Chapter 3- Appraisal Flashcards
This takes recently sold properties that are comparable to subject properties in order to arrive at realistic market value
Competitive Market Analysis (CMA)
A licensed individual who processes necessary qualifications to estimate value for a fee. Supportable estimate of the value of parcel of real estate made by qualified appraiser
Appraisal
This fee is usually based on time and expenses, never the amount of $ of appraised value
Appraisal fee
The capital outlay required to create improved real estate. Includes financing, building costs, labor, overhead, and profit
Cost “Production Cost”
Actual amount paid by a buyer to a seller for a particular parcel of RE
Market Price
Most probable price a parcel of RE should bring in an open and competitive market. Estimate fair market value
Market Value
What are the 4 essential elements of value?
D.U.S.T
- Demand
- Utility
- Scarcity
- Transferability
An appraiser concept referring to the legal and reasonable use, at time of appraisal, is most likely to produce the greatest net return
Highest and best use
A valuation principle that says the value of a property should be equal to that of a similar, substitute property. For example, an investor wouldn’t pay one million dollars for a property when another one is available with a similar use, design, and income for five hundred thousand dollars. The lowest valuation should be the upper limit of value for both homes being compared.
Substitution
Buildings that are similar in design, construction, and age to other buildings in the area have a higher value than they would have in a neighborhod of dissimilar buildings
Conformity
Valuation theory that recognizes that after a certain point of money spent on improvement will not add to overall value of a property
Increasing / Diminishing Valye
Theory holds that merging separate owned pieces of property into one large lot will increase the value of seperate pieces
Plottage
Process of merging lots under one ownership
Assemblage
Value determined by expectations of future benefits
Anticipation
An improvement to real property is only worth whatever it adds to the market value of a property as a whole. Value determined by what people will pay, not cost.
Contribution
Principal that addresses how dissimilar properties affect one anothers value
Regression and Progression
What are the 3 distinct stages a single property and neighborhood typically go through?
Growth, Equilibrium, and decline
This holds that increased or excessive profits tend to attract competitors. As similar competitors move into an area, profits will be seriously affected unless increases #’s attract more shoppers
Competition
An increase in the value of a property caused by increased population, development, or demand (external factor) for which the owner is not responsible.
Unearned Increment
What are the 3 approaches to value?
- Market
- Cost
- Income
What are the 4 factors subject to adjust valuation process:
- Market Conditions- adjustments must be made if significant changes since sale of comparable
- Location
- Physical Characteristics- lot size, # of sq feet
- Financing- differences in term/condition of sale
What is a judgement based on appraisers knowledge and experience?
Reconcilation
What are the 4 steps for cost approach to appraisal?
- Estimating value of land
2.
What are the 4 steps for cost approach to appraisal?
- Estimating value of land
- Estimating value of land
- Estimating accrued depreciation
- Computing total property value
A method of appraising real property based on the land value, plus reproduction costs of improvements, minus depreciation
Cost Approach to Valuation
Formula for Cost Approach to Valuation
Land Value + Replacement Costs - Depreciation = Property Value
Which approach of valuation is heavily relied upon when appraising non-income producing, special purpose projects?
Cost Approach to Valuation
This requires appraiser compute reproduction costs (costs to rebuild exact duplicate). Used in appraising older structures because it allows for replacement of outdated features and takes advantage of current construction materials
Estimating Construction Costs
Loss of value for any reason (age, use, deterioration)
Depreciation
What are the 3 methods of estimating reproduction costs?
- Sq foot method (L X W X H / SQ FOOT)
- Unit in place method
- Quantity survey method
What is it called when you find the total loss of value during life of building
Estimating Accured Depreciation
What are 3 categories according to cause of estimating accrued depreciation?
- Physical Deterioration
- Functional Obsolescence
- External (economic) obsolescence
Which characteristics of depreciation are curable?
Physical Deterioration and Functional Obsolescence
This is settling foundation, crack walls, leaking roof, or any loss of physical soundness (wear and tear). Judged to be curable if repairs result in increased value that would be equal to or exceed cost of repairs
Physical Deterioration
Loss of value a building suffers because of outdated design or materials (buildings no longer meet the needs/demands of users), and is curable if the deficiency is economical to correct and incurable if not economical to correct
Functional Obsolescence
Caused by changes in the surrounding environment that makes subject property less attractive to user, thus reducing market value (zoning changes, deteroring neighborhood that affects the value of all houses in the hood)
External Obsolescence
Based on the theory that the market value of a piece of property is equal to the present worth of whatever future income it can produce over remaining economic life
Income Approach to Valuation
What are the steps for determining value using income approach?
- Estimate Annual Potential Gross Income
- Estimate effective gross income
- Estimate Net Operating Income
- Select Capitalization Rate
- Apply Capitalization Rate to Determine Value
Price of a property divided by its rent - quick method of obtaining estimate of property value
Gross Rent Multiplier
“Steal from the Rich” adjustment factor
If a feature in a comp. is more desirable than subject = subtract value of feature from sales price of comp.
“Give to Poor” adjustment factor
If feature in comp is less desirable = add value of feature to sales price of comp
Useful life of property, usually shorter than physical life of structure
Economic Life
Chronological age
Actual Age
Difference between economic life and remaining economic life of structure
Effective Age
