A finite supply.
Transferability:The relative ease with which ownership rights are transferred from one person to another.
MARKET VALUE
Market value of real estate is the most probable price that a property should bring in a fair sale (also known as “an arm’s length transaction).
The three assumptions that the definitions of Market Value brings
- 3.
MARKET VALUE versus MARKET PRICE
Market value is a reasonable opinion of value based on an analysis of date.
Market price is what a property actually sells for-its sales price. Market price is a historical fact.
COST MAY NOT EQUAL EITHER MARKET VALUE OR MAKET PRICE
MARKET VALUE versus COST
In important distinction can be made. One of the most common misconceptions about valuing property is that cost represents market value, Cost and Market Value may be the same…
I.e adding a $15,000 pool may not add $15,000 to the value of the property.
What is the basic principle of Value?
A number of economic principles an affect the value of real estate.
Anticipation
According to the principle of anticipation, value is created by the expectation that certain event will occur. Value can increase or decrease in anticipation of some future benefit or detriment.
CHANGE
The principle of change relates to the economic and social forces that affect value. The competent appraiser will understand the economic and social forces that impacts a market: growth, stability, decline, or restoration.
COMPETITION
Is the interaction of supply and demand. Excess profits tend to attract competition.
CONFORMITY
The principle of conformity means that maximum value is created when a property is in harmony with its surroundings.
CONTRIBUTION
Under the principle of contribution, the value of any part of a property is measured by its affect on the value of the whole. Installing a swimming pool, greenhouse, or tennis court may not add value to the property equal to the cost, but remodeling an outdated kitchen or bathroom might .
HIGHEST AND BEST USE
PLOTTAGE
REGRESSION AND PROGRESSION
SUBSTITUTION
Three approaches to Value
-Sales comparison Approach
-Cost approach-5 steps
COST APPROACH-5STEPS *** Test
-Get value of land
-Estimate cost of Construction building/improvements
-Estimate depreciation
-Subtract depreciation (3) forms cost of building/improvements (2)
-Add in value of land (1) to (4)
EXample:
On a property, land is valued as $45,000. Current cost of construction for the house built on it is $250,000. It has currently depreciated in value by $25,000. What is the value of the property?
Cost approach
1.find the value—————————45,000
2.Estimate cost of construction —-250,000
3.calculate depreciation————-25,000
4.subtract depreciation Form cost of construction-225,000
5.Add land value to building cost. Plus ————270,000
COST APPROACH*** Test
Reproduction cost
Replacement cost
Determining reproduction or replacement cost
Square-foot method
Unit-in-quiet method
Quantity-survey
DEPRECIATION
Physical deterioration
Functional obsolescence-inside home-small rooms, narrow staircase
External obsolescence -outside of property outside plot-
Straight-line method (don’t worry too much about this. Problems will generally give you depreciation value)
Cost is divided by number of years.
$300,000 building with 70 year economic life
$300,000/70=$4,285.71 depreciation of value per year.
THE INCOME APPROACH***TEST
-Steps
1.Estimate Gross Income
2.Deduct vacancies. this gives you effective gross income
3.Deduct expenses from effective gross income (3). this is your NET OPERATING INCOME (NOI)
4.Determine capitalization rate(cap rate)
5.NOI/Cap Rate=Value or depending on what you need to find…
Income/Value= Cap Rate
Value x Cap RAte= NOI
GROSS RENT OR GROSS INCOME MULTIPLIER
See page 372 on book
1-1-4 units residential rentals
2- Based off monthly
See mathematical problem on page
